Financial “D-Day” Arrives

  • It’s “D-Day” in the currency wars — Europe fires on the dollar
  • Our early advice: Buy a safe and brace for tax increases
  • “Limited trade agreement” in view? We’re not buying it
  • Fearing little backlash, CEOs demand more gun control
  • Trump goes full-on nanny state with vaping products
  • Did King James just call BS on decades of stupid trademark tricks?

The new “D-Day” is here. Time for a damage assessment.

As noted here on Tuesday, “D-Day” is the term Jim Rickards applied to a major decision due today from the European Central Bank. The “D” stands for “dollar” because the decision aims in part at weakening the euro relative to the dollar. Washington is certain to fight back… and a new round of currency wars will soon be underway.

This morning the ECB pulled the trigger. Its benchmark interest rate of negative 0.4% was cut to negative 0.5%. The ECB will also resume its “quantitative easing” after a pause of only eight months — buying both government bonds and corporate bonds to the tune of $22 billion a month.

In other words, more of the same. ECB chief Mario Draghi has pursued negative interest rates and QE for years now and they’ve done nothing to “stimulate” the eurozone economy into real prosperity.

As it happens, D-Day is his swan song; going forward this mess will be in the hands of Christine Lagarde, fresh from her gig at the International Monetary Fund.

Christine Lagarde

“Mario, why didn’t you tell me it was going to be this bad?”

With this decision, the U.S. dollar index is flirting with highs last seen in the spring of 2017 at nearly 98.9.

For the most part, the decision is no surprise. Neither is the reaction from the White House.

Donald Trump Tweet

Only yesterday the president groused that the Fed should slash its benchmark interest rate — still a little over 2% — “to ZERO, or less… The USA should always be paying the lowest rate!”

We should spend a few moments contemplating what negative interest rates really mean.

Because in a sane world, they wouldn’t exist. Who in their right mind would lend money for three months or three years or 10 years… and expect to get less money back at the end of that term?

And yet negative interest rates have been the reality overseas for years now. Check out this chart of the yields on 10-year government bonds issued by the United States, Germany and Japan.

Negative Rates: Already Reality Overseas

The theory is that negative rates will encourage individuals and businesses to borrow more and give the economy a jolt.

The reality — as we’ve already seen overseas — is that negative rates spook people into thinking something is really wrong with the economy, and their first impulse is to hoard cash. When rates went negative in Japan nearly four years ago, demand soared for home safes.

But central bankers don’t know what else to do. So they keep doing it, hoping against hope it’ll work, eventually.

Maybe negative-rate mortgages might do the trick?

That’s what a Danish bank is about to find out. Last month, Jyske Bank — the country’s third-largest — began offering a 10-year fixed-rate mortgage at negative 0.5%.

Yes, you can borrow $500,000 and pay back only $497,500. (Of course the bank will still get its cut of fees and whatnot — heh.)

“A few months ago, we would have said that this would not be possible,” says the bank’s housing economist Mikkel Høegh, “but we have been surprised time and time again, and this opens up a new opportunity for homeowners.”

Here in the United States, the Federal Reserve might well accommodate the president’s wishes for “ZERO, or less.”

In July, Jim Rickards attended a confab of central bankers and other global elites at Bretton Woods, New Hampshire — marking the 75th anniversary of the Bretton Woods agreement that made the dollar the global reserve currency.

The highlight was an off-the-record panel featuring a current Fed official, a former Fed official and a current ECB official.

The ECB official clearly signaled the move deeper into negative territory that took place today.

And the Fed officials signaled they were open to going negative.

“The Fed panelists made it clear that no decision has been taken,” Jim says. “They merely made the point that a negative rate policy might be required and said the Fed was perfectly prepared to go there if needed.

“It was not regarded as controversial by the panelists even though it was completely unprecedented in the history of U.S. monetary policy.”

Consider yourself on notice. You might want to see what they’ve got for safes at your nearest hardware store. Assuming the powers that be don’t pull a cashless-society gambit.

While Jim applied the “D” in “D-Day” to the “dollar”… it applies just as easily to the “destruction of pensions.”

Giant institutional investors like insurance companies, university endowments and pension funds are required to put a portion of their investments into bonds and other fixed-income investments.

So they’ll have no choice but to buy negative-yielding debt… even if it destroys their returns.

Some of that destruction is already making itself felt in corporate pension plans — even while U.S. rates are still positive.

With bond yields plunging last month, U.S. corporate pensions ended August with only 82% of the money they’ll need to cover all their future obligations, according to the consulting firm Mercer.

That was a drop of four percentage points in one month — falling dangerously close to the 80% threshold where companies tend to tap into their cash flow to shore up their pensions.

That’s cash companies can’t use to grow their businesses. Or for dividends and buybacks. Either way, bad news for their share prices.

And that doesn’t even get into the train wreck of state and local government pensions, many of which are woefully underfunded. They too are hurting as a result of falling interest rates.

As we’ve long warned, whenever the next recession comes, state and local pensions will be hurting so badly that tax increases are sure to hit — although some taxpayers will be hit worse than others. If you missed our state-by-state breakdown in July, you might want to give it a look now.

The ECB decision isn’t the only market-moving news this morning.

Bloomberg reports the White House is looking to offer China a “limited trade agreement” that would delay some of the planned tariffs and roll back others.

With that, the major U.S. stock indexes are adding to yesterday’s gains. At 3,015 the S&P 500 is only 10 points below its all-time high six weeks ago.

[I had a few things to say this morning in The Profit Wire about the media’s obsession with “all-time highs.” We’ll be reopening access to this premium trading advisory in a few more weeks. Our charter subscribers are amassing a rock-solid record of winning trades.]

Gold has pushed back above $1,500, if only by a few bucks. Crude has tumbled back below $55.

The big economic number of the day is the consumer price index — up 0.1% in August. Year over year, the official inflation rate is running 1.7%. As always, any resemblance to your own cost of living is purely coincidental.

As for the “limited trade agreement”… we’ll believe it when we see it.

And even if it comes about, it won’t be the end of the story. Can’t you just see the president accusing China of going back on the deal if he thought doing so would work to his advantage during the 2020 campaign? Or alternatively, Elizabeth Warren accusing him of not holding the Chinese to the deal he negotiated?

As we said last month, this isn’t a trade war. It’s a new cold war.

A sizeable swath of corporate America is wading into the gun-control debate — on the side of more laws and regulations.

“Doing nothing about America’s gun violence crisis is simply unacceptable,” says a letter that arrived on the desk of Senate leaders today. The CEOs demand tighter background checks and a federal “red flag” law; similar laws in 17 states give courts the authority to temporarily confiscate firearms from people labeled “dangerous.” (Due process? What’s that?)

Among the signatories are the CEOs of Levi Strauss (LEVI), Twitter (TWTR), Uber (UBER), Lyft (LYFT) and Royal Caribbean Cruises (RCL).

You’d think Uber and Lyft have bigger concerns at the moment, like trying not to hemorrhage investors’ cash. But “business leaders are not afraid to get engaged now,” Levi’s CEO Chip Bergh tells The New York Times.

Never mind that gun crime and gun violence are still down dramatically from levels of 20 years ago; headlines about mass shootings have lured the CEOs into the “Do something!” trap.

Both of the big gunmaker names — Sturm, Ruger (RGR) and American Outdoor Brands (AOBC) — are down nearly 1% on the day.

Longer term, it will be interesting to see what gun owners do, if anything. Switch to Wranglers? Take taxis? Stay the hell off Twitter?

Speaking of the “Do something!” compulsion, the feds are on the verge of strangling the startup Juul Labs — which dominates the market in flavored vaping products.

The FDA plans to ban e-cigarettes with fruity flavors, along with menthol and mint. Only tobacco-flavored products would remain.

“We have a problem in our country,” said the president yesterday. Per The Wall Street Journal, “First lady Melania Trump, who was in the room with the president and the health officials, has urged more regulation of vaping products, and Mr. Trump cited her concerns about the welfare of their child, Barron.”

(Remember when Republicans mocked Democrats for nanny-state measures the Dems justified as being “for the children”? We do.)

Juul tried like hell to avert this outcome. Politico says it “spent millions of dollars on lobbying, hired high-profile Trump administration officials and blanketed Washington with ads touting its efforts against underage vaping.”

Now it’s looking like a bust — not only for Juul but also for the tobacco giant Altria (MO), which dropped $13 billion to acquire a 35% stake in Juul. MO is down nearly 1% on the day.

From a public-health standpoint, the decision will likely backfire. According to several surveys, adults who’ve turned to vaping to try getting off cigarettes much prefer the flavors the FDA is moving to ban. Not hard to imagine those people going back to the ol’ coffin nails.

The “Taco Tuesday” saga has descended into downright insanity. Or is it that 30 years of insanity are nearly over?

Yesterday the U.S. Patent and Trademark Office turned away an application by LBJ Trademarks — the marketing firm owned by NBA superstar LeBron James — to trademark the term “Taco Tuesday.”

We were unaware he was trying to trademark the term. We were aware only that “Taco Tuesday” was a thing with the King and his family on social media. To wit…

LeBron James Taco Tuesday

In rejecting the application, the agency sensibly said, “The applied-for mark is a commonplace term” that turns up in “everyday speech.”

To hear James tell it, the rejection was the intended outcome — as his spokesman says, “getting the U.S. government to recognize that someone cannot be sued for [the term’s] use.”

OK, but where does that leave the Taco John’s fast-food chain — which was granted a trademark for that very term by the same agency decades ago?

Only last month we mentioned how the company had sent a cease-and-desist letter to a brewery promoting “Taco Tuesday” just five blocks from company headquarters in Cheyenne, Wyoming. Taco John’s has sent similar letters to dozens of people and businesses who’ve used the term for the last 30 years.

Not one article we see about the trademark office’s decision addresses this disconnect.

Perhaps — and we’re just speculating here — the King got one of Taco John’s customary nastygrams and he had enough money and legal firepower to fight back. And his lawyers were creative enough to file their own trademark application.

But does yesterday’s decision render Taco John’s trademark null and void?

Evidently, the trademark office was too embarrassed by the whole farce to even address that question.

All hail the King! Seems he’s inventively called BS on stupid trademark tricks.

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. Once again, we’ve applied a $557 account credit to every Agora Financial reader who hasn’t claimed it already.

As always, we’re talking about a limited-time offer. It comes off the table at midnight tonight. Click here to learn how you can claim your credit.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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