Here’s the full new report “Everything You Need to Know About Negative Interest Rates” that I’ve been working on for the last week. If you’d like a PDF version of this report, just email us at support@tradingwithcody.com and we’ll send it to you.

NIRP, ZIRP and why easy money rules the day once again

Nobody ever believed that such a crazy concept as “Negative Interest Rates” could exist in the real world, and certainly not in developed economies around the world simultaneously. But such is reality today.

Negative interest rates and negative interest rate policies (“NIRP”, not to be confused with 0% interest rate policies or “ZIRP”), where a central bank charges the banks it regulates to hold their money, are now being more widely deployed. Believe it or not, countries accounting for a full quarter of global GDP now have negative interest rates, including the eurozone, Switzerland, and most recently Japan.

Here in the US, we’re likely heading we’re likely to see yet another easing cycle from the US Federal Reserve, which might very well include negative interest rates (but might not — more on that later). Why? Well, the Fed’s got a whole lot of excuses/reasons to cut its own rates and create new forms of Quantitative Easing (QE) and/or negative interest rates of its own.

As I’ve been saying since late 2015, when the Fed finally raised rates from 0 to 0.25%, I don’t think we’re actually heading into a tightening cycle. And I fully expect that Janet Yellen and the Fed will get much more dovish, eventually cutting rates back to 0% and probably bringing back some form of QE and/or negative interest rates.

In the weeks since I first started floating the idea that the Fed would go to negative interest rates and/or create another round of QE, the idea of us seeing negative interest rates here in the US has gone from far-fetched to quite likely. Now everybody’s trying to figure out what it means for them individually, for the stock market and for the economy writ large. This report is an attempt to explain how negative interest rates and a new easing cycle from the Federal Reserve in the context of the world’s larger currency wars will impact our world.

We’ve got the EU and Japan now with negative interest rates while the Fed is supposedly going to raise rates this year? The Fed’s hands are tied and we can expect lower rates and more easing in the US as the Fed/government tries to devalue our own currency. I’ve long explained that the Currency Wars in the world in the 21st Century are a race to the bottom including in this article called Why the currency wars are likely to hit the stock market from just about one year ago today when the markets were at all time highs.

Negative interest rates, QE, and other games these central bankers are using are all weapons from these currency wars. And the Fed has plenty of cover, including widespread fears about the potential for a serious economic downturn here in 2016.

With doubts about the Chinese economy, rumblings of a potential global recession, commodity and energy prices crashing, trillions of dollars of corporate debt that’s about to default as commodity and energy companies go bankrupt, and a few trillion of sovereign debt potentially not being paid back as countries whose economies depend on commodities and energy (think Russia, Venezuela, Iran, Saudi Arabia, and so on and even Canada and Australia which are heavily commodity-dependent) struggle — well, like I said, the the Fed’s got a whole lot of excuses/reasons to cut its own rates and create new forms of Quantitative Easing and/or negative interest rates of its own.

Said differently, the Fed’s likely to go back into an loosening phase and not a tightening phase.

The long term easing cycle is well established, as declining interest rates in the U.S. are a prevalent phenomenon, but not just a recent one. The picture below depicts a history of the Fed Funds rate as it correlates to the height of the Fed Chairman in a somewhat humorous but still very real way:

You can see in that chart that there’s clearly still a downtrend in the direction of the Fed Funds rate and as the world around us goes into negative interest rate mode in their latest currency war strikes, the Fed has cover to take rates lower either through a policy of negative interest rates or another major dose of QE or perhaps both. Central banks that have pushed rates into negative territory:

Bank of Japan: Rate is -0.1% for some reserves
Danish National Bank: Deposit rate is -0.65%
European Central Bank: Deposit rate is -0.3%
Swedish National Bank: Main interest rate is -0.5%
Swiss National Bank: Main interest rate is -0.75%
Norway National Bank: Negative reserve rate of -0.25%.

Other countries that are close to and could go to negative interest rates in the next year or two as these currency wars escalate. Canada’s targeted overnight rate is already low, at 0.5%, and the Bank of Canada has prepared markets for the possibility of negative rates by discussing how they might work as a policy tool. In December the Bank of Canada said the lower bound for the policy interest rate was around -0.5%. The Bank of England’s has held its main bank rate at 0.5% since March 2009.

The Fed itself seems to be preparing the world for negative interest rates. In its annual stress test of major banks, the Fed asked the banks to figure out what would happen to their finances in a “severely adverse” scenario that included a sharp rise in unemployment and a rate of -0.5% on short-term Treasury bills — in other words, what you’d expect to see if the Fed were to cut rates well below zero. Ms. Yellen noted that “the rates on Treasury bills could go negative even in the absence of a policy shift by the Fed, as has happened a few times in the past.”

The gap between short-term yields in the U.S. and other developed countries has been narrowing. The view that the Fed would keep raising rates even as central bankers in Europe and Asia add stimulus pushed the gap to its widest level since 2007 by the end of last year, but as the markets now realize that another easing cycle is likely here in the US, the spread is closing.

At 0.64% on February 11th, two-year Treasuries yielded 0.71% more than the average on similar-maturity obligations of Canada, Japan, Germany, France, Italy and the U.K. Yields in France, Italy and Japan trade below zero.

There’s not much hope for another outcome from the Fed and the policy makers, law makers and bankers that very low interest rates have enabled and now negative interest rates will continue to enable. (I’ll explain how the Fed and central bankers around the world got so boxed in later in the report). The markets know that the Fed’s likely to ease again, not tighten:

Are we definitely going to see negative interest rates in the US?

I’d say that it’s almost a sure thing that the US Federal Reserve reverses course from its recent tightening phase to another easing cycle. That doesn’t necessarily mean that the Fed is going to cut rates to negative territory, as so many other central banks have, but it does mean that we’ll likely see a 0% Fed Funds Rate before we see a 1% Fed Funds rate. Rather than cutting interest rates to negative levels, the central bank here in the US is more likely to create another form of Quantitative Easing (QE), perhaps buying up to $5 trillion of Treasuries and other forms of bank debt over the next two years.

Another round of QE means the banks will continue to take the money they borrow from the Fed at risk free rates of nearly 0% and will also be able to sell trillions of dollars of questionably valued bank debt, mortgage securities and, most importantly, corporate debt, of which the commodity and energy corporate debt is going to be nearly worthless, but which the banks will be able to pawn off on the taxpayer via the Fed purchases at much higher levels than actual market rates.

How did we get here?

Most Fed critics lately are upset that the Fed raised its target range for the Fed Funds Rate from 0%-0.25% to 0.25%-0.50%in December 2015, arguing that such a move undermined market psychology. However, this short-term point of view misses the whole point: the policy error that the Fed made was the $14 trillion of bank bailouts, an extended period of near 0% interest rates, and QE to save the bank shareholders instead of letting capitalism run its due course.

At this point because of years of bailouts, gamesmanship, and not allowing the markets to wash themselves out for several decades now, the only alternative to this currency war and race to the bottom via a long-term devaluation of our hard-earned dollars and every other fiat currency is a complete reset of the global banking, corporate and tax system. It’s possible, and probably inevitable, that at some point we do see a complete break up of the Too Big To Fail Banks and that the Department of Justice starts enforcing antitrust laws and breaks up global conglomerates and the IRS starts cracking down on corporate tax loophole engineering. Painful as such a complete system reset might be for the short-term, it is only a complete reset of the financial system that would get our economic system back on track for the long-term, unleashing the future generations from the burdensome chains of the current economic, financial and fiscal realities.

Some of the ways we could actually reset our economy and markets were recently proposed by none other than the President of the Minnesota Fed. I’ve long been hard on Neel Kashkari in his various bureaucratic positions over the years, after he moved from Goldman to Hank Paulson’s Treasury to TARP Bank Bailout Administer to now being President of the Minneapolis Fed, so I want to give Mr. Kashkari credit for even suggesting these things:

“1. Breaking up large banks into smaller, less connected, less important entities.

Turning large banks into public utilities by forcing them to hold so much capital that they virtually can’t fail (with regulation akin to that of a nuclear power plant).
Taxing leverage throughout the financial system to reduce systemic risks wherever they lie.”

Whether or not Kashkari is proposing such things only so the Fed can later plausibly say they’ve considered them but decided against such actual reform is up to debate. I am happy to see some recognition from the Fed and the mainstream media covering it that today’s system isn’t reformed from prior to 2008 in any meaningful way at all.

I find it instructive to always remember that the Federal Reserve, the Central Bank of the United States, is a private organization owned by the same Too Big To Fail Banks that it’s supposed to be regulating.

As such, we’ll only see negative interest rates here in the US if the big banks like JP Morgan, Goldman Sachs, Wells Fargo, et al. think that negative interest rates are in their own best interest. That doesn’t seem to be the case right now, seeing as the Too Big To Fail bankers are currently pleading, at least publicly, with the Fed and other central bankers around the world to not use negative interest rates.

Of course having your economists begging against negative interest rates in public, like you’ll see below, gives more plausibility to the banks claims later that any bailouts and benefits they’re getting from the central bank is against their will. Br’er Rabbit and briar patch anybody? Anyway, here are some recent quotes from the banks about negative interest rates:

Economists at Deutsche Bank U.S. Equities write, “Don’t go negative,” stating that central bank central planners are making a serious mistake. Negative interest rates will result in “escalating the currency war” that will usher in economic “mutually assured destruction,” evoking a horrific nuclear or chemical specter. They suggest that central bankers around the world, “Keep it simple and stick with what’s worked. Stick with QE!”

Analysts at Morgan Stanley write that “Further moves into negative rates will have much less of an impact on the euro, in our view, given that most of the portfolio adjustment is already complete. Rather, we are concerned it erodes bank profitability, creating other systemic risks. Could the most bullish ECB outcome be no rate cut?” Calling negative interest rates a “dangerous experiment,” the economists argued such policy would erode bank profits 5%-10% and risk curbing lending across eurozone borders.

So the logic goes that banks will see profits squeezed in a negative interest rate environment. Of course, I’m not sure I buy that logic, because there’s nothing to stop the banks from raising interest rates on mortgages and credit cards while being paid by the Fed to gamble the bank’s customers’ cash in the stock, currency, bond and other markets. For example, Swiss and Danish banks have hiked borrowing costs for homeowners since negative rates were introduced. Banks would be able to use the negative Fed Funds interest rates to justify moving to a negative interest rate for their depositors.

Charging people to store their money at the bank would of course in cite some people to move some of their money to real paper cash. However, central bankers and the governments they enable have a tool to fight that too, as they can remove large denominations from the paper cash market.

You’ve already seen European Parliament, European Central Bank President Mario Draghi telling the European Parliament that there was “increasing conviction in world public opinion” that the €500 ($558) banknote, the highest euro denomination, was used for criminal purposes.

Bank of England’s chief economist Andrew Haldane said that “a more radical proposal still would be to remove the [Zero Lower Bound] constraint entirely by abolishing paper currency [in England].”

Here in the US, none other than long-time revolving door user, former Treasury head, Larry Summers is proposing that the US remove hundred dollar bills from the circulation.

Banks are notorious for focusing on near-term profits, speculating in the markets, and maximizing bonuses while the times are good, so I can certainly see how the bankers might actually want negative interest rates.

So how are negative interest rates going to help?

While the hope is that negative interest rates would encourage commercial banks to make loans to avoid charges on cash in excess of mandatory reserves, the reality is that it will enable the bank to use that capital for market speculation, loans to global conglomerates and whatever else they think will boost near-term earnings. In addition, negative interest rates would result in fewer companies defaulting on their loans, which would prevent banks from suffering as many impairments on their loans, however this benefit would likely be short-lived as a negative interest rate policy might encourage companies to borrow excessively and become over-leveraged, leading to more defaults in the long-term.

We’re presently seeing the aftermath of the past few years of near 0% interest rates that has helped create the crashed commodity and energy sectors in front of us today.

The other hope is that negative rates also have the potential to weaken a nation’s currency, making exports more competitive and boosting inflation as imports become more expensive. Here is where the US is unique among all other nations who are or might someday use negative interest rates: the US Dollar remains the reserve currency of the world, it gives the central bank a whole lot of leeway to print new money and otherwise increase the money supply while every other developed country’s central bank and politicians are in a race to devalue their own currencies.

Another hope is that by lowering short-dated government bond yields, negative rates should increase the relative appeal of equities, helping that market. In other words, negative interest rates are also just another means of punishing savers by forcing them into riskier assets and otherwise creating new asset bubbles that will of course pop someday.

The primary reason that none of us in the real world and on Main Street can even fathom a world that has negative interest rates in it is because money and capital does have real world value, and negative interest rates challenge that basic piece of knowledge. That is, when you lend someone money or deposit it in a bank, you expect them to pay you some form of interest because you are taking a risk that you might not get your money back.

There are businesses on Main Street that would be happy to pay nothing to borrow big money to expand, much less to be paid to hold people’s money for them.

If negative interest rates exist, it’s only in an environment that is forcing people to do something that’s clearly not in their best interest, and that kind of economic phenomenon can only happen when the system is forcing people to do it. That is, a system where the real value of money is negative is a system that’s clearly busted.

Recently, I had the privilege of moderating a panel with Jeremy Siegel, Professor, Wharton School, University of Pennsylvania, William Eigen, Chief Investment Officer at JP Morgan Asset Management, and Michelle Seitz, Head of Investment Management at William Blair.

Jeremy Siegel noted that he’s been doing this for over forty years and that, up until a few years ago, he and his colleagues had basically assumed that negative interest rates would never exist in real life.

He said that in passing, when he noted that recently some major central banks have begun to institute negative interest rate policies, and he also said that he’s still quite certain that there’s a small limit to how negative interest rates can go, probably somewhere less than 1%.

I always like to think about the other side of any analysis, a concept I call “Flip It” and you’ll notice that phrase a few times throughout this report.

So after Jeremey noted that he was quite sure that there was a small limit to how low negative interest rates could go, despite the fact that negative rates didn’t weren’t supposed to be possible. I thought to myself “Flip It” and countered that I’d almost want to bet that there’s no limit to how negative interest rates can go in a race to devalue currencies around the world.

William Eigen put up a very interesting chart that showed spreads between high yield corporate bonds vs government bond rates are at record levels, noting that the “denominator in this equation is at record low levels of about 0.7%.”

I thought to myself “Flip It” and countered with the question of what would happen to that chart if government bond rates go negative asking him if the chart would go to infinity in that case? He answered that yes, it would. So I wonder how relevant that chart actually is.

Michelle Seitz gave an insightful talk that was mostly about the state of the industry, and how very regulated it is, these days.

I used to talk about on my Fox Business show all the time — that bailouts and other forms of government protections bring on regulation by their very nature.

She also noted that we are seeing an erosion of global monetary and fiscal policies including seeing the G20 fade into G7 fading into G0 would mark the end of capitalism. I thought to myself “Flip It” and countered that we might rightly call the end of global central planning for the economic system, “the beginning of capitalism”.

Deflation vs negative rates – winners vs losers

I asked the Jeremy, Bill and Michelle on that panel if I was right in my thinking that the poor and savers of this country would benefit from a deflationary cycle. Deflation benefits low-net-worth families by reducing the cost of living, increasing their buying power (reducing the price level of commonly consumed goods), and potentially reducing the wealth inequality gap (this is open to debate).

Deflation hurts anybody highly indebted, especially governments, but including companies and individuals with large debts vs capital ratios. If you have to pay back $100 in debt and the prices of all your assets, products and services that you sell are going down, it gets hard to pay that money back. When inflation is high, those who borrowed at a lower interest rate benefit, right? This is the same concept.

If negative interest rates and more QE will be to “combat deflation”, then we know that such things will hurt those who would otherwise have benefited from a deflationary cycle.

Who does benefit from negative interest rates? The first answer of who will benefit from negative interest rates came to mind was governments, given that they would then be able to literally be paid to borrow future earnings power and prosperity from future generations.

The second answer to who will benefit from negative interest rates that came to mind was giant corporations. In theory, giant corporations issue debt that is considered to be riskier than the debt issued by governments, so investors typically demand a higher interest rate on corporate debt, however, in the past some of the bonds issued by large corporations have seen such a significant surge in demand that their yield to maturity briefly went into negative territory.

For example, on February 03, 2015, after the ECB announced that it would begin a €60 billion a month QE program, the yield on a Nestlé four-year, euro-denominated bond that matured in 2016 traded briefly at -0.008%, meaning that investors who bought the bonds at that point in time were effectively paying to own the bonds.

For quite a while now, large corporations based in the U.S. have been taking advantage of low interest rates by cheaply issuing debt, with much of the proceeds going towards share repurchases. For example, according to the company’s 10-K filing for FY 2015, Apple “issued $14.5 billion of U.S. dollar-denominated, € 4.8 billion of euro-denominated, SFr1.3 billion of Swiss franc-denominated, £1.3 billion of British pound-denominated, A$2.3 billion of Australian dollar-denominated and ¥250.0 billion of Japanese yen-denominated term debt during 2015,” with varying maturities and fixed interest rates ranging from 0.35% (on a 5-year Japanese yen-denominated note) to 4.375% (on a 30-year U.S. dollar-denominated note). As a result, by taking advantage of the low global interest rate environment, Apple issued billions of dollars in debt and ultimately spent roughly $36 billion on share repurchases during FY 2015.

Negative interest rates hurt low-net-worth families and anyone who is saving money by making it nearly impossible for them to earn a decent “risk-free” return, and even if savers do manage to somehow generate a positive return on investment it will almost certainly be lower than the inflation rate.

Again, if negative interest rates and more QE will be to “combat deflation”, then we know that such things will hurt those who would otherwise have benefited from a deflationary cycle.

What’s the deal with these currency wars?

Everywhere in the developed world, we are in the midst of an all-out World Currency War. To really drive the point home, let’s call it by something a little more striking: World (Currency) War I, or WCW1.

That means we need to be watching the generals in this war (read: the leaders in our government, Central Banks and finance ministries around the world) to help guide us in our own personal mission to make it safely with our wealth intact.

As I’ve been saying to subscribers for many years now, “most scenarios in a currency war end game with the US Dollar on the winning side vs the other sovereign fiat currencies, as has been the case for the last few decades. But war, including currency war, sucks and war is not prosperous and war destroys value and hurts innocent people around the world.”

What has happened to the economies and stock markets in Japan and other countries that have already gone to negative interest rates is not comparable to what we will see when the U.S., with the reserve currency of the world and the most profitable economy in the history of mankind, goes to a negative interest rate environment.

One thing about markets and cycles that you’ll surely notice when you’re in the financial-news industry is that financial-industry news itself certainly does recycle headlines. George Soros writes about how markets, news and stocks all reflexively feed off one another and it makes you wonder where the topics like the day-to-day fretting over central bank moves come from.

I’ve been pointing out since 2009 that there’s an all out push by every national, state, county, local and any other governmental body, especially central banks, to subsidize, expand and bring in new corporate earnings. Targeted tax tricks and welfare for giant corporations and ever-higher stock prices is the obsession of our leaders the world over. That’s had profound results for corporate earnings and stock markets around the world, exactly as I’d expected. This won’t end well. The question is, as it’s been for the last year or so, how long do we stay at the poker table with our bubbled winnings?

What negative rates mean for stocks

In the Trading With Cody Chat Room a couple weeks ago in late January 2016, a member noted and asked me:

“Cody, your mindset doesn’t seem the same as when you were as bullish and shrugging off crisis after crisis like Greece, Cyprus, EU, Middle East tension, Russia/Ukraine, etc. … Do you see us having another leg down? Are you still positive on the year?”

He’s exactly right that I’m not as bullish as I used to be and willing to shrug off the current crises like I did for every single supposed “crisis” like Greece, Cyprus, the EU and so on from 2010-14.

What’s different this time is that stock valuations are higher than they were at any point back when I was writing wildly bullish posts into the teeth of short-term, panicky selloffs. Also, my analysis continues to highlight that oil’s crash is creating currency and economic turmoil in Russia and OPEC countries and creating some pain in Australia and Canada. That, and the impact of an upcoming wave of a trillion dollars of energy and commodity sector bankruptcies in the next year have me a bit cautious, my portfolio higher in cash, and with a few more shorts than I’ve had at any point in the last few years since I came back to trading from TV.

A Fed back in easing mode and a weaker dollar would eventually at least help ease the increasing pressures of China’s currency devaluation as it has been nearing a breaking point; it might help stop the endless decline in oil and commodity prices; it would help re-inflate export-centric US-based corporations — think Caterpillar, GE, Apple, etc. — and it would likely eventually force even the remaining few cash savers and sidelined cash further into higher-risk assets like the stock market.

And so what, stock markets will be off to the races again? Well, I’m not so sure.

Because then we have to get to the point where the Fed’s going to start easing before they can finish easing. Stocks will likely fall as the Fed’s going into another easing cycle here, as I’ve pointed out before that the markets often do the opposite of the old saw of “Never fight the Fed” and that we should “Always Fight the Fed.”

In fact, the last thirty years of history tells us that stock markets are more likely to tank during an easing cycle than not and that stocks are more likely to inflate into even bigger bubble-blowing bull-market valuations during the first part of a tightening phase.

In short, I’d be much more bullish if I thought the Fed was in the beginning stages of a tightening phase.

I explained this concept in an article called “Why you must fight the Fed and get ready for a new stock market bubble,” and in this interview with WSJ’s Simon Constable, both from 2010, when I wrote the following to explain why we were likely headed into a stock market bubble:

“There’s an old saying on Wall Street that you ‘can’t fight the Fed,’ but it’s dead wrong. For the last 15 years, you always want to buy when the Fed is getting done lowering rates and sticking around til the Fed starts to lower rates.

In about 1994, the Fed stopped lowering rates and never went that low again for many years, as the overall trend in rates was higher. Meanwhile, the stock market went into a huge bubble by the year 2000. By 2001, the Fed started dropping rates and the markets literally crashed over the next couple years. By 2003, the Fed was done lowering rates and we once again went into an environment of rising interest rates — and the stock market doubled over the next three years.

Both the fundamentals and the macroeconomic (i.e., Fed’s relentless liquidity/money pumping) forces seem to point to much higher prices… We’re done lowering rates and easing. But I do think the most likely scenario is, indeed, for a booming or even a bubble in the stock market again.”

So look back just over the last five years since I wrote that and you’ll see the logic of Fighting the Fed paid off yet again. If you think about it, the Fed has been in a tightening phase since 2009’s QE1. That is, the first QE was essentially $1 trillion or more in size. QE2 was $600 billion. QE3 was $40 billion a month. While the Fed officially announced tapering in June 2013, it had essentially been tapering (reducing the size of QE, i.e., “tightening”) from 2010 through 2015 when it finally officially raised rates.

So the bullish case, is that the time the Fed is done easing, the impact their easy money policies will finally be hitting the market.

First, global corporations will be able to play yet more financial engineering games and to literally be paid to borrow money to invest (hopefully at least a little bit) in technology and innovation and people.

Second, another round of an easing cycle here, would likely eventually create more asset bubbles and/or Bubble-Blowing Bull Markets. With that being said, don’t go thinking that it’s as easy as just buying stocks because the Fed’s about to ease yet again even from this historically easy levels. Why? Because you have to fight the Fed cycle. You’ll want to be bearish heading into an easing environment, stay bearish or neutral as the easing cycle peaks, and then get bullish as the tightening cycle begins once again.

If the Fed’s easy money policies work as they hope it will, the Fed would soon have to reverse course and/or at least stabilize their easy money policies rather than continuing to cut and/or creating new forms of easy money like QE, etc. When the Fed stops cutting and stabilizes, right before it starts into a tightening cycle — that’s when the biggest gains in the stock markets would be had. (Note that even in this best bullish case scenario though, there’s still likely to be more stock market pain and economic concern.)

With continued cheap money for corporations, margin-enhancing policies from the government at all levels and 0% rates still forcing savers into risk assets etc, I expect we still have more bubble-blowing bull market ahead of us. By the time the Fed finally acts to ‘tighten,’ the bubbles will likely be much bigger than they currently. Important to remember too, is that the bubbles will actually probably continue to inflate even after the Fed starts to tighten.

So as far as trying to game the broader stock market activity as the Fed goes back into an easing cycle here, whether or not that easing cycle includes negative rates, the impact to the stock market should be about the same.

Be cautious because it will likely take more stock market and/or financial and economic turmoil to truly get the Fed into an easing mode again, and then just as the easing cycle peaks, probably in a few months or a year or so, we’ll want to start scaling back into more long exposure and get ready for another Bubble-Blowing Bull Market courtesy of the Fed’s easy money policies as they finally work their way into the asset bubbles and corporate balance sheet shenanigans.

What happens if the Fed’s move to negative interest rates doesn’t spur new asset bubbles and/or economic improvement (even the fleeting kind)? Well, we’ll have to continue to analyze this new place of negative interest rates being open minded and objective as the economy, society and innovations of the world progress, just as always.

Does it have to be negative interest rates? Like I explained earlier, the answer is not necessarily, seeing as $5 trillion or $10 trillion worth of QE in a negative interest rate environment can provide a lot to juice the U.S. economy and create another wave of asset bubbles including a new bubble blowing bull market cycle ahead for at least a year or two as the punished saver class and retirees of this country get forced into stocks and other assets in search of avoiding paying a negative interest rate for parking their money at the bank. In the end, whether it comes in the form of negative interest rates or in the form of another few trillion of QE, the general outline for stocks remains the same.

Let me be clear that I’m not advocating for more of what legendary value investor Robert Marcin would call “whining free market hypocrisy begging the Fed for QE” on Scutify, I’m simply trying to analyze the most likely scenario for the markets and the economy so we can be better positioned to profit and avoid losses in real dollars in our own portfolios.

How about Gold?

I think most investors and traders know the logic behind the “gold as a store of value” idea, especially with the endless quantitative easing, 0% interest rates, and, increasingly, the Currency Wars all of which are simply modern-day equivalents of the old “printing worthless paper money” concept. If the government and banking industry have a monopoly on the currency used in this country, and if they are issuing limitless amounts of dollars into the system, eventually, inflation and gold are likely to spike.

I’ve had a lot of success over the years fighting “conventional wisdom” in my investing and trading, and the idea of a commodity like gold going up when the governments of the world are debasing their currencies, is certainly “conventional wisdom.” However, the whole reason behind calling my approach “Revolution Investing” is because of the huge impact that government policies are having on our 21st century markets, and the force of endless money printing is powerful enough to trump any sentiment-driven movements in the gold markets in coming years. The path of least resistance for gold, silver and other precious metals is still higher.

But there’s a catch. Do you recall what RMBS, CDOs, and all those other “mortgage backed securities” that were “insured” against losses? Turned out that when the chips were down and all the cards were on the table that all those debt securities and “insurance” policies were worthless because the banks and monoline insurers and brokers and government didn’t have the money backing that paper that they all promised they did have. The same thing is happening with the paper precious metal markets.

In my opinion, all those gold, silver, and other commodity-backed ETFs and contracts for delivery of hard assets are likely to turn out as worthless as most of those mortgage backed securities did. I have to believe that the commodity ETFs and commodity price insurance contracts and hedges and markets have likely issued much more paper than they’ll ever be able to pay if and when investors and traders actually start demanding their hard assets.

So if you want to invest in gold, I suggest that you start, slowly but surely collecting and investing in gold and silver coins and bars. The best way to buy physical gold or silver is to shop around slowly but surely locally and every time you drive to another big city until you find a reputable dealer that’s not trying to scalp you but wants your continued business over the next few years. Then slowly but surely build up some gold and silver coins, bars, or whatever and keep it stashed safely away.

Some final trading, investing and market thoughts

If you were freaking out and/or panicky at last Wednesday’s lows when the Dow Jones Industrial Average (DJIA) was at 15,500 and the S&P 500 was at new 2 year lows — now is the time to lighten up a little bit. If you were panicking last Wednesday and wanted to go to cash when the markets were tanking, you should probably consider trimming 10% or 30% of some of your positions so you can sleep better at night. Just a friendly neighborhood reminder to sell when you can, not when you have to.

I will say I have been surprised by how quickly the markets got hit and how many stocks crashed so quickly in the last few weeks. There are probably a lot of great shorts in biotech and health care and still some in energy. But I’m not looking to get aggressively short into the teeth of this decline. We’ve raised cash, reduced the size of our longs in half and put on some more shorts in the Trading With Cody portfolios (where I post all my personal trades and positions) throughout 2014 and 2015.

What to do? As I’ve been saying, we don’t have to commit fully either way. We don’t have to be aggressively long or aggressively short. We don’t have to try to catch every move in the markets or make sudden rash decisions to sell all our stocks and mutual funds when markets have tanked. We don’t have to try to catch the exact bottom in the markets and wait 100% in cash and shorts until then. This is why I repeatedly preached that we wanted to sell when we can, not when we have to throughout 2014 and 2015 before stocks tanked.

I’m still net long and even bought some call options on Wednesday as I sent out in a Trade Alert called “Doing some buying as the bulls panic” when the markets put in their panicky near-term bottom, but I’m far from being the aggressively long vocal bull I’d been in 2011-15.

You can’t flood the corporate economy and force savers into risky assets like stocks for years on end and then contain the effects of those policies by cutting back on your pumping. Jawboning the end of excessive, emergency liquidity measures isn’t going to change anything, though it will likely give you a small-term market correction if and when the Fed finally ends all forms of qualitative easing.

As Joshua Brown said he learned from me as he quoted me in an article he called Things I Learned in 2009: “Cody Willard (Fox Business Network’s Happy Hour) taught me that when the Republican/Democrat Regime in power redistributes trillions of dollars from the renters and savers to the bankers, most bank stocks will go up. A lot.”

Ultimately the Fed’s recent moves are just window dressing and they have little choice but to cut rates to negative levels and/or create trillions in new QE. Yet more welfare programs for giant banks and global corporations would be a shame and waste and will at best create new asset bubbles, but probably will simply redistribute wealth.

As for investing in banks themselves? Maybe for a trade I could see it. However, in the end, I think the banking industry is so dependent upon near 0% rates and other subsidies and welfare from the government that it’s a busted model and, as a result, I don’t want to own any large bank like JP Morgan or Goldman for the long-term. See also, my comments above about how we are likely to have to reset our financial system one way or another at some point in my lifetime.

That said, always bet on growth, bet on US innovation and bet on a bright future. Those who say that today’s developed economies are post-growth and unable to grow again are shortsighted and don’t have a vision for where technology can continue to help us prosper. The borrowing of trillions of dollars from the future generations of developed economies — and therefore from all children around the world — will certainly impact their ability to thrive, but thrive they will. We will.

Let’s review our playbook. We seek to own companies with very strong balance sheets that are revolutionizing and/or outright creating their industries. We try to buy those companies cheaply/early like we did with Apple in 2003, Google on its IPO, FB near $20 after its crashed IPO, First Solar after letting it crash in the alternative energy bubble pop, and many others such as those that we can hold onto them for many years. We start small and slowly in each position, recognizing that there will be many ups and downs in each stock in the years ahead. Since we believe in these companies ability to grow as they revolutionize their industries over many years, we scale into our long positions when the stocks are getting hit and we trim them when stocks rally hard. We get aggressively long after stock markets crash and we whittle down our long exposure when markets bubble.

Long-term followers of mine know that we’ve trimmed our remaining longs and outright reduced the total number of longs in the portfolio and added shorts throughout 2015 after having been aggressively long since I’d left TV and started trading again in 2011.

All that said, I don’t think we’ve seen the last of this Bubble Blowing Bull Market even as there are more potential crash catalysts these days then there has been in years.

Remember: I wouldn’t rush into a full position all at once in any of these stocks or any other position you’ll ever buy. Patience and allowing the market and time to work to your advantage by buying in tranches is key. Maybe 1/3 or 1/5 of whatever you might consider to be a “full position” in any particular stock. And I wouldn’t ever have more than 5-15% of your portfolio in any one stock position at any given time. The younger you are and/or the higher the trajectory of your career income, the more concentrated and risk-taking you can be with weighting in your portfolio. But spread your purchases and your risk out over time and over a several positions no matter your age or risk-averse level.

Scaling into a position using an approach of buying 1/3 or 1/5 or smaller tranches for both longs and shorts over time is how I build my personal portfolio positions, but there’s no scientific way to run a portfolio. Sometimes you have to pay up for the latest tranche but I try to be patient and wait for a temporary sell-off to add to the existing position.

Before you ever make any trade, step back and catch your breath before moving any money anywhere. Rank your positions and your whole portfolio and make sure you’re not about to make any emotional moves with your money.

If you haven’t yet read “Everything You Need to Know About Investing” then spend a couple hours doing so, please. It’s a quick read but chock-full of important ideas, concepts and strategies that amateurs and pros alike should understand.

About the authors

Cody Willard is the editor of TradingWithCody.com, where he posts all his stock and option trades from his personal account. He is the Chairman of Scutify Apps and the principal of CL Willard Capital. Mr. Willard was an anchor on the Fox Business Network, where he was the co-host of the long-time #1-rated show on the network, Fox Business Happy Hour. He was a former hedge fund manager, and his stock picking ideas and economic outlooks have been featured on NBC’s The Tonight Show with Jay Leno; ABC’s 20/20; CBS’ evening news; CNBC’s SquawkBox; Jon Stewart’s The Daily Show; as well as in the Financial Times, the Wall Street Journal, the New York Times, and many other outlets.

Liam Garrity-Rokous is currently a junior in the Carroll School of Management at Boston College, pursuing a Bachelor of Science in Management with a dual concentration in Finance and Corporate Reporting & Analysis.

Bibliography

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Other helpful articles and links and sources from this report include:

What Is ‘Quantitative Easing’

Why The Fed Won’t Adopt Negative Interest Rates

Negative 0.5% Interest Rate: Why People Are Paying to Save

Stop Worrying About Negative Interest Rates

“Don’t Go Negative,” Deutsche Bank Pleads

Negative interest rates are a ‘dangerous experiment’, warns Morgan Stanley

Fed’s Annual Stress Test

The consequences of negative interest rates

Europeans Say ‘Hands Off Our Cash’ as Interest Rates Go Negative

Australia Stands Out in a Negative Rate World, Goldman Asset Says

How low can you go? – speech by Andrew Haldane