Over the last few weeks, we've talked a lot about where the markets have been, how they've broken down on news of China's slowing growth, struggling u.s. equity markets, central bank madness in Europe and Japan, and crashing commodity prices…
Which begs the question: “Where do we go from here?” Everyone wants to know what happens next – will the markets continue to struggle under the weight of these problems, or will they shake it off and rally back near all-time highs?
Fortunately, you all have been paying attention, and have hit me with some excellent, well-informed questions that speak to this very issue.
Let's get down to business.
Q: Will the Federal Reserve ever take interest rates negative? If they do will that be a “risk-on” opportunity like it has been every time they did QE? ~ Patrick
A: The Fed could push short-term interest rates (Fed Funds) into negative territory, but it wouldn't be a “risk-on” opportunity for investors to buy stocks.
First of all, if the Fed thought it was necessary to drive rates negative, either they believe the economy is surely heading towards recession, would have fallen into a recession, or the stock market had crashed, which could happen on its own, or result from a steep contraction of GDP. There's no way the Fed taking rates negative under those circumstances is a risk-on opportunity.
Investors are watching other central bankers drive rates negative in Europe and Japan and it's not working. The ECB drove rates negative a while ago and, most importantly, European bank stocks have been absolutely smashed.
Lest we forget, central banks don't exist for the benefit of economies, they exist to further the interests and profitability of the big banks they serve.
So, the banks getting hit on the heels of negative rates is a real problem for the ECB. The real truth is the ECB is doing what it's doing to help “liquify” struggling banks. That's really scary. A big bank failure in Europe could be one of the Black Swans that foreshadows a global panic, a la 2008. Negative rates have done nothing to spur any meaningful or even demonstrable economic growth in Europe.
Adding insult to injury, stock markets across Europe are slipping as investors see all this and don't believe a negative rate strategy is working or going to work. Sure, the ECB could go for broke and accelerate its failed policies in a mad, last ditch, throw-the-kitchen-sink-at-the-fire approach. But that would be out of pure desperation.
