With Record Lowest Interest Rates Coming, Market Bullish on Gold & Stocks, Cryptocurrencies will “Gain in Favor” too

  • “Japanification scenario,” the Fed has to cut rates below zero,
  • The 2020s will begin with the lowest interest rates in 5000 years
  • In the long run, negative rates ruin the financial system – UBS CEO
  • Falling interest rates would lead to irrational capital allocation and an eventual crash

The Federal Reserve is cutting interest rates to stimulate activity as the trade war between the US and China casts a pall over the economy.

However, there isn't much room with the current rate set in the range of 2% to 2.25%. And it won’t be long before the mark hits zero and then turn negative.

According to the report from analysts at Bank of America, the second-largest US lender, the Fed has to cut rates below zero, a path many countries like Denmark, Japan, and others have already taken.

Although low, investors are now assigning increasing odds that the Fed will need to take rates potentially negative, describing the setup as a “Japanification scenario.”

“We believe negative rates in the U.S. are a possibility,” the analysts wrote.

“The 2020s will begin with the lowest interest rates in 5000 years.”

BofA’s periodic report stated that there has been a total of 731 global interest rate cuts since the Lehman in an attempt to renormalize the monetary policy.

“The 2020s will begin with the lowest interest rates in 5000 years.”

The value of negatively-yielding bonds has reached $17 trillion, equivalent to 30% of the total outstanding debt securities market value. $1 trillion is the value of negatively-yielding corporate bonds.

Global debt is also near an all-time high level of global GDP at 310%.

Moreover, S&P 500 is not only in its longest bull market but the biggest of all-time, while $5.4 trillion are being spent on stock buyback since 2009 by US corporate.

BofA is bullish on stocks and commodities and bearish on bonds, cash, and the US dollar.

“Negative rates ruin the financial system”

The top banking executives of Europe meanwhile have ramped up their criticism of negative rates, warning of severe consequences to asset prices and the broader economy.

UBS CEO Sergio Ermotti said negative rates are hurting savings rates and social systems while Deutsche Bank AG Chief Executive Officer Christian Sewing warned that more monetary easing by the ECB will have “grave side effects” on Europe, a region that is already living with them for half a decade.

“In the long run, negative rates ruin the financial system,” Sewing said.

The ECB will decide on Sept. 12, if it would cut its interest rate even further as economic indicators showed a decelerating economy.

These negative rates are also hurting the bank’s interest margins by putting pressure on them.

Gold is the Best Safe Haven Asset But Cryptos will Gain as well

The falling interest rates, Mark Mobius, the founder of Mobius Capital Partners recently said would lead to “irrational capital allocation and an eventual crash.”

As such, Mobius advises investors to allocate 10% of their assets in physical gold and believes cryptocurrencies would gain as well.

Due to the fact that gold maintains its status as a currency — that stood the test of time — it is the best safe haven option, according to him.

As for cryptocurrencies,

“Given the increasing credibility and faith in cryptocurrencies, they will gain in favor as a currency,” he said.

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