Could They Pay YOU to Take Out a Loan?
- Shutting it down
- Another oil revolution?
- 2016 conference update
Three times each week (Monday, Wednesday, and Friday), I record a short video, which we post to our social media pages.
You can check out today’s video on The Daily Reckoning Facebook page here.
In preparation for the video, and after we shoot the video, I’ll often chat with Dan (the chap from our marketing team who organises all this stuff) about the latest stuff going on in the market.
Not surprisingly, the recent focus has been on interest rates. That’s understandable when the Reserve Bank of Australia (RBA) has cut the cash rate to a record low of 1.75%.
It’s also understandable when the top news stories on Bloomberg include headlines such as:
‘RBA to Cut Cash Rate Two More Times in 2016, Nomura Predicts’
‘Negative RBA Rate on Radar as Fund Manager BT Predicts Cut to 1%’
[Needle scratches off record]
Negative interest rates in Australia! What the heck?
We thought Australia was different to everywhere else, due to the sound financial management of the economy, low levels of government debt, and a ‘battling Aussie’ mentality.
As Bloomberg notes in one of those stories:
‘BT Investment Management predicts the Reserve Bank of Australia will cut its cash rate to 1 percent and could even take the benchmark below zero as inflation and economic growth disappoint.’
For those folks who say it couldn’t happen, they may care to remember that, not so long ago, the idea of central banks printing money at will and buying their own government’s bonds would have seemed a crazy notion.
Today, it’s a generally accepted practice. To the extent that we doubt if any mainstream analyst would blink an eyelid if the RBA announced a money-printing program as soon as tomorrow.
That was the context of today’s video for our social media channels…that central banks are taking rates lower, and even taking them into negative territory.
Remember, in 2014 there wasn’t a single dollar of government debt anywhere in the world that was yielding less than 0%. Today, there is over US$7 trillion of government debt worldwide yielding less than 0%.
In Australia, a 10-year government bond currently yields 2.3%. Shorter dated two-year bonds yield 1.6%. How long before that eventually reads with a minus sign before it?
Perhaps not long. The trend appears to be clear. Governments and central banks are doing their darnedest to induce inflation. Their current method is to cut interest rates.
Many Western economies now have negative interest rates on bonds, and some are even considering imposing negative interest rates on bank savings accounts. The abolition of cash is part of this plan, forcing people to only hold electronic ‘cash’ in a bank account, which the government and/or central bank can debit as an ‘interest charge’ on savers.
The rationale being that, if savers know the bank will charge them interest for holding money in their account, there will be an incentive to spend. This (the argument goes) will help spur an economic recovery.
But what if that doesn’t work? To be frank, we don’t expect it to work. In that case, what’s next?
This is where Dan, our marketing man, offered his take on what could happen next: banks will pay you for taking out a loan.
To say that we fell back into a chair on hearing those words would be an accurate statement. It was as close to a ‘eureka’ moment as we’ve had in a long while.
If central banks want people to spend, and they’re prepared to punish savers by imposing costs on savings, isn’t it only natural that they would do more to encourage borrowing?
Regardless of whether a housing loan is 5% or 3%, it may not be enough to get you to borrow money to buy a house. But what if the bank paid you for taking out a loan?
What if the bank paid you 2% per year on a $500,000 loan? You’d still have to make monthly repayments, but instead of the bank adding interest to the principal, the bank would deduct interest from it.
It’s a crazy idea, bordering on lunacy. It’s also (sad to say) an idea that could very well become a key policy by some central bank somewhere in the world within the next 12 months.
If it does, we’ll name it the ‘Daniel Rule’, and we’ll expect any central bank that implements it to pay Dan a royalty for using this brilliantly insane and ridiculous idea.
Overnight, the Dow Jones Industrial Average gained 222.44 points, or 1.26%.
The S&P 500 added 25.7 points, or 1.25%.
In Europe, the Euro Stoxx 50 index closed up 23.14 points, or 0.78%.
Meanwhile, the FTSE 100 index gained 0.68%, and the German DAX added 0.65%.
In Asian markets, the Nikkei 225 index is up 104.09 points, or 0.63%.
China’s CSI 300 index is currently 0.91% higher.
In Australia, the S&P/ASX 200 index is up 28.71 points, or 0.54%.
On the commodities markets, West Texas Intermediate crude oil is trading for US$44.45 per barrel. Gold is US$1,271 per ounce.
The Aussie dollar is worth 73.5 US cents.
Shutting it down
The doors are closing.
At midnight on Saturday, we’ll stop taking new admissions for Phil Anderson’s Time Trader service.
We don’t know when we’ll reopen the doors again. I’m sure we will one day. But we honestly can’t see if it will be later this year or next.
If you’ve hemmed and hawed about whether to give it a shot, you’ve only got three days to make up your mind before the door slams shut.
Another oil revolution?
After sinking to a multi-year low in February, the oil price has rebounded.
The US benchmark oil contract, West Texas Intermediate crude oil, has nearly doubled since the February low.
Since then, it has seen a remarkably steady advance, before falling into what now appears to be a neat sideways trading range. You can see the one-year oil price chart below:
Were predictions of an oil price crash to US$20 or even $10 a barrel overstated? Or is the current rebound just a short term rally?
Well, the answer to both questions might possible be ‘yes’.
Whenever any asset price falls a long way, the more it falls, the more folks believe it will never stop falling.
We still remember the market lows in 2003. A broking colleague at the time said that he didn’t believe stocks would ever go up again. He was serious about it too.
In 2008, as the market crashed, there was a similar sentiment — ‘Stocks won’t just fall 50%, they’ll fall 90%.’ Some stocks did indeed fall 90%. That included one or two of the stocks I was recommending at the time in Australian Small-Cap Investigator.
But, overall, the market didn’t collapse 90%. It fell by around half, and then rebounded strongly. That was the case here, and in most other Western markets.
However — just as a ‘swallow doesn’t make a spring’ — a stock or commodity market rebound doesn’t mean prices won’t subsequently fall.
Oil has rebounded well. So has the Aussie market. But with the potential upcoming listing of the world’s largest oil company, Saudi Aramco, could it create a new dynamic for Saudi Arabia and the world’s oil market?
As the Financial Times reports:
‘Saudi Arabia is raising production and pressing ahead with a global expansion plan for its state oil company ahead of what could be the world’s largest ever stock market listing.
‘In some of the first comments since a government reshuffle at the weekend, Saudi Aramco chief executive Amin Nasser emphasised the company’s willingness to compete with rivals, putting on notice oil producers from regional adversary Iran to US shale producers.’
No one should underestimate the significant of Saudi Aramco ‘going public’ with a stock listing.
Until now, Saudi oil interests have really been a cash-cow for the Saudi government. Its entire welfare and government spending system relies on domestic oil production.
However, it’s worth remembering that national oil companies (NOCs) are typically less efficient than private and publicly-listed oil companies.
An NOC doesn’t have a profit motive. It only has a revenue motive. It needs to sell as much oil as it can in order to fund government spending. And while the NOC has a cost structure like any other business, we can politely say that the ability to [cough] massage the cost structure is quite easy.
But as a publicly listed company, theoretically at least, it will be much harder to massage the numbers.
That will drive business and cost restructuring, but, even more importantly, it will likely drive innovation as well.
If the US shale revolution caused upheaval in the oil market, and broke new ground with technology, it could be mindboggling to think of the revolution that innovation in the Saudi Arabian oil industry could have on the market.
Saudi Arabia already has the world’s biggest oil reserves, and is a key player. How would the market change if, suddenly, Saudi Aramco began using hydraulic fracturing (fracking) technology?
In the US, where the technology is widespread, the breakeven costs are high. At US$44 per barrel, many shale oil producers are running at a loss. But if Saudi Arabia gets in on the act too, this could drive the costs down for the Saudis.
Sure, there would be a positive knock-on effect for US producers too. But that’s the point. While it’s possible that the oil price will continue to rally higher, in our view, the argument for a resumption of falling prices is more convincing.
We’ll continue to watch with interest. Things rarely stay quiet for long in the oil market. The proposed listing of Saudi Aramco looks set to be the event that kicks off the next ‘revolution’ in the oil industry.
2016 conference update
Gotta dash. The production crew is here to film details of our upcoming 2016 investment conference.
We’re getting close to the point where we’ll be able to reveal everything to you. If all goes to plan, first details could be available for you this weekend.
I’ll keep you posted. If you only go to one investment conference this year, this will be the one. You can’t miss it.