The Real Reason Central Banks Are Manipulating the Markets Today

July 13, 2019 A publication from [Stansberry Research] [DailyWealth] The Weekend Edition is pulled from the daily Stansberry Digest. --------------------------------------------------------------- The Real Reason Central Banks Are Manipulating the Markets Today By Justin Brill --------------------------------------------------------------- The idea of negative interest rates is nonsensical... It's like capitalism turned upside down. Instead of being paid to lend your money to a bank, government, or company, you're actually paying them for the "privilege" to do so. As a result, negative-yielding debt simply shouldn't exist in a healthy, free economy. And prior to 2014 or so, it was practically unheard of. But as the central banks of Europe and Japan began to ramp up negative interest rate policy ("NIRP") in 2015, that all changed. Between late 2015 and mid-2016, the total amount of negative-yielding government debt surged more than sixfold... from less than $2 trillion to more than $12 trillion. Then, it appeared these central banks were beginning to step back from these policies... The total amount of global negative-yielding debt fell by half – to roughly $6 trillion over the next two years. But last fall, everything changed again... Negative-yielding debt began to climb higher as central banks responded to new fears of a slowdown in the global economy. This trend has continued to accelerate through the first half of 2019... Late last month, the total amount of this debt broke through $13 trillion for the first time. But believe it or not, a significant amount of junk-rated corporate debt now sports a negative yield, as well. As Bloomberg reported earlier this week... Central bankers hinting at more monetary stimulus have depressed yields so much that even some European junk bonds trade at levels where investors have to pay for the privilege of holding them. The number of euro-denominated junk bonds trading with a negative yield – a status until recently associated with ultra-safe sovereign borrowers – now stands at 14, according to data compiled by Bloomberg. At the start of the year there were none. Yes, you read that correctly... This trend has become so extreme that investors are now essentially paying to invest in the debt of some of the riskiest companies on the planet, too. It's truly a lose-lose proposition... If everything goes right, these investors are guaranteed to lose money on these bonds. But unlike sovereign debt investors, these folks are also taking on serious credit risk. If one of these companies defaults on this debt, they could easily lose half their investment or more. Back in 2016, the massive expansion of NIRP kicked off a big gold rally... The precious metal soared about 30% from its bottom at roughly $1,050 per ounce in mid-December 2015 to its peak at around $1,370 per ounce in the summer of 2016. The same thing is happening again this time... Just as we saw in 2016, the surge in negative-yielding debt has coincided with a big breakout in gold. In fact, as you can see below, the charts of gold and negative-yielding debt look remarkably similar over the past few years... Unfortunately, we fear this trend is likely just getting started... The central banks of Europe and Japan appear to have abandoned whatever caution about NIRP they previously had. And now, here in the U.S., even the Federal Reserve is seriously discussing negative interest rates for the first time. In short, despite these record highs, the amount of negative-yielding debt could still rise dramatically from here... which means new highs for gold and silver may not be far behind. --------------------------------------------------------------- Recommended Link: ['How I Retired at 52... Without Stocks']( "I don't work anymore thanks to ONE single idea from Stansberry Research that anyone can use. I see 20%-plus annual returns. And I never worry about a market crash." Paid-up subscriber explains how he did it – in his own words – [right here](. --------------------------------------------------------------- But negative rates aren't the only way central banks can manipulate the markets... The Stansberry's Investment Advisory team recently reminded subscribers that this problem continues around the world today. As they wrote in their latest issue, published on July 5... Since the financial crisis in 2008 and 2009, the Federal Reserve has had three rounds of quantitative easing (QE) stimulus. QE basically involves the central bank buying securities from the market and holding them on its balance sheet. The Fed's QE programs involved buying U.S. Treasury and mortgage-backed securities. The Fed's balance sheet reached a maximum size of around $4.5 trillion around the time the third round of QE ended in late 2014. It has since shrunk to around $3.8 trillion, as the Fed has let some of its holdings mature without reinvestment. Not to worry... The other central banks have more than picked up the slack for the Fed. The [European Central Banks ("ECB")] has bought eurozone sovereign bonds. But its QE has also involved buying corporate bonds. The easing directly lowers the cost of capital for companies... and not just in Europe. Even companies in the U.S. are taking advantage of Europe's negative rates and the cheap cost of capital. Many have issued bonds denominated in euros. For example, Ford Motor Credit – the financing arm of the carmaker Ford Motor (F) – issued 1 billion euros worth of bonds last month with a coupon of 1.5%. As they noted, this situation also would never exist in a healthy, free market... Yet, thanks to the ECB, the financing arm of a U.S. automaker can actually borrow money at a lower rate than the U.S. government can. Let that sink in for a moment. Meanwhile, the other major central banks have been plenty busy as well. More from the Stansberry's Investment Advisory issue... Through its own QE program, the [Bank of Japan ("BOJ")] owns around half of all of the Japanese government bonds outstanding. The BOJ also purchases stocks in the form of exchange-traded funds (ETFs). The Swiss National Bank ("SNB") doesn't even bother with ETFs. It buys stocks directly and has a $91 billion equity portfolio. Its largest holdings are U.S. companies: Apple (AAPL), Microsoft (MSFT), and Amazon (AMZN). All told, these four central banks now hold about $16 trillion of assets on their balance sheets. And as you can see from the chart below, the pace of aggregate buying even sped up after the Fed stopped QE... Again, much of this has happened without the Fed's "help." But that may not be the case much longer... Now that the U.S. central bank is expected to kick off a new rate-cutting cycle later this month, we fear it's simply a matter of time before it also begins a new QE program of its own. Unfortunately, as the Stansberry's Investment Advisory team explained, these policies have come at a tremendous cost... It's no secret that wealth inequality has skyrocketed in the last decade. Many folks have taken to blaming capitalism for these problems. In fact, as we detailed in our book, The American Jubilee, we expect this to be a major issue in the upcoming U.S. presidential election. However, the reality is that it's this manipulation – this "perversion" of capitalism, as they called it – that is actually driving much of this trend. In short, while central bank stimulus does little to boost the real economy, it's great for stock prices... But the average American doesn't own any stocks. All this begs the question... If these perversions don't actually help the economy – and only worsen the divide between the "haves" and the "have nots" – why do central banks continue to pursue them? The real reason is simple: It's debt. More from the July issue of Stansberry's Investment Advisory... The economy hasn't deleveraged since the financial crisis... The central bankers haven't let it. Deleveraging by defaults is a painful process... Companies go bankrupt. People lose their jobs and stop paying their debts. Home prices decline. The economy contracts, and more companies go bankrupt. And politicians get voted out of office. So central bankers have continued the stimulus to prevent defaults and to try to spur inflation. But inflation continues to miss their targets. The endgame for them is much higher inflation. And they don't care if they destroy fiat currencies in the process. You've no doubt heard us talk about our debt problems... In total, U.S. debt has reached $72 trillion. This includes household, corporate, and government debt. Total U.S. debt reached 380% of GDP during the Great Recession. It has only pulled back to around 350% today. The U.S. economy is still highly leveraged by historical standards. The rest of the world is in the same boat... Debt is why the perversions will continue. Of course, this doesn't mean they'll be successful... You can't solve a debt problem with more debt. Stimulus or not, the reckoning can't be delayed forever. Sooner or later, these bad debts will be wiped out. And tremendous opportunities will be available to investors who know where to look. Some of the best will likely come from the corporate bond market... We expect the coming crisis will make it possible to buy high-quality bonds for potentially pennies on the dollar. And we launched an entire service – Stansberry's Credit Opportunities – specifically to take advantage of these opportunities. But if you've been waiting for the end of this boom to learn more about this strategy, there's something you should know... You don't need a crisis to make big, safe returns in corporate bonds. Sure, we expect to find the best opportunities after the real trouble begins. But our colleagues Mike DiBiase and Bill McGilton have already helped Stansberry's Credit Opportunities subscribers earn some incredible returns over the past few years. Since we launched this service in late 2015, the Stansberry's Credit Opportunities team has racked up an impressive 85% win rate on recommended bonds... good for an average annualized return of nearly 21% on closed positions. That's more than double the return of the overall high-yield corporate bond market. It even beat the return of the stock market over the same period. In fact, we recently heard from one Stansberry's Credit Opportunities subscriber who used this strategy to help him retire early at age 52. We were so impressed with his story, we agreed to let him go on camera to share it directly with our other subscribers. [Click here to see for yourself](. Regards, Justin Brill Editor's note: You might think only Wall Street professionals can invest in corporate bonds... But the truth is, anyone can do it. To prove it, we agreed to let a longtime subscriber explain how this strategy helped him retire at age 52. And more important, he got us to agree to something we've never done before. [Watch his presentation right here](. --------------------------------------------------------------- [Tell us what you think of this content]( [We value our subscribers’ feedback. 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