Eight Centuries of Interest Rates

Peter Schiff has called negative interest rates an absurdity, Kevin Muir thinks they are an abomination, and ex-Credit Suisse CEO Oswald Gruebel thinks they are crazy. But is today’s negative interest rate environment really so strange?

To understand the present, it always helps to step back and get the bigger picture. Which is why I want to spotlight a recent paper that mines through historical documents for 800 years worth of interest rate data.

In case you’ve missed it, many parts of the world are characterized by negative real interest rates. Investors in 5-year German bonds currently earn -0.6% per year in interest. That’s right. Investors must pay the government for the right to hold a bond for five years.

Compounding the burden of holding a German bond is inflation, which in Europe is expected to register at around 1.5% per year. Inflation eats into the value of a bond’s interest payments and principal. Combining the already negative interest rate with 1.5% inflation means that a German bond investor can expect a total negative return of around -2.1% per year.
Interest rates since 1311

On the face of it, a -2.1% return seems thoroughly outlandish. But in a recent Bank of England staff paper, economic historian Paul Schmelzing finds that negative interest rates aren’t that odd. Schmelzing has gathered an incredible 800-years of data on interest rates and inflation going back to the early 1300s.

Schmelzing’s data shows that real interest rates have been gradually falling for centuries. The real interest rate is the return that one gets on a bond or a loan after adjusting for inflation.

Here is one chart that Schmelzing plots from the data he has collected.

Interest rates on 454 personal/non-marketable loans to sovereigns, 1310-1946, and U.S. EE-series savings bonds (Source: Schmelzing, 2020).

It shows interest rates on 454 loans made to sovereigns by court bankers and wealthy merchants. Data goes back to the early 1300s. These are non-marketable loans, meaning that they could not be resold on secondary markets. Included in this list is a 1342 loan made by Simon van Halen, the regent of Flanders, to the English king Edward III, to help him wage war on France. Van Halen extracted a princely 35% per year before inflation! Another loan is the Duke of Milan’s 218,072 Milanese pound debt to the Medici bank in 1459, which cost 15.4% per year.

As the chart illustrates, the real interest rate that lenders have demanded from sovereign borrowers over the last 800 years has been gradually declining. The 0.5% real interest rate on modern U.S. savings bonds, a close cousin of earlier courtly loans (they are also non-marketable) may seem low on first blush. But zooming out, the savings bond fits the trend quite accurately. It’s not far off what a lender might have expected to earn from the Habsburg Emperor in the 1790s.

Schmelzing’s paper has many curious details about medieval financial markets. Not included in his interest rate data, for instance, are loans denominated in various odd units. In times past, a lender might stipulate repayment in chickens, jewellery, land, fruit, wheat, rye, leases for offices, or some sort of entitlement. To keep calculation easier, Schmelzing only collects information on loan that are payable in cash.

Nor does Schmelzing include loans from Jewish communities in medieval times. These loans often used the threat of expulsion to extract artificially low interest rates.

To adjust the interest rate on loans for inflation, Schmelzing relies on consumer price data compiled by economic historian Robert Allen. Allen’s consumer price index baskets go back to the 14th century. He has constructed them for major cities like London and Milan using old records of items like bread, peat, wood, linen, soap, and candles. Prices are expressed in silver unit equivalents to correct for debasement of the coinage.

Cultural differences are reflected in each city’s respective consumption baskets. For instance, the English basket features butter and beer, while the North Italian features olive oil and wine. Antwerp’s series includes rye bread, but in places where rye bread wasn’t as popular (ie. London and Paris), wheat bread is substituted...

- Source, Bullion Star

Just because doomsayers warn of Armageddon doesn’t mean they’re right

Markets are doomed. Again. Warnings of looming Armageddon have become routine over the last decade, so it wasn’t surprising to hear another apocalyptic forecast at the recent World Economic Forum at Davos.

“Guggenheim says market a ‘ponzi scheme’ that must collapse,” headlined Bloomberg, following comments from Scott Minerd, the global chief investment officer of Guggenheim Partners. Loose monetary policy had inflated asset prices but investors would eventually “awake” to the rising tide of corporate bond defaults and downgrades, said Minerd. A “tipping point” will be reached and investors should expect a “severe” equity bear market with losses of 40 to 50 per cent. Guggenheim has more than $275 billion in assets under management and Minerd, a member of the New York Federal Reserve’s investor advisory committee on financial markets, is widely regarded as a thoughtful, experienced money manager. In other words, he is not regarded as a perma-bear given to wild scaremongering.

Nevertheless, we’ve been here before. “Markets are on ‘collision course for disaster’, says Guggenheim’s Minerd”, headlined MarketWatch in March 2018. “Guggenheim investment chief sees a recession and a 40 per cent plunge in stocks ahead”, reported CNBC a month later. Near the bottom of last May’s minor market pullback, Minerd warned of a “much more severe downturn before the end of the summer”, with stocks likely going “somewhere below the lows” at the end of 2019.

Investors who followed this advice lost out – the S&P 500 quickly recouped its losses and ended 2019 with gains of 29 per cent, its second-best year since 1997.

Apocalyptic commentary

Minerd is obviously entitled to share his concerns and healthy markets have always been made up of a mix of bullish and bearish voices. Nevertheless, the sheer volume of apocalyptic commentary today is different, noted a November report by JP Morgan strategist Michael Cembalest.

“Something peculiar happened after the global financial crisis: the rise of the Armageddonists,” said Cembalest, referring to the variety of money managers and forecasters “whose apocalyptic comments spread like wildfire”.

Armageddonist commentary differs from money managers adopting a “defensive posture”, said Cembalest, in that the latter are conservatively dialling down their risk profile while the former are effectively calls for “wholesale reductions in portfolio risk” due to expectations of “recession, bear markets, financial crises and general mayhem”.

The report contains a table containing Armageddonist commentary dating back to 2010 from 17 different observers. The tone tends to be certain: in 2011, high-profile bear and Gluskin Sheff strategist David Rosenberg said he was 99 per cent sure of a recession by the end of the following year; the odds of a near-term global recession were “100 per cent”, said Marc “Dr Doom” Faber in 2012; “I am 100 per cent confident the crisis that we’re going to have will be much worse than the one we had in 2008,” said money manager Peter Schiff in 2013. Some of the names on the list are widely perceived as investment cranks, although others are major figures. They include Jeffrey Gundlach, the billionaire bond manager who said in 2011 that it “seems suicidal” to buy stocks and who advised investors to “sell everything” in 2016. Legendary investor George Soros, who warned in 2016 that markets were facing a “serious challenge that reminds me of the crisis we had in 2008” is also there, as is billionaire investor Carl Icahn, who warned in 2015 of a “very massive bubble” and a “bloodbath”.

The table of 17 names was “not an exhaustive list”, said Cembalest, and it’s easy to think of other major figures who could have been included. Billionaire investors like Bill Gross, Stanley Druckenmiller and Paul Singer have all issued dire warnings at various stages over the last number of years...

- Source, The Irish Times

Fed Will Cut Rates Back Down to Zero, Balance Sheet to Explode

Gold hit its highest level in almost seven years, touching $1,594.70 an ounce Monday, and gold bugs may see further gains thanks to Sen. Bernie Sanders, I-Vt.

The chances of a Sanders presidency are on the rise, according to a Fox News poll released Sunday which showed 23 percent of Democratic primary voters prefer the Vermont Senator, up from 20 percent in December. The poll found that former Vice President Joe Biden remains the frontrunner for the Democratic nomination at 26 percent, but that was down from 30 percent last month. Sanders matches up favorably against President Trump, leading 48 percent to 42 percent in a head-to-head matchup.

“If Sanders becomes president in 2020, the price of gold will be well above $2,000 on the day after election night,” Peter Schiff, chief executive officer and president of the Westport, Conn.-based Euro Pacific Capital told FOX Business. He added that the precious metal could reach $2,000 before the election if the market thinks Sanders is going to win.

“What a Sanders win means is much bigger government deficits, and much more money printing by the Fed because there is no way to finance all of the spending that will happen with tax hikes on the rich,” Schiff said. “We’ll get tax hikes on the rich, but they’re not going to provide the revenue to pay for the programs.”

Schiff believes the U.S. budget deficit, which was up 11.8 percent through the first three months of this budget year to $356.6 billion and on track to top $1 trillion for the first time in eight years, would balloon even further under a Sanders presidency. He is also promising to cancel more than $1 trillion of U.S. student debt and has also been a proponent of other massive spending projects like the Green New Deal.

“There is gonna be no Republican opposition to the deficits that would finance the spending because after all, the Republicans didn’t object to record deficits under Trump when the economy was supposedly the greatest ever,” Schiff said. “The deficits could be three or four trillion dollars a year and the money printing will be off the charts.”

As for the coronavirus and any potential impact it might have on the price of the precious metal, Schiff says that gold was rallying before the outbreak and that it is “not why” the price is going up even though metals are considered a safe-haven amid uncertain times.

Analysts at J.P. Morgan examined the 2003 outbreak of SARS, and found gold’s price rose by more than 8 percent in the two-and-a-half months after the World Health Organization issued an emergency travel advisory in mid-March, but said the U.S. invasion of Iraq and an easing cycle by the Federal Reserve “muddy the water immensely.” They say gold will hit $1,655 and possibly even $1,715 based on the technical set up.

Looking ahead, gold investors will be paying close attention to the Federal Reserve’s upcoming two-day policy meeting which concludes on Wednesday.

While the central bank is expected to keep rates unchanged, investors will be focused on any commentary regarding the expansion of its balance sheet by about $400 billion over the past few months through short-term repo operations and the purchase of Treasury bills.

Schiff thinks the Fed will cut rates back down to zero at some point in the future, and that its balance sheet will “explode to a much higher than the four-and-a-half trillion that they tapered from.”

“There’s no way the dollar’s reserve status will survive a Sanders presidency,” Schiff said. “America is going to be a much, much poorer nation. Our standard of living is going to implode, but the money printing is going to be crazy.”

- Source, Fox News

Peter Schiff: Gold will explode if Bernie Sanders wins in 2020

The Fed is Going to Ensure Gold and Silver Move Higher

"The Fed’s not going to do anything about it. So, we’re going to have higher inflation. We’re going to have slower growth. I think we could see a push up in long-term interest rates as the dollar really starts to weaken. And that destroys the appetite for US dollar-denominated debt. 

So, if you have higher consumer prices and higher interest rates, that’s a negative for the economy. But it’s a positive for gold, because the Fed is going to try to rescue the economy by printing even more money, and all that’s going to do is stoke the inflationary fire. So, I think we’re going to see a big up move, not just in 2020, but probably for the remainder of this decade. 

You’re going to see the type of move we had in the first decade of this century. Remember, gold did really well from 2001 to 2010 timeframe. So, in the teens, gold really treaded water. This is going to be the next leg up and I think this is going to be an even more explosive decade for gold than the first decade of this century.”

- Source, Schiff Gold

Peter Schiff: The 20’s Will Be An Explosive Decade for Gold

"You know, the reason the US stock market went up this year is because the Fed surprised everybody by doing exactly what I had been predicting they would do. They aborted their feigned attempt to normalize their interest rates and shrink their balance sheet. They went back to rate cuts and quantitative easing. This is extremely bullish for gold.”

- Source, Schiff Gold

Peter Schiff: Market Is an Inflation-Driven Bubble Ready to Pop

Euro Pacific Capital CEO and economist Peter Schiff’s outlook for the U.S. stock market in 2020 isn’t very optimistic, and it’s not because of the coronavirus — yet.

“Look, obviously, it’s too early to tell if there’ll be any kind of impact or meaningful impact on global trade, GDP or the markets as a result of this virus,” Schiff said in a recent interview on RT Boom Bust.

The perennial gold bull thinks the real issue with the market is that stocks are extremely overvalued, thanks to the Federal Reserve, which he argues has created a fake rally through its “stealth quantitative easing” action that’s pumping fake money into the system.


“It should be coming down. The only thing really supporting it is the Federal Reserve and all the money they’re printing with their stealth QE program, although it’s not stealth really,” Schiff said. “Everybody knows they’re doing it. They just refuse to admit it.”

Dallas Fed Chief Robert Kaplan even admitted that the central bank’s action is affecting assets earlier this month.

“My own view is it’s having some effect on risk assets,” Kaplan said. “It’s a derivative of QE when we buy bills and we inject more liquidity — it affects risk assets. This is why I say growth in the balance sheet is not free. There is a cost to it.”

Schiff thinks the market isn’t being bolstered by factors that normally drive a rally, and soon enough the bubble is going to burst.

“There’re no earnings behind this,” he said. “There’s no strong economy behind this. This is an inflation-driven bubble, but the air should be coming out.”

And speaking of bubbles, Schiff points to another bubble in the U.S. auto industry that has been enabled by none other than … the Fed.

“I think the U.S. auto sector is another bubble that was made possible by the Fed,” Schiff argues. “You have Americans who are buying cars with seven or eight-year loans, where they’re lying about their incomes just to qualify. So I think you have a dangerous auto bubble here.”

Schiff thinks that auto bubble will lead to a contraction in the U.S. auto market — where delinquencies are at an eight-year high — but foreign auto markets may actually get stronger.

“Particularly in places like China, where people don’t borrow money to buy cars. They buy cars they can actually afford using the money they actually have,” Schiff jabbed.

And he doesn’t think U.S. President Donald Trump’s threat to hit the EU with auto tariffs will work simply because the U.S. isn’t competitive in the sector.

“When you live in glass houses, you’re not supposed to throw stones,” Schiff said of the tariffs. “And we haven’t been playing fair in that part of the market.”

The U.S. gross domestic product for 2019 hit a three-year-low 2.3%, and Schiff thinks the ongoing recession in U.S. manufacturing is bound to hit the service sector soon.

“It’s long overdue,” Schiff argued. “Obviously, there’s a lot of politics involved now in whether they can kick the can down the road long enough to kick the recession past the 2020 election.”

Schiff thinks that if a recession does happen this year, there’s no way Trump wins his reelection bid in November. And he pointed out that if Democratic Socialist Bernie Sanders were to take the presidency, it would “be very dangerous for the U.S. stock market,” but he said Monday it would be great for gold.

“There is a lot of risk to the U.S. economy,” he said, “and the U.S. market that everybody is ignoring at the moment.”

- Source, Money and Markets

Peter Schiff: Nothing But Bullish News for Gold, Yet Prices Have Gone Down

"Gold isn’t just an inflation hedge. It is predominantly that. The main reason gold is going up is because of the Fed. But obviously, in a world where you have heightened geopolitical risk, which could adversely affect bond markets and stock markets, you would expect to see greater demand for gold as a hedge in your portfolio. And that’s why the price of gold was up better than $20 an ounce today (Friday).

History shows that under most outcomes gold will likely rally to well beyond current levels. That’s consistent with our previous research, which shows that being long gold is a better hedge to such geopolitical risks.

When you factor in ongoing uncertainty with respect to US-China trade talks and heightened security issues with Iran, gold really is a no-brainer.

We’ve had nothing but bullish news for gold stocks. We have a $30 move up in the price of gold. We have heightened geopolitical risk associated with gold. Yet the gold stocks have gone down. Why is that? Again, I think you’ve got a lot of fearful traders. There’s a wall of worry in this bull market. There’s a lot of skepticism in the gold rally, which I regard as being healthy. You don’t have a devil-may-care, throw caution to the wind type of attitude the way you have it in the S&P 500. People are nervous in the gold stock market."

- Source, Peter Schiff

News Bites $2000 gold price by election night is possible

Political changes from the U.S. presidential election in November could see gold prices soar, this according to Peter Schiff, CEO of Euro Pacific Capital. 

“I think if Trump is not re-elected, if we get like, President Sanders, gold should go above $2,000 this year, and if it’s not above $2,000 by election, it should be $2,000 election night once we get the results,” Schiff told Kitco News on the sidelines of the Vancouver Resource Investment Conference.

- Source, Kitco News

Oil Prices Are Going Up and Costs Are Going to Have to Increase

"My initial feeling is because we took out this guy, the world is a little bit less safe than it was the other day. And the risk premiums have to go up, because the odds of some type of hot war in the Middle East go up.

Sure, the US economy isn’t as vulnerable as it once was because we’re not importing as much as we used to. But consumers still have to buy oil. They still have to pay for things. 

Prices are already going up, and this is going to add upward pressure on already increasing prices, which is going to be a negative for people who have to buy energy, or buy things that are transported using energy, or things that are manufactured with energy. I mean, costs are going to be going up and this is a negative.”

- Source, Peter Schiff

Gold price will skyrocket if Bernie Sanders wins 2020 presidential election, says Peter Schiff

The price of gold, which hit its highest level in seven years, reaching almost $1,600 an ounce this week, will continue to rally, says veteran stock broker Peter Schiff.

According to him, gold bugs may see further gains thanks to Senator Bernie Sanders.

The Democratic Party 2020 hopeful’s chances are on the rise, a Fox News poll released on Sunday showed. It found that 23 percent of Democratic primary voters prefer the Vermont senator, up from 20 percent in December. He matched up favorably against President Donald Trump, leading 48 percent to 42 percent in a head-to-head matchup. Former Vice President Joe Biden remains the frontrunner for the Democratic nomination at 26 percent, but that is down from last month’s 30 percent.

“If Sanders becomes president in 2020, the price of gold will be well above $2,000 on the day after election night,” Schiff, the CEO and chief global strategist at Euro Pacific Capital, told FOX Business. The precious metal could reach $2,000 before the election if the market decides that Sanders is going to win, he said.

“What a Sanders win means is much bigger government deficits, and much more money printing by the Fed because there is no way to finance all of the spending that will happen with tax hikes on the rich,” Schiff said. “We’ll get tax hikes on the rich, but they’re not going to provide the revenue to pay for the programs.”

According to the economist, the US budget deficit will balloon even further under a Sanders presidency.

“There is going to be no Republican opposition to the deficits that would finance the spending because after all, the Republicans didn’t object to record deficits under Trump when the economy was supposedly the greatest ever,” Schiff said. “The deficits could be three or four trillion dollars a year and the money printing will be off the charts.”

According to him, “There’s no way the dollar’s reserve status will survive a Sanders presidency.” He says: “America is going to be a much, much poorer nation. Our standard of living is going to implode, but the money printing is going to be crazy.”

Talking about the China coronavirus, Schiff said that gold was rallying before the outbreak and that it is “not why” the price is going up even though metals are considered a safe-haven amid uncertain times.

- Source, Russia Today

Peter Schiff: Gold Climbs Wall of Worry

Gold surged above the $1,550 mark in the wake of a US airstrike that killed a prominent Iranian general and has hit levels not seen since 2010. Monday morning, gold was trading above $1,575. As Peter Schiff put it in his podcast Friday, the yellow metal is climbing a “wall of worry.”

- Source, Peter Schiff

Peter Schiff: Cheap Monetary Policy and Bad Trade Deals

The Chinese yuan has been gaining strength against the dollar in recent weeks, in part because of optimism that there will eventually be a resolution to the trade war. But the Chinese currency is still over 17% lower than it was when the US imposed its first tariffs. Does this mean the markets are cautiously positioning for a deal, or is there still skepticism about the phase 1 deal? Peter focused on the bigger picture.

"Well look, a phase one might happen because a phase one is insignificant. The real deal is supposedly phase two. That’s the one that’s not going to happen. So, if anybody thinks we’re going to have a substantive deal, they’re wrong. But the reality is, I think the Chinese yuan is undervalued relative to the dollar and I expect it to rise rather dramatically over time.”

Peter said this is not good news for the US.

"It’s going to make imports more expensive for Americans, so it’s going to reduce our standard of living. And I do think ultimately, it’s going to push up interest rates as well, as the Chinese and a lot of other creditors are no longer lending money to Americans, and so we have to draw from our own savings pool, which is extremely shallow. It means the Federal Reserve is going to be printing a lot more money as it monetizes the debt that the Chinese and other nations no longer want to buy, and this is further going to lower the American standard of living.”

Horwitz said it’s hard to get a read on the yuan because it doesn’t trade freely. It’s always pinned by the Chinese government. He said he thinks the Chinese will keep their currency low as long as they can to offset tariffs and keep Americans buying their goods. He said he doesn’t agree with Peter at all that the yuan will explode to the upside.

Peter said, be that as it may, the Chinese have made a mistake undervaluing their currency and they’ll eventually figure that out.

"They did that deliberately because they wanted to maintain exports to the United States. But I think that was a key mistake. I mean, it helped America because we got to live beyond our means. But I don’t think it did anything for the Chinese economy. It helped undermine it. Because they accumulated a huge pool of US dollars and they ended up doing things with that – created malinvestments and other distortions. I think the best thing that can happen to China is simply to allow their currency to appreciate, to reduce their exports to the United States because we can’t afford to pay for those products, to let their own nation consume that production so that their own people can benefit from their hard work. But unfortunately, Americans are going to have a rude awakening when all of a sudden we have to live within our means. And our means have been dramatically diminished over the years. We haven’t been investing. We haven’t been saving. We’ve been relying on an overvalued currency to import what the rest of the world produces. And we haven’t saved very much. We’ve just been borrowing to consume and all this is going to come back to bite us.”

The stock markets continue to go up, despite a lot of bad economic data. Horwitz said stocks will continue to go up until they don’t, but at some point, the markets will melt down. Cheap monetary policy has created an environment where investors really have no place else to go. Horwitz said there is no way to time the crash, but people will have time to get out if they don’t panic when it starts selling off.

Peter said he doesn’t think people will have time to get out.

"I think with this — this is a bubble. It’s going to pop. I agree. there’s no way to know how much air they’ll successfully blow into it. The minute it drops, everybody says the correction is over, you gotta buy the dip. So, I think most people are going to watch all their paper profits vanish … It’s not just going to be that people are going to lose dollars when the stock market bubble pops, but the dollar bubble is even bigger. And when that pops, even the dollars you haven’t lost are going to lose most of their value. So, I think Americans are going to be wiped out in the US stock market and the bond market. I mean, people are going to be surprised at how much of their wealth they lose playing it safe in the bond market. Because you’re not playing safe. You’re playing with dynamite there. There are no US dollar-denominated assets that can be considered safe right now. It is a giant casino. And yeah, you know, people think the economy is good because they managed to blow more air into the stock market bubble and the bond market bubble, but the economy is in worse shape now than it’s ever been. It’s in far worse shape than it was before Trump took office, mainly because he continued to pursue the failed policies of Obama, who pursued the failed policies of Bush.”

The show opened with a discussion of Boeing and the impact lower aircraft sales could have on the US economy. Horwitz said this is what happens when a company gets in bed with the government and gets a plane out too fast. He said he thinks it will hurt US GDP going forward.

The host noted that Boeing has already lost $62 billion off its market cap and asked Peter if the company can recover?

"Well, I’m sure over the long term, there will be a recovery. But in the short run, certainly, this will weigh on our exports, which also could weigh on the dollar. You know, I’ve been thinking the US dollar was headed lower anyway, but if we end up with bigger trade deficits in part because we have fewer exports of aircraft, that is going to be another factor of many that I think will be weighing down the dollar and the US economy.”

- Source, Schiff Gold

Crypto critic Peter Schiff loses access to his bitcoin wallet

(Video cannot be embedded, click image to watch)

Crypto critic and gold bug Peter Schiff told Twitter followers on Sunday that he'd lost access to his Bitcoin holdings after his wallet was "corrupted." The Final Round panel discusses these claims, and what it could mean for Bitcoin investors.

- View the Video Here