The stock market feast gets louder and louder with the news that the United States and China are talking about trade.
And more champagne is being poured, even though the unemployment rate hit 14.7% in April, as reported on Friday. Why is the market apparently celebrating the loss of jobs? For answers, please see “Why it’s not so crazy that stocks are growing even though 26 million people are unemployed.”
Investors are too drunk to notice that the federal funds forward rate has become negative. This contradicts the V-shaped economic rebound elixir on which the stock market is drunk. Plus, it could herald very bad things to come. Let’s explore using two graphs.
Please click here for an annotated graph of the January Federal Fund Futures.
Note the following:
• The first graph gives a long-term perspective.
• The first graph shows that after having touched the upper band of the “mother of the support zones”, the stock market threatens to exceed the lower band of the resistance zone. From a technical point of view, this is normal behavior. However, when you take into account the general economic situation and the fundamentals, that is another story.
• The second graph shows that the federal fund futures in January became negative. A value greater than 100 indicates negative rates.
• As a precaution, the Federal Reserve has not announced negative interest rates yet. Futures contracts simply indicate that the market expects the Fed to announce negative interest rates by January.
• In our analysis of the Arora report, describing negative interest rates as “bad” is not too strong a word.
• Japan and Europe already have negative interest rates. Have you taken a look at the perpetual anemic growth rates in Japan and Europe? In our analysis, these economies are deteriorating. In contrast, the United States has strength and potential for strong growth. Hopefully our leaders will realize that negative interest rates in Europe and Japan have failed and will move away from them. But hope is not a good investment strategy. Investors should, for the first time in history, begin to consider a scenario of negative interest rates in the United States.
will likely provide many short-term business opportunities.
• It is highly speculative due to a lack of history, but bitcoin
can be a beneficiary. Keep an eye on Grayscale Bitcoin Trust
It is often traded at a premium and has several drawbacks, but has an advantage for investors who do not wish to open a cryptocurrency account. There will likely be many opportunities in bitcoin in the future.
• If the stock market was controlled by prudent investors, there would be a massive sale – perhaps a loss of more than 50%. But the stock market is not controlled by cautious investors.
• Momentum investors control the stock market. Expect a narrative to develop among them that negative interest rates are good for stocks. Stocks compete with bonds. If bonds pay lower rates or negative rates, shouldn’t stocks be priced much higher? Expect to buy in five stocks: Amazon
• What about negative interest rates reflecting a difficult economy? It’s just too deep for dynamic investors to understand.
• In theory, bonds should benefit. However, don’t rule out a massive sale, especially if the Fed loses control of interest rates.
Answers to your questions
The answers to some of your questions can be found in my previous writings. Please click here for more details.
Disclosure: Subscribers to the Arora report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is the founder of The Arora Report, which publishes four newsletters. Nigam can be contacted at [email protected]