ECB cuts overnight deposit rate to -0.1%...Deflation!
s4ny
Posts: 1,565 ✭✭✭
A few minutes ago the European Central Bank cut the overnight deposit rate to -0.1%. This
is the greatest indicator of deflation since the financial crisis began in early 2008.
This impacts gold both positively and negatively. It is positive because there are no carrying costs
or opportunity costs for holding gold. Holders of gold are not passing up interest that they could be earning.
It is negative for gold because gold is the most important inflation hedge and there is little or no inflation
that needs to be hedged.
Gold has been flat for the last 3 days indicating that market participants recognize both the positives and the
negatives.
is the greatest indicator of deflation since the financial crisis began in early 2008.
This impacts gold both positively and negatively. It is positive because there are no carrying costs
or opportunity costs for holding gold. Holders of gold are not passing up interest that they could be earning.
It is negative for gold because gold is the most important inflation hedge and there is little or no inflation
that needs to be hedged.
Gold has been flat for the last 3 days indicating that market participants recognize both the positives and the
negatives.
0
Comments
There's a ton of money being created to drive these interest rates down and to keep them down.
Ask yourself - where is the money going? It's not going into savings accounts and it's not going into gold. It's still paying off bad bank debt from 2008, and it's also pumping the stock market. What are the reasons?
Putting it into stocks works - until the value of the cash flows from production output of the underlying stocks, discounted for time, doesn't match the projected price that's been put onto the stock itself.
There's reality, and there's fantasy. This is the classic example of why buying gold when prices are low is a good idea. This is the opposite of buying at the market peak when everybody's hot for metals.
It's "crazy" not to be buying stocks right now - right? Which is the illusion, and which is real? We report, you decide.
I knew it would happen.
"Who needs risk management when you’ve got guaranteed bailouts? - Jesse Felder
<< <i>Inflationary. Metals seem to be reacting positively. >>
Grr, I had my trigger ready to pull if we breached into sub 1200/18 territory.
hmmm. CLCT should do well in negative rate environment.
"Who needs risk management when you’ve got guaranteed bailouts? - Jesse Felder
At NIRP, your money is worth less than nothing.
Might as well buy stocks. That's the "thinking" involved.
Besides, there's no way that they can afford to let rates rise. But don't fool yourself, forcing rates to be low is not cost-free. There are costs.
When the dark pools of bad bank debt are finally liquidated from all this money creation, we'll get a taste of just how much new money is out there. Until then, WYSIWYG.
I knew it would happen.
The FED and ECB need to raise rates.
Knowledge is the enemy of fear
<< <i>The FED and ECB need to raise rates. >>
You know they cant
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<< <i>If you were a bank would you rather lend into a weak economy where risk of nonpayment is high, or accept a tiny loss of 0.1%? >>
Would depend on what I thought my odds were of being bailed out in event of losses.
Weak economy? I thought all was well and we were on a road to recovery?
"Who needs risk management when you’ve got guaranteed bailouts? - Jesse Felder
<< <i>If you were a bank would you rather lend into a weak economy where risk of nonpayment is high, or accept a tiny loss of 0.1%? ..... >>
or....use that money instead to buy beaten down precious metals and commodities? The highest "risk" of deflation always occurs right before the switch back to inflation occurs.
If I were a bank I'd rather move some of that zirp money to under-priced/oversold assets. How can there be little to no inflation when the stock market has gone up 2.5X in the past 5 years?
Today's investors are selective as to where they send their money to cause inflation (stocks, top 1-5% of the best collectibles, top 5% of homes and commercial real estate, healthiest foods, etc.). Inflation and
deflation are moving targets. You can always find plenty of each if you look around. One man's deflation is the next guy's inflation. What was the ECB rate before this move to -.1%. If it was 0% or
even .1% I still that as a nearly inconsequential move in the bigger scheme of things.....good for short term posturing and hysteria though.
Gold probably bottomed on Tuesday on the 29th day of this cycle. That's a fairly long cycle but fits with the short 17 day cycle that preceded it. Give whatever reason you want for gold to have bounced
today. But it was going to happen anyways just due to the depth of the current cycle and extremely oversold conditions (ie daily gold rsi 25). A number of miners started perking up last week and early this week.
A lot of people were looking to Friday's NFP to provide a steeper short term bottom...may not happen now. But, a whipsaw will probably still occur.
I am no expert(seems maybe no one is) but hasn't Japan been suffering under deflation for like 20 years or more?
Just wondering.
<< <i>" The highest "risk" of deflation always occurs right before the switch back to inflation occurs. "
I am no expert(seems maybe no one is) but hasn't Japan been suffering under deflation for like 20 years or more?
Just wondering. >>
Looks to me like someone turned Japan's inflation switch to "on" a couple years ago
The Nikkei dropped for 20 years while the Yen surged against the US dollar for that same period. It's not likely those same conditions continue for another 20 years.
I suspect the Nikkei will continue to rally as they have plenty of room to weaken the Yen for years to come.
<< <i>" The highest "risk" of deflation always occurs right before the switch back to inflation occurs. "
I am no expert(seems maybe no one is) but hasn't Japan been suffering under deflation for like 20 years or more?
Just wondering. >>
Japan's population is shrinking. They are very stingy with immigration, no one having kids
<< <i>
<< <i>" The highest "risk" of deflation always occurs right before the switch back to inflation occurs. "
I am no expert(seems maybe no one is) but hasn't Japan been suffering under deflation for like 20 years or more?
Just wondering. >>
Japan's population is shrinking. They are very stingy with immigration, no one having kids >>
And they are historically a society of savers, not borrowers.
"Who needs risk management when you’ve got guaranteed bailouts? - Jesse Felder
Im pandering to my audience.
<< The FED and ECB need to raise rates. >>
You know they cant
Because the market does not demand it.
I suspect the Nikkei will continue to rally as they have plenty of room to weaken the Yen for years to come
Agreed. I will go so far as to say the Nikkei will vastly outperform gold over the next 5 years.
Knowledge is the enemy of fear
<< <i>It's not deflation. It's just another bank bailout, and incidently it's the only way left to keep the collective government debt loads from literally exploding if rates rise at all. >>
"Price of assets like equities, real-estate, discretionary goods will rise because the cheap money everyone is borrowing will be used to buy more stuff. While all this happens everyone takes on more dept. It is a brutal spiral leading to increase debt levels, inflation and eventually bankruptcy."
And,
"This will be deflationary for the US, producing a string of "unexpected" misses in corporate earnings, GDP and inflation, and will leave Washington with no choice but to respond with renewed debt monetization and money printing and in all probability negative interest rates of its own. "
"Who needs risk management when you’ve got guaranteed bailouts? - Jesse Felder
Second, we as PM investors should welcome deflation as our worthless fiat paper money will buy more of the things we love, such as over-hyped nuts, meat and silver.
Knowledge is the enemy of fear
<< <i>First, banks will NEVER charge YOU to give them money. NEVER. >>
In real terms, they already do, in nominal terms. Quite possible. Who would have believed a generation ago that a bank would charge a $3-4 service fee to speak to a teller.
<< <i>First, banks will NEVER charge YOU to give them money. NEVER.
Second, we as PM investors should welcome deflation as our worthless fiat paper money will buy more of the things we love, such as over-hyped nuts, meat and silver. >>
First, banks will PROBABLY never charge you for them to hold your money. But, who woulda thought that central banks would ever charge member banks to hold their money, especially when they are required to keep a certain percentage of their money on deposit with the central bank. And, who woulda thought that a bank could confiscate a percentage of deposits as we witnessed in Greece with their "bail ins." Prepare for a paradigm shift in the way we experience banking.
Martin Armstrong, who is noted for calling the 1987 economic crash to the very day, warns that U.S. banks are preparing a raft of new account fees that will serve as a de facto negative interest rate.
Second, we as consumers should welcome deflation. Regardless of the propaganda about how good a small amount of inflation is, lower prices can never be a bad thing for the person spending the money.
"Who needs risk management when you’ve got guaranteed bailouts? - Jesse Felder
<< <i>Regardless of the propaganda about how good a small amount of inflation is, lower prices can never be a bad thing for the person spending the money. >>
Stability in the money supply and consistency in pricing is optimal. Labor heavy services such as education and a haircut should remain stable, while tech products that benefit from advances like autos and computers should drop in price and not be an accessory to the fed chairs scheming.
To do that of course, we could no longer create "free" money as the need arises, or sock investors with cap gains taxes as they struggle to keep pace with rising prices.
Consider how great it would be for a Govt facing future entitlement expenses.
Knowledge is the enemy of fear
Bank of America is paying .07% (7 bps) on $250,000 deposits. Citi and Chase are paying .10%, not much more.
They want relationships because the credit card business is very profitable.
Look for minimum balances and fees to increase as Martin Armstrong points out.
It is hard to think that we could tip into deflation, but who would have thought 5 years ago that the stock market (S&P 500) would triple from the lows and the 10 year
US Treasury note would yield 2.6%?
<< <i>lower prices can never be a bad thing for the person spending the money
Consider how great it would be for a Govt facing future entitlement expenses. >>
Perhaps it would be a good time to unwind the $3,000,000 surgeons that are providing the care and let them get by on $500,000 a year. Cannot have socialism without participation from the supply side.
Knowledge is the enemy of fear
<< <i>$3,000,000 surgeons? Dude, you crack me up sometimes.
Agree...have a close friend who is a surgeon.
After paying off high student loans for both college and medical school, paying high malpractice fees, paying office rent, nurse to help, receptionist, billing person etc it is scarry how little he clears.
This for working 80+ hours per week including in the middle of the night if on call.
Plus, many patients cannot or will not pay at all.
Imagine here if you sold coins on eBay or elsewhere and some of your customers did not pay you.
Anyone who thinks surgeons make $3,000,000 is clueless.
All this free money since 2008 has been going unfailingly to the banks. Let me be clear - the new debt monetization has all been donated to the banks since 2008. Bankruptcy laws would have worked fine, except that people in congressional offices and board rooms would have been held accountable.
When the unwinding and operation twist are all finished, the only difference between 2007 and 2015 will be that the level of US Treasury Debt will have tripled and short term interest rates will still be at 0.1%.
Historically, low interest rates compared to the rate of inflation yield a metric called "the Real Interest Rate". When the Real Interest Rate is 2% or less, gold tends to rise at an annual rate of 20% or more. This is due to simple opportunity cost. When the price of gold is artificially suppressed and the Real Interest Rate is 2% or less for an extended period of time, my opinion is that "something's going to give".
I knew it would happen.
Clear your mind of this crap. Gold went up 700% over 11 years. It was a bubble and it popped. Nothing artificial about that. Gold is not being kept down, instead it went up too high too fast. Let it build a new investor base before the next up leg.
Artificial, manipulation, conspiracy nonsense has not aided any PM investors.
Knowledge is the enemy of fear
<< <i>
<< <i>$3,000,000 surgeons? Dude, you crack me up sometimes.
Agree...have a close friend who is a surgeon.
After paying off high student loans for both college and medical school, paying high malpractice fees, paying office rent, nurse to help, receptionist, billing person etc it is scarry how little he clears.
This for working 80+ hours per week including in the middle of the night if on call.
Plus, many patients cannot or will not pay at all.
Imagine here if you sold coins on eBay or elsewhere and some of your customers did not pay you.
Anyone who thinks surgeons make $3,000,000 is clueless. >>
They are not all broke
In the field of medicine I would rather be in the hardware business. I had back surgery in December and the screws they used were 5400 dollars each, the set screws were 1700 each, the drill bit was 1250, the rods were 3000 each and something that I have never figured out was 40,000.00. Insurance cut the bill in about half but still not bad for about 100 bucks worth of hardware.
Docs are like all other professions some make big $$$$ and others make a few cents, I prefer the ones with the big houses, nice cars and young blond wives.
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Box of 20
Clear your mind of this crap. Gold went up 700% over 11 years. It was a bubble and it popped. Nothing artificial about that. Gold is not being kept down, instead it went up too high too fast. Let it build a new investor base before the next up leg.
Artificial, manipulation, conspiracy nonsense has not aided any PM investors.
It's well-documented what happens in the gold market with clockwork regularity. Thousands of sell orders materialize out of nowhere at low volume points and then disappear after the hit on price. I never said that gold didn't rise too high too quickly and then suffered an adjustment. Of course it did.
It's important to know what role gold plays in the world of finance - none. From a practical standpoint, gold's history as a store of value flies in the face of all governments' propensity to screw their own citizens. I haven't made any recent predictions about gold, or stocks because I truly have no idea how long the status quo can exist.
I do know that fortunes can be made and lost overnight. I also know that the small fish will be the last ones out. If you spend more time mesmerized by your paper profits in the stock market than you do on your craft or your profession, you should reconsider whether or not your longterm financial strategy is on solid footing.
Back to the topic at hand, it's all about government finance and the US Treasury market is the supertanker of the world. It takes a serious amount of adjustment to change its speed or course, but once the change has been made it's harder to change it back. We've just witnessed a change in course from 2008 to now that puts us on a faster track to default. The shift in emphasis to push financing further out towards the 30 year horizon will only add volatility to the bond market.
Granted, our economy is still in better shape than most, and our dirty shirt doesn't look too bad in comparison but here is where we're headed. Our debt isn't yet at 240% of GDP, but it's well over 100% and still increasing, with no apparent changes in policy in sight:
Japan's Keynesian dystopia
Normally, I'd say that such a situation is remote enough that I wouldn't worry too much about it. Problem is, the rest of the world has become more industrialized while we've continued to give away many of our advantages. And now it appears that many of the more influential economies and political regimes of the world are joining together to compete with us more directly by removing our advantage of having the dollar as the world's reserve currency.
A country where part time workers are the norm from which our up & coming generation of leaders will arise gives me serious concern. Our policies have allowed way too many of the good industrial jobs to get away and have promoted a pernicious proliferation of the entitlement mentality. These are generalizations but they will cause serious drag on our ability to prosper, in my opinion.
All of this computes to more uncertainty than I'm willing to accept in the stock market. As a student of bubbles, cohodk you should see what's happening now in the stock market, much more clearly than most. Seriously, how are earnings these days, and how are these earnings derived? What's the quality of the earnings? If you're riding the stock market to its alltime highs, you're only betting on the Fed, not on innovation and/or productivity - in my opinion.
It's not about gold - gold has very little to do with any of this - it's always been about government finance - but gold is worth a serious look, for many and various reasons.
I knew it would happen.
I hear disdain.
I agree that gold can be a worthwhile investment over the coming years. I disagree that is undervalued or was manipulated lower or that there is a conspiracy for whatever nefarious reasons. I think we get caught up in "where prices once were" and try to use that as a justification for our ideas on current pricing. Gold was probably under priced in 2001--my guess is that it should have been around 450-500--but this still represents a 150% increase in price so it already has priced in the increase in debt levels. It did its job, unfortunately many got caught up in the hype and fear mongering and made ill timed investments.
Do not discount the stock market as a viable investment. And we have all been wrong about interest rates. I used to be heavy in the deflation camp then I stood on the sidelines, but rates are saying that deflation is still a serious concern.
Knowledge is the enemy of fear
<<If you spend more time mesmerized by your paper profits in the stock market than you do on your craft or your profession, you should reconsider whether or not your longterm financial strategy is on solid footing.>>
I hear disdain.
Not really disdain, since I was being totally objective and have fallen prey to that trap in the past myself. I may have been reacting a little bit to someone's gloating comments in another thread, but the advice is sound.
I agree that gold can be a worthwhile investment over the coming years. I disagree that is undervalued or was manipulated lower or that there is a conspiracy for whatever nefarious reasons. I think we get caught up in "where prices once were" and try to use that as a justification for our ideas on current pricing. Gold was probably under priced in 2001--my guess is that it should have been around 450-500--but this still represents a 150% increase in price so it already has priced in the increase in debt levels. It did its job, unfortunately many got caught up in the hype and fear mongering and made ill timed investments.
Lol, read my lips. I didn't say anything about where prices once were or that gold is undervalued. You did. And if you choose to ignore the various reports that have documented manipulation in the markets (not just gold) for various reasons, that's your business. But the manipulations ARE well-documented. What gold represents to me is money outside of "the system". Whether it's smart to have money outside of the system is a different conversation, but in my opinion, the system isn't that good.
Do not discount the stock market as a viable investment. And we have all been wrong about interest rates. I used to be heavy in the deflation camp then I stood on the sidelines, but rates are saying that deflation is still a serious concern.
I don't discount that the stock market can rally big, even now. The stock market rewarded the right people during the Depression as well. Joe Kennedy did quite well (I'm sure it was all quite legit), and by golly they made him the very first SEC chairman too! I view gold as a neutral asset compared to the stock market, where big swings in both directions are possible at this moment. I'm simply too big a chicken to play in that arena right now.
Deflation still is a concern (see my comments further above) and until all those derivative contracts are put to bed, there's no predicting what the liquidity or financing requirements are going to be in the open market. What a helluva situation to have created. Further, it's my understanding that the derivatives market has become even more hot'n heavy since 2008, not less.
Which leads me back to my position that until the whole legal and financial system is put back in order, all bets are really off.
In a counterintuitive sort of way, it really wouldn't surprise me if some of those low-low-low yield Treasury bonds turned out to be the best speculation out there right now. But again, I'm too big a chicken to actually put money into that possibility, even though it wouldn't surprise me in this political climate.
Maybe some nice, green energy bonds?
I knew it would happen.
interesting, I've always been too chicken (of missing big stock market gains) to be out of the market completely. ditto metals and rental real estate, despite rather large moves in both directions over the past decade. The volatility and somewhat off-setting nature of the asset classes has been productive.
And we have all been wrong about interest rates.
Yup! woulda coulda shoula NOT missed the bond rally of a lifetime, but oh well..
Liberty: Parent of Science & Industry
Yup! woulda coulda shoula NOT missed the bond rally of a lifetime, but oh well..
My only question would be, how do you know that the bond rally of a lifetime isn't upon us right now? Rates can go lower than you think.
I knew it would happen.
Liberty: Parent of Science & Industry
I knew it would happen.
Please show me where gold was manipulated down from 1800 to 1300, or from 1300 to 1800. If you are concerned about an outsized trade that knocks gold down $30, only to see it rally back in the next hour, then I am sorry if this troubles you so. I feel frustrated that after 10 years I have not been able to adequately project a better understanding of markets.
What gold represents to me is money outside of "the system"
I agree.
I'm too big a chicken
My experience is the best rewards come when one is scared. Gold was the "easy and safe" trade, and thats why it failed. And, it really wouldn't surprise me if some of those low-low-low yield Treasury bonds turned out to be the best speculation out there right now, perhaps you just gave the bond market a kiss of death.
As a student of bubbles, cohodk you should see what's happening now in the stock market, much more clearly than most. Seriously, how are earnings these days, and how are these earnings derived? What's the quality of the earnings?
I have clearly outlined my criteria of a bubble over the years and I do not see the overall stock market in a bubble right now. If the Sp-500 is at 4000 in 3 years then I would consider it a bubble. Earnings are not robust, but very solid. There is not some "grand scheme" of accounting principles at work to give an illusion of strong profit growth. Companies are much more productive and streamlined than they were 5 years ago--hence the slow employment growth. Take a look at the "bubble thread" for an example of a bubble chart. The current market, while in need of a correction, is not even close to being in a bubble.
Knowledge is the enemy of fear