Complex Finance - Negative Rates and the War on Cash - 18 Feb 2016

Cash is King, for now

Image source from zerohedge.com

It is becoming increasingly obvious, perhaps even to central banks themselves, that recent monetary policies are becoming ineffective in spurring economic growth.



Low interest rates are the economic poison that deepens the rich-poor gap by encouraging investments in unproductive, speculative assets and debt-fueled growth rather than productive and sustainable ones.

On the other hand, higher rates flush out malinvestments as unproductive assets get taken out of the economy.



The negative rate disease started in Europe, when the Northern European countries started running out of bonds to QE. With interest rates already near zero, the options were:
1. Admit that low interest rates and QE doesn't work, and go back to higher rates, or
2. We need lower rates...MOAR! Oh wait it's already at zero?



Lowering rates is a far more palatable option, but not before banning cash.

To put it bluntly, banning cash goes together with negative rates. If your bank account earns you 1% interest, and a rival bank offers 2%, you'd take the 2%. If both banks have negative rates, you would take your money out. Plain and simple.



One problem though. The banking system runs on the fractional reserve banking model. People rarely withdraw all their money at the same time. A bank keeps maybe a portion of that for daily operations. Maybe 5%, 10%, 15%, around this region.



If negative rates are implemented on deposit accounts, people are going to take their money out! It becomes a tax on savings, and no one likes to be taxed.



If more money is withdrawn than the reserves a bank has, the bank practically defaults. This is easily solved with a ban on cash. (Or more QE, but that is so outdated)



Recent developments have shown increasing chatter about cash and its role in society. Do some googling and see for yourself.



To summarise, the pros of banning cash are:

1. Everything can be tracked, hence everything can be taxed. (Is this a benefit? Lol)

2. Makes it harder for criminals and money launderers.

3. Convenience. No need for long queues at the Arcade?



The cons of banning cash and implementing negative rates are:

1. Moral hazard for banks. No more fear of dreaded bank runs. Wait do we still need banks if we don't use cash?

2. It's possible for everything to be taxed. Including your savings. Also, maybe the digital payment for your taxes can be taxed too.

3. Debasement of the currency. Holding a currency where you have to pay tax on savings isn't really good value.



Now you might be here for investment ideas so...my guess is if the trend continues towards banning of cash then its a good idea to diversify into alternative forms of money.



Now, it can't be all that bad right? Galactic credits might be pretty cool.

Complex Finance - Oil Prices - 16 Feb 2016

Not too Hot and Not too Cold, Not too High and Not too Low

When i have nothing important to blog about i'll be writing about random updates in the world of finance...like this one.

So today was pretty bullish for the markets in general. This was following yesterday's epic squeeze. It was magnificent, the Nikkei rocketing off 1,000+ points!



Major news headline of the day is that Saudi and Russia, among other producers, have agreed to freeze production output. (wait for it) At January levels.



Is this bullish news? Or bearish? The immediate market reaction was a steep flush downwards in crude prices. By now this shouldn't be surprising. This is about as surprising as the Japanese Yen strengthening after the Bank of Japan introduced negative interest rates. Or as surprising as the markets strengthening after releasing of weak economic data.



What is bearish about this news is, January outputs are probably at a very high level. Freezing outputs at such a high level now doesn't sound so good.

What is bullish however is the surprising fact that Saudi and Russia are able to craft an agreement while they are on the verge of open war in Syria.



Let's look at the motivation for this set of agreement. As exporter nations, both Saudi and Russia are practically bleeding their reserves trying to maintain their national budgets from the lower oil revenues. Low oil prices is definitely a not good thing for both parties to have.

On the other hand we shouldn't forget that they have a common enemy here, which is the US shale oil and gas industry. Oil prices that are too high are not acceptable as well, because US shale oil is more expensive to extract, and as good businessmen they would prefer more shale companies to close shop first.

Hence we could reasonably guess that what Saudi and Russia needs is for oil prices to be in the Goldilocks region. Not too low and not too high.



While attention grabbing headlines are intended to have an effect on prices, at least in the short term, whether Saudi and Russia freezes ACTUAL production is a different matter altogether.



Disclaimer: My personal views on oil: bullish in the short term, bearish in the long term. Since this is an oil article I have to disclose that I am long GUSH: Direxion Daily S&P500 Oil & Gas Bull 3x Shares ETF.

Complex Finance - Simple Truths - 15 Feb 2016

The world of Finance. For every bull there is a bear and for every chart there is a media outlet saying this and another saying that.

Why did stocks go up today?

Maybe a certain newspaper will be saying, the economy is totally fine. Buy the dips.

A certain website will be saying, the economy is so bad, central banks are about to prime the pumps. Buy the dips.

Another website might be saying, short interest has gone up, hence stocks went up on a short squeeze. Short the rally.

The discerning investor (or speculator) will know that, in the world of Finance, no matter what the media says there is an underlying truth, and also the truth peddled by the so-called experts in the media.

This simply means, if you want to know reality, you have to read more. Read local news. Read world news. Read online news. Read alternative finance sites. Read it all.

Then, draw your own conclusions.

And understand everyone, including yourself, is affected by all sorts of bias. If you are already invested in the market, think of how you might be secretly hoping for the market to go up. Tell yourself to wake up. Then, put your ego down and draw the conclusions again.

A financial writer prefers a fancy title about the precarious economic situation because that draws more viewership. An agent shows you dollar cost averaging charts because investment linked stuff net the most commissions. An editor of a stock analysis website tells you to "BUY BUY BUY" because, well, the next question is "Buy what?", then "Please sign up for my stock recommendation service". (Yes its Motley Fool)

You get the gist.

Everyone is a fool to a certain extent. Be discerning. Explore and read more. Be the lesser fool.