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The Case for Negative Interest Rates - Rationale, Risks and Origins

Why on earth would a bank charge negative interest rates? It's so " upside down" and counter-intutive we thought it would be a good idea to cover the topic in this weeks blog post.

During times of economic uncertainty central banks lacking in policy alternatives to stimulate the economy have turned to unconventional policies such as negative interest rates to stimulate the economy. The use of negative interest rates is a tool to counter potential deflationary spirals where - in times of economic uncertainty - there is less incentive on the part of businesses and consumers to spend and therefore less investment, growth, profits and a higher propensity for unemployment which in turn creates a negative feedback loop. By offering negative interest rates banks disincentivize individuals and businesses to hold cash at banks as it now costs depositors money to do so (which turns the traditional banking model on its head) and encourages businesses and individuals to borrow money by actually being paid to borrow by the banks.

Sweden was the first to experiment with negative rates in July 2009 when the Reiksbank cut interest rates to -.25%. The ECB (European Central Bank) did so in 2014 lowering its interest rate to -0.10%. Other European countries and Japan have done likewise with over $10 trillion in government debt carrying instrument with negative yields by 2017. The objective is to encourage banks to lend money rather than hold reserves at the central banks (where they are now charged for the privilege). Another objective is to use negative interest rates to devalue a currency and in essence make it more competitive, stimulating the economy through demands for export of goods and thereby encouraging business expansion.  This has been one of the objectives of the ECB.

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28 Trillion Reasons to be Vigilant

$28 Trillion - take a moment to reflect on this number - is the current total of the US National Debt. As of June 17th it is precisely $28,311,074,615,442.85. We titled this blog post "28 Trillion reasons to be vigilant" because this number is not going down, has not gone down in the last 15 years and is unlikely to go down. So, what does this mean for the USA and for you?

1.The cost of servicing the national debt as a percentage of US revenue is going up.

2.If interest rates rise significantly, even as high as 3-4%, how sustainable is servicing the national debt? The Fed has a significant incentive - 28 trillion incentives - to keep interest rates as close to zero for as long as possible without going into negative yield territory. This would very likely have been the case had COVID never happened. COVID however has provided the US a perfect storm to do keep interest rates at all time lows and inject $6 trillion and counting into the economy. This serves several national purposes: It provides massive liquidity to withstand the shock of COVID, it devalues the US dollar by doing so, which in turn dilutes the national debt value, it keeps interest payments on the national debt as low as possible and it allows for the most optimum conditions for the economy to return to pre-COVID employment numbers.

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Identifying Trends and Moving Averages

Stock, Commodity or Bond prices do not move in a straight line. All fluctuate with changing variables including but not limited to economic, political, competitive, human or technological factors. Identifying price trends is the underlying basis of technical analysis and critical to traders and investors whether it is over a short, medium or long term basis. To do this, the technical analyst has hundreds of technical indicators at their disposal that are now also woven together in trading algorithms, AI (artifical intelligence) and trading BOT's that operate independent (largely) of any human.

Today we are going to discuss 'moving averages" which track trendlines. There are only 3 potential trendlines for any security which is Up, Down or Sideways. Moving averages track and chart prices - over different timelines - and with different formulas. For example, a simple moving average charts the closing prices of stocks over periods such as 20, 50, 100, 200 or 400 or more days. An exponential moving average places more emphasis and wieght on recent price changes than past price changes. These moving averages can be used to track micro, medium and macro trends and trends within trends. Certain moving averages are better suited or more accurate depeding on the timeline being measured. As the name suggests "moving average trend lines track "averages" which inevitably do not account for unexpected sudden events. They are "reactionary" pattern indicators and predictive only to a certain extent. As such they have value for investors or traders but they are not absolute.

Moving indicators track trends and the convergence of various moving indicators can provide "confirmatory strength" signals of a trend or additional weighting to the preponderance of a trend. Again, while no signal is written in stone, they must be understood in the context of "probability analysis" and historic metrics which in turn provide "odds". On a relative basis, these odds can determine risk and positioning in time and over time. For example if a 20 day average crosses a 50 day moving average or a 50 day average crosses a 200 day moving average to the upside or the downside, these can be indicative of a supporting trend and it's strength or weakness.

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The Melt Up Ingredients -Stimulus, Debt, Inflation & Low Interest Rates

We have seen this movie before. After the roaring 1920's, the stock market melted up to euphoric highs only to crash in stupendous fashion. In the internet boom of the late 1990's the NASDAQ hit likewise euphoric highs only to crash back down to earth. Following extremely lax lending practices coupled with low interest rates the flying real estate boom coupled with mortgage backed securities fueled the 2007/8 great recession taking the entire banking and monetary system to the brink. Massive stimulus injections lifted us out of that great depression.

Economists have long seen repeating economic cycles in history. Booms followed by Bubbles and then Busts with long periods of economic stagnation, only for the cycle to repeat. We have written about this before but want to write about it again because while we have seen this movie before in the US and all around the world, the movie we are seeing unfold the US today is different to one's we have seen in US history.  

The convergence of record national debt, stimulus, low interest rates, inflation, a booming stock market in the midst of a global recession have created a mix of ingredients that could fuel one of the great bubbles and busts of the modern era.

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What's Chaikin Folks? Identifying Money Flows

There is a whole lot of Chaikin going on! In todays blog post we are continuing the series about technical analysis and the large toolbox of indicators available. Today we are looking at an indicator that attempts to measure money flows into and out of a security.

The Chaikin Money Flow was created by Marc Chaikin along with the Chaikin Oscillator and Accumulation/Distribution signals to measure the flow of money into or out of a security over a given period of time.

The Money Flow Volume was conceived by Chaikin to measure the buying and selling pressure for a security over a user defined period of time such as 15, 50 or 200 days. The most popular setting for this indicator is over a 20-21 day period. The value of the oscillator swings between 1 and -1 with buying pressure being greatest when the value is closest to 1 and selling pressure being greatest when the value is closer to -1.

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Phone: 925-906-9800
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Hawley Advisors is an investment advisor, registered with the State of California. Any investment ideas or strategies on this website are for the purposes of education and general information only and should not be construed as specific investment advice. For more information about our firm please check the SEC Public Disclosure website: https://www.adviserinfo.sec.gov/

 

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