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Authored by Vitaliy Katsenelson via RealInvestmentAdvice.com,

I was recently going through a new client’s portfolio and found it full of the likes of Coca-Cola, Kimberly-Clark and Campbell Soup – what I call (pseudo) bond substitutes. Each one is a stable and mature company. Your mother-in-law would be proud if you worked for any one of them. They have had a fabulous past; they’ve grown revenues and earnings for decades. They were in their glory days when most baby boomers were coming of age. But the days of growth are in the rearview mirror for these companies – their markets are mature, and the market share of competitors is high. They can innovate all day long, but consumers will not be drinking more fizzy liquids, wearing more diapers or eating more canned soup.

If you were to look at these companies’ financial statements, you’d be seriously under-impressed. They paint a stereotypical picture of corporate old age. Their revenues haven’t grown in years and in many cases have declined. Some of them were able to squeeze slightly higher earnings from stagnating revenue through cost-cutting, but that strategy has its limits — you can only squeeze so much water out of rocks (unless someone like 3G Capital takes the company, sells its fleet of corporate jets and starts mercilessly slashing expenses like the private equity firm did at Budweiser and Heinz). These businesses will be around ten years from now, but their profitability probably won’t be very different from its current level (not much higher, but probably not much lower either).

However, if you study the stock charts of these companies, you won’t see any signs of arthritis; not at all – you’ll have the impression that you’re looking at veritable spring chickens, as these stocks have gone vertical over the past few years. So this is what investors see – old roosters pretending to be spring chickens.

Let’s zoom in on Coke. Unlike the U.S. government, Coca-Cola doesn’t have a license to print money (nor does it have nuclear weapons). But it is a strong global brand, so investors are unconcerned about Coke’s financial viability and thus lend money to the company as though it were the U.S. government. (Coke pays a very small premium to Treasury bonds.) Investors ignore what they pay for Coke; they only focus on a singular, shiny object: its dividend yield, which at 3 percent looks like Gulliver in Lilliput (fixed-income) land.

And as investors do so, they are ignoring an inconvenient truth: They are paying a very pretty penny for this dividend. Coke is trading at 23 times earnings. This is not the first (nor will it be the last) time this has happened to Coke stock. Investors who bought Coke in 1998 were down 50 percent on their purchase ten years later and have not broken even for more than 15 years.

And this brings us to the problem with shiny objects: They don’t shine forever. Investors are paying 23 times earnings for a very mature business. Consumption of Coca-Cola’s iconic carbonated beverage is on the decline in health-conscious developed markets, and you can clearly see this in its income statement — sales and earnings have languished over the past decade.

Let’s say Coke does what it has not done over the previous decade and grows earnings 3 percent a year, despite the shift in consumer preferences away from sugar-powered and chemically engineered (diet) drinks. If at the end of this journey its price–earnings ratio settles to its more or less rightful place of 13 to 15 times, then jubilant Coke investors will have lost a few percentage points a year on Coke’s price decline. Thus the bulk of the dividend will have been wiped out by Coke’s P/E erosion.

Coca-Cola to some degree epitomizes the U.S. stock market. If over the next ten years, despite all the headwinds it faces, Coke is able to grow earnings at a faster pace than 3 percent and interest rates remain at current levels (so that the company’s P/E stays at the present “I want this 3 percent dividend at any cost” level), then its stock will provide a decent return. However, there is a lot of wishful thinking in this paragraph.

If interest rates rise and/or consumers’ tastes continue to shift from high-margin sugary drinks to low-margin (commodity) water, then Coke will be hit from both sides – its earnings will stall, and investors will take their eyes off its shiny dividend. Suddenly, they will see Coke for what it is: a 124-year-old arthritic American icon whose growth days are sadly behind it.

I am using Coke just to demonstrate the importance of differentiating between a good company (which Coke is) and a good stock (which it is not), and the danger of having an exclusive focus on a shiny object — dividends — when you are analyzing stocks.

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Thomas Barrick’s Colony Capital might want to hold off on its planned purchase of “some or all” of the Weinstein Company’s major assets, because the company might need those to settle a civil probe that’s been opened by New York Attorney General Eric Schneiderman.

According to the New York Times and the New York Post, Schneiderman’s Civil Rights Bureau on Monday sent a subpoena to the Weinstein Company – which recently accepted an emergency loan from Colony – seeking a laundry list of documents — personnel files, criteria for hiring, promoting and firing, formal and informal complaints of sexual harassment or age or gender discrimination, and records of how those complaints were handled, said a source familiar with the investigation.

Schneiderman also wants paperwork and communications related to eight settlements that Weinstein reached with accusers that were first reported by the New York Times. The investigation will also examine whether the company should be held financially responsible for any of Weinstein’s misconduct.

Eric Schneiderman

The question of who at the company knew what about Weinstein’s aggressive behavior has been widely explored since the scandal broke earlier this month. Reporting by the New Yorker suggests that most of the firm’s employees knew both Harvey and Bob Weinstein to be difficult, aggressive and abusive in their professional lives – and some were aware of Harvey’s sexual transgressions.

“No New Yorker should be forced to walk into a workplace ruled by sexual intimidation, harassment or fear,” Schneiderman said in a statement.

 

“If sexual harassment or discrimination is pervasive at a company, we want to know.”

The inquiry will seek to determine whether the company should be held financially liable for Weinstein’s behavior, according to the NYT.

David Boies, a lawyer who has represented Weinstein and the company, said the company and its board were aware of as many as four payouts to women related to Harvey’s behavior. Lance Maerov, a board member, said he was told of only one settlement with a woman who complained of misconduct. The company did not return requests for comment on Monday.

Harvey Weinstein

Weinstein was fired by the company’s board shortly after the scandal broke. He recently completed a one-week stay at a $2,000-a-night rehab center. While he was there, the LAPD announced it had opened a sex crimes investigation into him – bringing the number of criminal investigations into Weinstein’s behavior to four. They include: The DOJ, LAPD, NYPD and Scotland Yard.

As the Times points out, civil investigations like this can be very costly. Those found in violation can face fines and other penalties. In 2015, ConEd was required to pay nearly $4 million to a group of hundreds of female employees after an investigation by the AG and the Equal Employment Opportunity Commission found multiple instances of sexual discrimination.
 

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Authored by James Howard Kunstler via Kunstler.com,

Down With Sex!

It’s interesting to see how, in a culture so pornified that any nine-year-old can watch sex acts on-screen all the live-long day, we discover that decorum is absent in American life. This, at the same time that the more Gnostic political Leftists want to transform human nature by erasing sexual categories in their quest to create a utopia of hermaphrodites.

Sex is bothersome, you know. It comes between people literally and rather awkwardly, and it is fraught with tensions so primitive that it can frighten and shame us. Is it any wonder that these tensions will manifest in a workplace where men and women spend their waking hours? Are you really surprised that sexual attraction is a currency for advancement? That it tends toward the naked exchange of favors?

I’d submit that the wreck of Harvey Weinstein is a dramatic representation of collapse of the movie industry as we’ve known for nearly a century. The two-hour motion picture exhibited in a large room with a lot of seats is in its death throes. It joins the long-playing album of recorded music and the book-length literary exercise called the novel in the elephants’ graveyard of art-forms. The fall of HW is just the period at the end of the sentence.

The past month has been a bloodbath for the theatrical release of movies. Supposed blockbusters are being pulled from the empty cineplexes like guest speakers from the college lecture halls. The struggling middle-class doesn’t need movie theaters anymore, and the flat-screens at home enable them to get lost in whole fictional worlds that grind on in weekly episodes year after year like so much bratwurst. Who knows how long that phase of show biz will last. In evolution, remember, the climactic form of an organism is often supersized. Think: Baluchitherium, titan of the Oligocene land mammals. (And imagine sex between two creatures the size of tractor-trailer trucks!) The fate of television “content” like Game of Thrones probably depends on the fitness of an electric grid that is looking pretty sclerotic these days. Personally, I think the show-biz of the future will tend toward puppet shows.

Fortunately (or maybe not, depending on your political ideology) sex will still be with us, and its eternal tensions with it. What is more subject to change is the division of labor. Most adults I know accept it as axiomatic that social changes they’ve seen in their lifetime have become permanent installations in the human condition. That was Tom Friedman’s “narrative” about globalism, which is now fracturing and withering. The same is true of the Gnostic Leftists, who believe they are on a trajectory to exterminate the detested cissexist heteropatriarchy. How do you suppose things will work out in a nation of eunuchs and trannies?

You’ll be surprised, perhaps, at how not permanent these trends may be. The decadent USA, lacking discipline and decorum, lost in raptures of grandiose techno-narcissism, broadcasting its twerked-up gangsta fantasies while it sucks finished goods from other lands in exchange for janky bonded debt, is becoming the international pariah. It’s a good bet that the tensions arising out of that dynamic will, one way or another, provoke the blow-up of the trade and financial systems that nourished the phase of history now passing — with plenty of collateral damage in all the other realms of daily life.

In the meantime, America sinks into a swamp of sexual excess, sexual preoccupation, sexual confusion, sexual recrimination, and sexual remorse. The one thing that none of the combatants can agree on is what might pass for sexual normality. The very notion would be taken for a war-cry.

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Is there such a thing as too much good news?  According to Goldman Sachs, the answer is yes.

Over the weekend, we reported that per the latest Weekly Kickstart report from Goldman’s chief equity strategist, David Kostin, there was only one question on Goldman clients’ minds: when will the current rally, which is about to become the longest in history without a 3% correction, and 333 days without a 5% “drawdown”, finally end?

As usual, Goldman provided a variety of arguments why the rally could continue (passage of tax reform the key upside catalyst), and why it could end, mostly because stocks have never been more overvalued…

… although Kostin warned that usually attempts to time a market correction end in tears:

Catalysts for equity market corrections are notoriously difficult to identify ex-ante. In fact, catalysts can even be difficult to identify in retrospect; historians still debate the cause of the Black Monday plunge although portfolio insurance is viewed as the reason the collapse was so dramatic. We do not expect an imminent drawdown, but the risks identified most frequently by clients may limit medium-term S&P 500 upside.

Still, there is one economic indicator that, according to Kostin, has emerged as a red flag of caution. According to Goldman, the most actionable economic indicator currently is the manufacturing ISM, which has so far provided the green light for stocks to maintain their ascent (even as “hard” economic data has been anything but stellar in recent weeks):

Economic growth is the most important driver of corporate earnings and equity performance. Since the Tech Bubble, S&P 500 returns have generally tracked the pace of US economic activity as captured by the ISM Manufacturing Index. After dipping in 2Q, the index has surged in recent months and in September hit 60.8, the strongest reading in 13 years (since May 2004). The US acceleration matched a surge in global growth; our global Current Activity Indicator shows a 4.9% pace of real economic growth, nearly the fastest in five years.

So far so good. The concern, however, is what happens next, and it is here that “too much good news may be bad news.” According to Kostin, “although economic data are extremely strong now, an ISM reading above 60 typically marks the peak of growth and presages economic and equity deceleration. Since 1980, the ISM has exceeded 60 in eight separate episodes; four of those lasted only one month.”

And the punchline: “Investors buying the S&P 500 at ISM readings of 60 or higher have gone on to suffer negative three- and six-month returns on average as economic activity slowed.”

In other words, “an environment of synchronized global growth acceleration today raises the risk of coordinated global slowdown tomorrow.” And that’s not even including “coordinated global” tapering by central banks, which sooner or later will be priced in by the market.   

Furthermore, since much of the “global, coordinated economic growth” was largely a byproduct of China’s tremendous credit impulse in the months headed into the 19th Party Congress, which is ending shortly, and as a result China’s credit injection is about to slow significantly if not shut outright, the likelihood of a sharp drop in US and global manufacturing surveys is rising rapidly.

Finally, keep in mind that despite its caveat of a 2nd year-end S&P price target of 2,650 if tax reform passes, Goldman’s official target for the US market remains 2,400, or nearly 200 points lower. So will market repricing be driven by a slowdown in manufacturing, especially once the full knock-on effects from the recent hurricanes is fully priced in? And will a bearish Goldman prediction finally come true? The answer will be revealed over the next few weeks when the next round of Flash PMIs and ISMs are revealed.

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'Price' and 'risk' have decoupled in The Dow over the past 6 weeks or so, since China intervened in its FX markets…

While US equity prices have soared across the board, Dow 'VIX' is up dramatically while S&P 'VIX' is down (as one would historically expect)…

Smashing the cost of protection for The Dow to its highest level relative to the S&P in over 17 years…

What are Dow options traders telling us?

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In a statement to the UK Parliament today following last week’s EU summit, Prime Minister, Theresa May, stated that she was “ambitious and constructive” about the progress of Brexit negotiations. May talked up (again) progress made on safeguarding citizens’ rights so that EU nationals can remain in the UK and vice-versa. She also reiterated that significant progress has been made on Northern Ireland and that it’s been agreed that there will be no fiscal infrastructure at the border.

She had little to say about the critical issue of financial settlement – merely that Britain will honour its commitments for the remainder of the EU budget plan (2021) as she outlined in her Florence speech. She said that progress is being made as both sides go through these commitments “line-by-line.” May stated that the EU has agreed to make preparations to move on to the discussions about trade and the UK/EU future relationship and that this wouldn’t have been possible without the “momentum” that resulted from the Florence speech.

However, with the financial settlement remaining a stumbling block to progress, May was vulnerable to a renewed attack, which was duly delivered by opposition leader, Jeremy Corbyn.

Corbyn stated that he had a “worrying sense of Groundhog Day with every update” from the Prime Minister. After the Florence speech, he reminded May that she had talked about “momentum” in the negotiations and an agreement on citizen’s rights was “within touching distance”, both phrases which she repeated today. He lambasted the Prime Minister for still not having a clear idea when trade negotiations will begin and accused her keeping parliament in the dark as to precisely what she has agreed with the EU. He asked if she would confirm whether privately she said to the EU that the UK “would pay more than indicated in the Florence speech?”

Leaks from last week’s EU summit suggested that May might be prepared to pay more than 40 billion euros. The EU is believed to want 60 billion euros. Not surprisingly, May denied that more money had been offered and stated that she had a “degree of confidence” that sufficient progress will have been made so that discussions about trade can begin by December 2017.

There has been much discussion about the possibility of a “no-deal” Brexit in the UK media in recent days. Some members of May’s party, increasingly frustrated by EU negotiating tactics, would prefer the Prime Minister to walk away from negotiations. Labour Party Brexit spokesman, Keir Starmer told the Sunday Times that his party is reaching out to rebel MPs in the Conservative Government to force the Prime Minister into subjecting any final deal on Brexit to a parliamentary Vote. Starmer is also demanding five other changes to the so-called Great Repeal Bill – European Union (Withdrawal) Bill – including the addition of a two-year implementation period.

The wide variety of opinion in the Conservative Party about a “no deal” Brexit provided Jeremy Corbyn with ammunition to mock the differing views held by senior members of Theresa May’s Cabinet. Corbyn mocked the Government for Home Secretary’s (Amber Rudd) comment that “no deal was unthinkable”, the Brexit Secretary’s (David Davies) comment that “no deal was an option” and the Secretary for International Trade’s (Liam Fox) comment that “no deal was not Armageddon.” If no deal was “not Armageddon” wasn’t the Government setting the bar “a bit too low? asked Corbyn.”

Corbyn and other MPs emphasised that businesses wanted clarity on Brexit as quickly as possible and preferred a transition period. As Bloomberg reports

U.K. Prime Minister Theresa May repeatedly dodged questions Monday as to whether she will seek a swift agreement on the Brexit transition period that businesses are crying out for, rather than bundling it into the overall deal. Businesses are stepping up their calls for an urgent agreement with the European Union that would allow them to trade as usual for two years after Brexit.

 

But May’s spokesman said that the transition deal would be part of a wider agreement, which isn’t expected to be finalized until shortly before Brexit day in March 2019.

 

‘Everybody has always been clear that we are looking to wrap all this up in one single go; everything will be agreed at the same time,’ the spokesman, James Slack, told reporters in London. ‘The point of an implementation period is it’s a bridge to where you’re headed, so you need to know where you’re headed to finalize that implementation period’. Asked by several lawmakers in the House of Commons a few hours later whether that was her position, she avoided the question, saying only that she was confident the UK would get a good deal.

One of May’s statements that caused mild amusement on our part was her assertion that both sides have approached the Brexit negotiations “with a professional and constructive spirit”.

One could argue that this contrasts rather too obviously with the confidential briefing about May’s dinner with EU President, Jean-Claude Juncker last week, that is thought to have come from Juncker’s office. According to Reuters

It was the second time in six months that a correspondent for Germany’s Frankfurter Allgemeine Zeitung who is respected for his access to Juncker’s team has published an account of the EU chief executive’s reactions after a dinner meeting with the British prime minister on Britain’s EU withdrawal.

 

May was accused of being “disheartened”, “discouraged” and “begging for help.”

The BBC reported her ex-adviser Nick Timothy accused EU official Martin Selmayr of being the source of the account in a German paper claiming Mrs May was politically weak and had ‘begged for help’ at a dinner. He claimed it showed ‘some in Brussels want no deal or a punitive one’.

Mr Selmayr denied involvement…The apparent leak of what happened in the dinner follows a similar incident in April, when Mrs May accused some in the EU of ‘meddling’ in the general election campaign after details of a dinner between her and Mr Juncker in Downing Street appeared in the German press. Downing Street said it had no comment on the latest reports and pointed out that both sides were of the view that the recent get-together had been ‘constructive and friendly’.

And Foreign Secretary Boris Johnson said that although the tone of last week's summit was ‘more positive’ than he expected, he wanted the EU to ‘get on’ with talks on trade.”

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Authored by John Rubino via DollarCollapse.com,

There’s a debate raging over what, exactly, bitcoin and the thousand or so other cryptocurrencies actually are. Some heavy-hitters are weighing in with strong, if not always coherent opinions:

Jamie Dimon calls bitcoin a ‘fraud’
JPMorgan Chase CEO Jamie Dimon did not mince words when asked about the popularity of virtual currency bitcoin.

 

Dimon said at an investment conference that the digital currency was a “fraud” and that his firm would fire anyone at the bank that traded it “in a second.” Dimon said he supported blockchain technology for tracking payments but that trading bitcoin itself was against the bank’s rules. He added that bitcoin was “stupid” and “far too dangerous.”

————————

Peter Schiff: Even at $4,000 bitcoin is still a bubble
One of the best-known among the bears, investor Peter Schiff, is now making his case in even stronger terms for why bitcoin has advanced ever farther into bubble territory.

 

Schiff, who predicted the 2008 mortgage crisis, famously referred to bitcoin as digital fool’s gold and compared the cryptocurrency to the infamous bubble in Beanie Babies.

 

Moreover, the recent run-up in bitcoin hasn’t softened Schiff’s view: If anything, it’s reinforced his sense of impending doom.

 

Schiff told CoinDesk:

 

“There’s certainly a lot of bullishness about bitcoin and cryptocurrency, and that’s the case with bubbles in general. The psychology of bubbles fuels it. You just become more convinced that it’s going to work. And the higher the price goes, the more convinced you become that you’re right. But it’s not going up because it’s going to work. It’s going up because of speculation.”

 

“What it comes down to is that bitcoin ain’t money.”

 

“Libertarian-minded crypto fans saw this was a way to liberate people from the government,” he said, concluding:

 

“I think it will have the opposite effect. People are going to lose money. This could really backfire, giving libertarian ideals a bad name by making fiat look good. The downside can be really spectacular.”

————————

Hedge fund manager James Altucher: Cryptocurrencies Could Be Worth $200 Trillion One Day
I’m not exaggerating when I say cryptocurrencies are the biggest innovation since the internet. We’re on the ground floor of an enormous trend that’s going to change the world.

 

Cryptocurrencies are currencies with no government in the middle. No bank in the middle. No organizations in the middle keeping track of all your payments, or taking advantage of your spending so they can invade your privacy, and on and on.

 

Cryptocurrencies solve trillions of dollars’ worth of problems, which is why they will be worth trillions of dollars one day.

 

Consider the potential:

 

There is currently $200 trillion in cash, money and precious metals used as currencies in the world. Meanwhile, there’s only $200 billion in cryptocurrencies. Cryptocurrencies are eventually replacing traditional currencies.

 

So that $200 billion will eventually rise to the level of currencies. And probably sooner than we can imagine.

 

Ask yourself, why does the world need multiple currencies? There’s actually no real reason. The only reason we have a U.S. dollar and also a Canadian dollar is that in 1770 the people in Canada decided not to join the U.S. So an artificial border created two currencies. It’s all dictated by artificial borders.

 

In the past, an ounce of gold would be accepted almost anywhere in the world. In that sense, unbacked modern fiat currencies are a step backwards.

 

But in cryptocurrency world, there are what I call “Use Borders.” Every currency is defined by its use. For instance, Ethereum is like Bitcoin but it makes “smart contracts” easier. Contract Law is a multi-trillion dollar industry so this has a huge use case. Filecoin makes storage easier. It’s a $100 billion industry. And on.

 

Studying the “use” cases, and the effectiveness of the coin to solve those use cases can help us make investment decisions confidently.

 

This is the great promise of cryptocurrencies and why they will change the world. It’s just getting started.

Don’t try to make sense of the above. Instead, let’s just assume that the cryptocurrency universe will continue to expand for a while and narrow the discussion down to a single question: Are cryptocurrencies inflationary? That is, will their spread lead to higher or lower prices for the average person, and greater or lesser financial instability for the markets, and what does this mean for today’s fiat currencies?

One common opinion is that cryptocurrencies can’t be inflationary because their owners have to pay for them in fiat currencies. So one bitcoin bought means one dollar, yen, or euro sold, with the net effect on prices being zero.

This makes intuitive sense at first glance, but only holds for the moment of purchase. Consider what happened after someone in, say, 2014 exchanged dollars for bitcoins. The dollars held most of their value, which means the total amount of dollar purchasing power in the world remained constant. But those bitcoins went up by several thousand percent, dramatically increasing the purchasing power – and thus the potential inflationary impact – of the bitcoin complex.

A real world example is Julian Assange:

Julian Assange Says Wikileaks Has Made a 50,000% Return on Bitcoin. Here’s What That Means
Wikileaks has seen an amazing return on investments in bitcoin, founder Julian Assange says, and he is “thanking” the U.S. government for forcing the controversial organization to get into bitcoin in the first place.

 

In a Tweet on Saturday, Assange said the group’s investment in the cryptocurrency has seen a return greater than 50,000% since 2010. Wikileaks began investing in bitcoin back then because global payment processors like Visa, Mastercard, and Paypal were under pressure by the U.S. government to block the ability of the group to take payments.

 

In fact, Bitcoin has seen a more-than 9 million percent return over the dates Assange references. In certain periods in 2010, bitcoin was trading for mere pennies. According to coindesk.com, one unit of bitcoin is now worth a record high of roughly $5,700. Anyone buying bitcoin through much of 2011 and 2012, when one unit was sometimes trading below $1 and was often under $10, would indeed see a return on investment of more than 50,000%, assuming they never sold.

The difference between Wikileak’s purchasing power pre and post-bitcoin is immense. If Assange decides to spend his windfall on goods and services he’d have, at the margin, an inflationary impact on the stuff he buys.

So the answer to the question of cryptocurrencies’ impact on price levels depends on how their values change. If they rise after people buy them, then they’re inflationary. If they rise a lot, they’re potentially very inflationary.

In this sense, it might be helpful to view cryptocurrencies as assets like houses or stocks rather than as money. When they rise relative to fiat currencies they increase the purchasing power of their owners, generate a “wealth effect” in which owners feel richer and more comfortable with splurging, and in that way push up prices. Based on the following chart, a lot of early adopters are feeling a whole lot richer these days.

Which then leads to what might be the major cryptocurrency theme of the coming year: Why would governments allow such an inflationary supernova to explode right in front of them when they presumably have the power to stop it? Here’s one possible – and of course disturbing – answer:

Will cryptocurrencies trash cash? ‘Fedcoin’ could do it
Economist Ed Yardeni of Yardeni Research asks the obvious question: Why would central banks—which derive their power as the centralized gatekeepers of fiat currency creation, check clearing and payment processing—embrace a movement that’s primary motivation has been to usurp this power in a decentralized way?

 

Part of that, according to St. Louis Federal Reserve president James Bullard, is recognition that the technology has achieved critical mass. Thus, there’s a fear of being left behind as the very foundations of banking and monetary policy—intermediation, funds transfers, transactions—rapidly change, not unlike the way the creation of mortgage-backed securities and credit default swaps changed housing finance in the mid-2000s.

 

There’s another, more self-serving purpose: Central banks could use their own cryptos to put the squeeze on paper currency. Why? To facilitate the use of negative interest rate policy, which has been deployed in Europe and Japan in recent years in half-baked forms. Currently, in Switzerland, short-term interest rates are at -0.75%.

 

When another recession hits, especially if one comes soon, a dive to even deeper rates of negative interest would be hampered by the hoarding of cash since banks would charge for deposits (vs. absorbing the cost of negative rates themselves, as they’re doing now). This is known by the economics cognoscenti as the “zero lower bound” in that interest rates cannot go much below negative before the traditional functions of deposits, loans and fractional money creation break down. Mattress stuffing ensues en masse.

 

The Fed is clearly thinking about it. In testimony to Congress last year, Fed chairman Janet Yellen admitted policymakers “expect to have less scope for interest-rate cuts than we have had historically,” adding she would not completely rule out the use of negative interest rates.

 

The BIS­—the central bank of central banks—in its latest quarterly review posited that a crypto backed by the Fed “has the potential to relieve the zero lower bound constraint on monetary policy.” Any distinction between regular dollars and this new “Fedcoin” could be removed by establishing a fixed one-to-one valuation. Any competition from the likes of bitcoin could be squashed by regulation; not unlike how the private ownership of gold was outlawed in the 1930s when it threatened the Fed’s ability to ease credit conditions.

At the risk of being repetitious, pretty much all of the above looks good for gold and great for silver.

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