February 12th Weekly Recap

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(Articles from Jordan Wirsz and Nell Sloane)

Weekly Summary Report

February 12, 2016
By Jordan Wirsz

Incredible. This week truly has been nothing short of, incredible.

The talk about negative interest rates around the globe have been reaching fever pitch, including the prospect of negative rates here in the U.S. If you attended my bi-monthly webinar that I presented this last Tuesday, one of my three best investing ideas is to look at 2016 as a year to pick the top in bonds and treasures for a short position (LONG TERM!). This recent activity in the bonds and treasuries is setting that up almost perfectly. However, what if we go to negative rates?

Well, first let me explain what “negative interest rates” mean. It DOESN’T mean that you get paid to borrow money. It means that banks get paid to borrow money from the government. The idea is that by paying banks to borrow money, it will spur banks to lend and create economic activity. However, that’s not exactly how it works. How this works is that the negative rates would apply to bank reserve funds (which are not lendable…Those funds have to stay on the bank’s balance sheet as reserves). In theory, this would make the bank more profitable and be able to take on greater risk, ultimately incentivizing banks to lend. Or does it? If you’re getting paid for zero risk, why take on any risk at all? Of course that does mean lower interest rates to consumers, but no, we will NOT be paid to borrow money.

Janet Yellen testified before congress this week, suggesting that the Fed policy is NOT ruling out negative rates here in the U.S., but they are still researching and analyzing how negative rates would actually impact the U.S. markets and economy.

This is a sign of desperation. Make no mistake about it, negative rate policies are a “last resort”. Hence, why gold has rallied so strongly over the last few days in a near vertical move to over $1250/oz. The “fear” trade is back on much as it was in 2010, 2011, and 2012. Gold is nearing the levels that would “technically” define it as a “bull market.”


I am not in the gold camp. Even though billionaire investor Mark Cuban announced that he was buying gold, that is not in of itself a reason to get bullish on metals. In fact, I believe once the global slowdown is over and the U.S. sees some positive GDP growth, the yellow metal and its family of other precious metals will ultimately be known for what it is…a hunk of metal that doesn’t pay a dividend and that won’t be used anytime in the near future as a “currency.” But with all this talk about the potential of a U.S. recession and negative rates, the less-informed “expert investors” pile into the metals as a hedge because they don’t know where else to go.

I truly believe that the negative interest rate talk is very* premature. We are so skittish as a country about our economic condition, that we haven’t even seen the signs of the real recession looming and we’re already talking doomsday. Janet Yellen (perhaps one of the least competent Fed Chairs we’ve ever had) is dealing with the looming economic slowdown with tremendous rhetoric that does nothing but fuel already roiling markets and forecasts. Now, investment managers with Harvard and Stanford MBA credentials do the only thing they know how to do…follow the crowd with a lot of gobbledygook analysis that makes them sound intelligent.

But here is the skinny:

Yes, we are *potentially* heading into a recessionary period. In fact, Bob Dole just said he believes we have a 50/50 chance of recession but he says he “remains hopeful.” I am betting on a 30% chance, still. HOWEVER, if a recession does hit, it is NOT going to be disastrous to the U.S. economy. It is simply going to be a slowing, led mostly by a recession in tech, a recession in energy, and a recession affected by the global commodity slowdown mainly due to China. Remember, the last recession was a housing-led recession which crippled housing, construction and banks. Housing, construction and banks are MASSIVE parts of our GDP here in the U.S. A recession today won’t hit the majority of consumers the way it did in 2008 and beyond. In fact, although the numbers are a bit “funny math”, the U.S. unemployment rate has been decreasing while simultaneously the economic growth has been slowing. This tells me what we’re in the midst of a global recessionary environment, wherein other countries are in FAR WORSE condition than the U.S., including China, Germany, Greece, Australia, and Canada. I believe that the countries to really worry about are the ones I listed here, not the U.S. Still, we remain the “best of the worst” in the U.S. and capital inflows will continue to find their way to the U.S., which will prop up our economy versus hurting the countries where that capital is coming FROM.

For example, look at Deutsche Bank credit risk curve, which surged to a record this week:


Ouch…That pain is real for international banking institutions abroad. Banks have been taking a beating, including Credit Suisse, how trading at levels not seen since the big crisis of 2008.


You would think all the talk about negative rates would be good for banks, right? Wrong. If it was good, banks would be doing much better than they are…Obviously. Take a look at the S&P bank index versus the S&P itself:


The problem with negative rates is that it also means lending rates are likely to remain low because all of a sudden, Treasuries and Bonds will have higher demand pushing yields down. Incredibly, look at what happened this week on the 10 year Treasury:


We are very likely to continue to see volatility in bonds, equities and commodities alike. It would not surprise me at all to have a big rally in equities in the next week or two and subsequently have treasuries tank. Visa Versa, it wouldn’t surprise me to see equities tank and rates compress even more. But technically, the U.S. equities markets are oversold and we’ve seen a good support like at about 1800 on the S&P. that may hold for several weeks to come. The “double bottom” with stochastics turning positive tells me that we may see a good bounce here…Until we receive more bad news about the economy. Here is the S&P March futures where you can clearly see the double bottom that took place yesterday, and stochastics turning up…


Interestingly enough, our Savant Report contributor and my good buddy Jim Willis did a wonderful job predicting a double bottom in oil. Not that I ever doubt Jim, although our opinions differ from time to time, but he called this one about perfectly. Here, we see the April futures contract “double bottom” at the $28.50-ish mark. Although the nearby future contract for March which is expiring soon touched the low $26, mark, it didn’t stay there long. The April contract, now rolling soon, made this wonderfully perfect “double bottom” pattern that you see below:


My bet is that oil has bottomed for the time being. I’m not predicting that it won’t go down over the longer term, but for now, I don’t see April prices getting any lower than about $28. We are in the process of a big rally today, up some 12-13% from yesterday on hopes that a decrease in production will drive prices higher. Baker Hughes estimate of rig counts dropped AGAIN, down 28 to a total of 439 rigs operating, down more than 50% from last year’s number of 1,056 rigs. Oil producers are hoping that OPEC reduced production to create a hard floor in prices. I’ve learned to never try and predict what OPEC will or won’t do, for reasons I’d rather not write about.

One of the big problems with oil producers today, is a real conundrum. It’s STORAGE.

Storing oil is expensive, and its getting even more expensive. Why? Because we are actually RUNNING OUT OF ROOM TO STORE OIL here in the U.S. Storage facilities are nearing maximum capacity! So the challenge is debating whether to store the oil and pay for the storage in hopes of higher prices in the future, but the challenge is also finding a place to store the oil while dealing with higher storage costs due to the rapid increase of demand. The conundrum is that you can’t simply “stop producing” oil from a well. You have to cap the well, and there is massive costs associated with doing such a thing. So, if you’re a producer, so you continue to pump oil and try to store it? Do you pump oil that costs you $50 to produce and sell it for $30? Or do you spend the hundreds of thousands or possibly millions of dollars to cap a well and cut your losses? Goodness… I’m glad I don’t have to be the guy making those decisions…I’m not sure there is one better than the other.

This is why we’ll see many, many, many undercapitalized oil producers, explorers, and service companies go bankrupt. The well capitalized ones will be strong enough to ride this out, and the REALLY well capitalized ones will do a great job picking up land leases and rights, along with producing wells at pennies on the dollar. For those producers smart enough to see through the smoke and flames of the fire they’re in the middle of, there will be billions of dollars to be made.

All This Negative Rate Talk

February 12, 2016
By Nell Sloane

It was apparent this week after Yellen’s HH speeches that the US governing bodies are completely perplexed and frankly left in the dark when it comes to justifying or even deciphering allowable FED policy action. I heard many questions on the whereabouts of the FEDs legal authority to even utilize such an extreme measure. Obviously Congress doesn’t even know whether or not it is within the FEDs mandate or not. I am not even sure the FED truly knows, but in all honesty, they hold the proverbial congressional power to do whatever they want to maintain their mandate, namely QE.

Putting all that aside, let’s think for a moment where the FED currently stands on monetary policy. I think people are overlooking the fact that they DOUBLED the rate of Fed Funds and IOER less than 2 months ago. Now many can speculate as to the rationale behind such a move, whether it was because the FED truly believed that the economy is steadily improving (cough, cough) or plainly they bowed to pressure from the investing public to either put up or shut up. Obviously the FED lost that bluff and had to act, so they did.

So no matter the rationale the FED used, the fact of the matter is that they did indeed double the rate and in doing so, in our opinion, did not tighten, but rather increased the banking sectors subsidy as well as gave the banking authorities the right to raise the rates they charge their customers. This was a move to solidify the banks position, not a move stating that the economy is improving.

We think most in the investing community have lost sight of what the real driver of the modern economy is. Plain and simple, its QE. Once we embarked down that path globally, well the path was set and there is NO TURNING back.

So don’t be fooled by the FED, do you honestly think the FED wants to hike when all other Central Banks are monetizing and installing negative rates? Come on we know the general public lacks thorough understanding of modern day monetary mechanisms, but we expect more from our professional players.

As we stated before the FED hikes because it has to save the banks, their conduits to the people, plain and simple. Although the FED knows that the Minsky moment awaits everyone, private and public entities alike, it has no choice, as the old saying goes, well, “it’s been written!” There’s no turning back now.

As for negative rates the FED cannot do that or it will wipe out the very entities its worked so hard to save. The banking sector cannot afford any further contraction in their net interest margins, it’s that simple. In fact we think the FEDs plan is to continue to hike in the face of every other entity around the globe, their motivation? Well what seems obvious to us, is that the only way to control people is through power, either political or monetary means, and to steal a phrase from one of our favorite fictional characters,

Tony Montana: “In this country, you gotta make the money first. Then when you get the money, you get the power. “(Scarface 1983)

Then the quote went on to say when you get the money then you get the women, but we will stick to the relevancy here, but you get the picture.

People, the world, the investing public, the investing professionals, have a hard time looking at the FED for what they really are. They are the embodiment of two very important facets.

  1. They are the monetary creation mechanism for the US Government, although the US government sometimes forgets its place and allows the tail to wag the dog often, make no mistake, without the FED the government cannot spend, period! (This is why Jefferson and Jackson were so vehemently against central banking)
  2. They are the private bankers for the global elite. Yea yea we know the United States is a Republic and every few Novembers its citizenry are bestowed the honorable indulgence of participating in its elections, but let’s be honest, whether the public likes it or not, they generally have no voice in any matters that truly matter. Sorry to break everyone’s bubble but yes and to quote another one of my favorites, Messier George Carlin: ” It’s one big club and you ain’t F#$%ing in it!”

The bottom line unconventional times requires unconventional measures and the FED and its endless resources, in my opinion smells an opportunity to solidify its dominance. We are quite sure the US government has a hand or say in this measure, we are quite sure that the US government wants to know how to weaken its most staunchest opponents. There are more than a few ways to weaken countries, you don’t have to go in and blow everything up, sometimes monetary policies have a way of getting the job done without too much use of military prowess. So we can only speculate as to the reasons but we know too well that taking things for face value is a fools game and in the end he who holds all the money (fiat or gold, we prefer gold)holds all the power, that we are most certain of. The FED would like us to think they don’t know what they are doing or that they are just picking and choosing, don’t be naïve they have a plan and I am most certain they will execute it with perfection! -Nell Sloane

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