Stock market investors are oblivious to the potential calamity of negative interest rates

Investors are too drunk to notice that the fed funds futures rate has gone negative. This contradicts the “V”-shape-economic-rebound elixir that the stock market is drunk on. Furthermore, it could foreshadow really bad things to come. Let’s explore with the help of two charts.

Two charts

Please click here for an annotated chart of the Dow Jones Industrial Average ETF DIA, +1.97%, which tracks the Dow Jones Industrial Average DJIA, +1.90%.

Please click here for an annotated chart of January fed funds futures.

Note the following:

• The first chart gives a long-term perspective.

• The first chart shows that after touching the top band of the “mother of support zones,” the stock market is threatening to break above the low band of the resistance zone. From a technical perspective, this is normal behavior. However, when you take into account the overall economic picture and fundamentals, it is a different story.

• The second chart shows that January fed funds futures have gone negative. A value above 100 indicates negative rates.

• As a note of caution, the Federal Reserve has not announced negative interest rates at this time. Futures simply indicate expectations by the market that the Fed will announce negative interest rates by January.

• In our analysis at The Arora Report, calling negative interest rates “evil” 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, those economies are decaying. In contrast, the U. S. has vigor and the potential for strong growth. Hopefully our leaders will realize that negative interest rates in Europe and Japan have failed and will stay away from them. But hope is not a good investment strategy. Investors should, for the first time in history, start considering a scenario of negative interest rates in the U.S.

• Gold might be the primary beneficiary. Keep an eye on gold ETF GLD, -0.60%, silver ETF SLV, +1.26% and gold miner ETF GDX, -0.48%. Leveraged gold ETFs such as NUGT, -0.88% and DUST, +0.92% will likely provide many short-term trading opportunities.

• It is highly speculative due to a lack of history, but bitcoin BTCUSD, -4.37% may be a beneficiary. Keep an eye on Grayscale Bitcoin Trust GBTC, -4.38%. It often trades at a premium and has several drawbacks but has an advantage for investors who do not want 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 selloff — perhaps a loss of over 50%. But the stock market is not controlled by prudent 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 are paying lower rates or negative rates, shouldn’t stocks be priced much higher? Expect buying in five stocks: Amazon AMZN, +0.50%, Apple AAPL, +2.38%, Microsoft MSFT, +0.58%, Alphabet GOOG, +1.15% GOOGL, +1.10% and Facebook FB, +0.51%.

• What about negative interest rates reflecting a dire economy? That is simply too deep for momentum investors to understand.

• In theory, bonds should benefit. However, do not rule out a huge selloff, especially if the Fed loses control of interest rates.

Answers to your questions

Answers to some of your questions are in my previous writings. Please click here for 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 reached at [email protected].