Two days ago Reuters reported the 3 month
“Euribor” went into negative interest rate territory . In this
missive I will try to make sense of this as to “why or how” this could
happen. I do not believe there is an answer other than the madness and
insanity of being locked in a “short squeeze” room with the exits being
blocked.
Over the last three years we have seen gold trade many times in
backwardation, James Turk has reported this again is occurring in
London. The only explanations for this is that market participants
either need gold now for whatever reason and will pay a premium to get it
…or, they fear not receiving gold contracted for in the future. The
bottom line is this, for backwardation to occur, the “current” gold must
be in short supply for some reason. I believe this is what we are
seeing in Europe, “collateral” is in shortage and a short squeeze has pushed
pricing into a Twilight Zone without logic.
After gold backwardation came the next head scratcher which began last
year where various bonds, bank accounts and even mortgages being written with
negative interest rates. How do any of these make sense? You
“pay” the sovereign or even corporate borrower to lend money to them?
Or a bank pays you to borrow money on a house or property? Think about
the incentives here. Wouldn’t it be better to just take your money out
of a bank or broker to avoid the negative interest and just bury it in a hole
somewhere? How about banks lending at negative interest rates for a
home, wouldn’t the bank be better off NOT making the loan and instead just
sitting on the reserves? Here is David Stockman’s current take.
A similar situation to this happened years ago in Switzerland (and again
currently) where interest rates went negative as people wanted assurance “of”
principal rather than “on” principal. The fear of currency devaluation
was so great, capital piled into the “hard currency” francs. This is
NOT what is happening today in Europe, no one is accepting negative yield
just to own the euro “for safety” as it has already crashed versus the dollar
and more so versus gold. What I believe has happened is the
system has fewer and fewer doors where the exists are being blocked
and collateral withdrawn.
It is only a matter of time before we see depositors burying actual
currency notes, they are also converting into precious metals but
the paper exchange subsidy still holds, for now? Not only is the ECB
withdrawing collateral via “QE”, individual depositors are purchasing German
sovereign debt and withdrawing it from the market. Take the Greeks for
example, they fear their own banks and know they are not safe, they fear
depositing in German or other banks because their deposits may be frozen or
worse, confiscated. So what is their option for “safety” in this paper
room? Direct purchases of sovereign debt!
Now, “interbank” lending has gone into negative interest rates which is
beyond lunacy. Banks which are theoretically run by “smart” people are
paying to lend and of course willfully being paid to borrow. The only
explanation I can come up with is that collateral has become so scarce that a
short squeeze has resulted. Any institution that needs collateral is
forced to pay the market rate which now includes locking in a guaranteed
loss. Business in Europe has become so poor, no one can, much less
wants to borrow anything. “Debt saturation” is where we came from in
2007-08 and further down the rabbit hole to where we are now, inverted
interest rates on ALL levels …now even between “pros”?
I view what is now happening as “eating into the bone”. Debt has
become so highly priced, locking in guaranteed losses is now seen as
“wisdom”. When viewed in history, the current mania will not be seen as
a tribe or nation gone mad, it will be seen as the entire human population
losing sight of their senses and allowing the lunatics to run the insane
asylum. I have no idea what the event will be to wake up the world but
the event is out there and its realization will be akin to awakening from a
nightmare in a cold sweat.
“Debt is better than money” is becoming the current
belief in the world. In fact, with negative interest rates it
can be said the world now values debt greater than money. This cannot
be so because of the simple fact that actual paper notes can be held out of
the system and not “discounted”. How can owning debt today which
promises less currency in the future be worth more than more currency
today? The fear of loss is so great that currency itself is being
discounted versus debt. If you think this through, it says “everything
is worth nothing” because the currency itself is bad and losing
confidence. Maybe this is why we are seeing a push from all
around the world to go “cashless” and fully digitize? This would be
closing and locking the only remaining door other than making precious metals
illegal. The only way for this to be “normal” is if the lunatics are
running the asylum …they surely are!
