NORMANDY, France – “Now, I think I’ve seen everything” is an expression that – like “this is the end of history” and “I’ll never leave you” – usually turns out to be premature. But it is what we found ourselves saying yesterday. Not out loud. We just moved our lips in mute amazement. On Tuesday, the Italian government sold a 2-year note yielding MINUS 0.023%. We don’t know what is more preposterous: that the Italians were able to borrow money at a negative nominal interest rate or that the press reported this transaction with a straight face.

The Fed’s Big Pivot It should have provoked howls of laughter, withering scorn, and unvarnished derision. But here at the Diary, we will not point the finger and chuckle. We will not invoke our usual tone of sarcasm. We will not damn the whole thing to Hell with loud and blustery cussing. Instead, we’ll take the high road; we just want to know what it means. But before we get to that, let us pick up the news. Here’s the latest, from Bloomberg:

 

Federal Reserve officials pivoted toward a December interest-rate increase, betting that further job gains will lead to higher inflation over time and allow them to close an unprecedented era of near-zero borrowing costs. The Federal Open Market Committee dropped a reference to global risks and referred to its “next meeting” on Dec. 15-16 as it discussed liftoff timing in a statement released Wednesday in Washington, preparing investors for the first rate rise since 2006.

“Pivot” has become the latest fad verb. It seems to mean “move” or “go toward.” You can use it in practically any setting. Investors pivoted toward higher prices yesterday, with a 198-point increase in the Dow. You might tell your husband that you’re pivoting toward buying a new Tesla. And we pivoted back to France last night… after a few days in Ireland. It is a gray day in Normandy this morning. But the leaves have pivoted to such glorious shades of orange that the effect is a profound and melancholy splendor.

A beautiful melancholy – a leaf-covered path in Normandy

But let us pivot back to our subject for today…

An Odd World

A negative nominal interest rate – meaning a negative rate before you account for inflation – implies an odd world…

…maybe even a world that cannot really exist.

To lend at less than zero suggests you believe the present value of money is less than its future value – in other words, deflation. And you must assume that the risk of default or inflation is near zero.

This allows the Italians to go out and build roads or pay pensions with money that cost them less than nothing.

 

How long this will last, we don’t know. But as long as rates remain below zero (and they could go lower!) money is not just free… it’s a cost not to borrow!

Imagine you are buying a house. (Now, you can see the mischief afoot!) If lenders are willing to grant a loan at a negative nominal interest rate that’s secured by nothing more than the full faith and credit of the Italian government, then lenders should surely be willing to extend credit to you against the value of your house.

That would leave you with a curious mortgage – one that pays you interest. At the Italian rate, a $1-million house would come with an extra income of about $19.16 a month.

This raises profound metaphysical issues. If a mortgage carries negative interest, it implies that the house (an equal capital value) also has negative value.

After all, you have to pay someone to live in it. And if houses are worth less than nothing, we have to wonder what a car is worth… or a diamond ring… or a luxury cruise?

Does that mean that money has no value? Or even negative value?

After all, you can no longer give it to someone in exchange for a positive interest payment. Now you must pay him to store it for you, as though it were furniture that won’t fit in your house. You don’t like it anymore. But you don’t have the heart to throw it away.

And if money has no value, what happens when you hire, say, a gardener to pull out weeds? Should you pay him? Or should he pay you? How many hours should he have to work for you before you consent to take his money?

The whole thing is so contrary to nature we gasp when we think of it. We are flummoxed.

But you are a smart person, dear reader: Maybe you can figure it out for us.

The Strange Case of Sweden

This is all prelude to taking up the strange case of Sweden…

All we know about Sweden is what we learned by watching the movie The Girl with the Dragon Tattoo.

And all we learned from that was that Swedes tend to be murderers, sadists, lesbians, and pock-marked wimps.

Maybe that accounts for the torturous financial system the Swedes are creating.

Reports Business Insider:

Sweden is shaping up to be the first country to plunge its citizens into a fascinating – and terrifying – economic experiment: negative interest rates in a cashless society.

The Swedish central bank, the Sveriges Riksbank, on Wednesday held its benchmark interest rate at -0.35%, the level it has been at since July.

Though retail banks have yet to pass that negative rate on to Swedish consumers, they face increased pressure to do so as long as the rates remain where they are. That’s a problem, because Sweden is the closest country on the planet to becoming an all-electronic cashless society.

Remember, Sweden is the place where, if you use too much cash, banks call the police because they think you might be a terrorist or a criminal. Swedish banks have started removing cash ATMs from rural areas, annoying old people and farmers. Credit Suisse says the rule of thumb in Scandinavia is: “If you have to pay in cash, something is wrong.”

A resistance is forming, and some people are protesting the impending extinction of cash. Björn Eriksson, former head of Sweden’s national police and now head of Säkerhetsbranschen, a lobbying group for the security industry, told The Local, “I’ve heard of people keeping cash in their microwaves because banks won’t accept it.”

Alert readers will recognize this negative interest story as one we have been following. We believe it won’t be long before we have negative rates in the U.S., too.

The feds will pivot to even stricter controls on cash to gain more control over the economy and practically unlimited power to tax and spend – without congressional approval.

Sweden is ahead of the U.S. feds on this one. We can only hope it goes far ahead, fast, and blows itself up before the U.S. pivots down that path, too.

Regards,

Signature

Bill

 

Tech Insight

[Editor’s Note: We’ll soon be launching a new investment advisory, Exponential Tech Investor, to help you profit from game-changing innovations. Below, editor Jeff Brown identifies an exciting area of breakthrough technology.] DNA sequencing is an area of tech I’m keeping a close eye on. That’s because it’s undergoing exponential change…The technology has been around for decades. But it was far too expensive to be practical. We just didn’t have the abundance of low-cost computing power that’s available today.The first human genome was sequenced in 2000 at a cost of $2.7 billion. Today, the cost of sequencing has dropped to less than $1,000. Within two years it will be less than $100. By 2020, I expect it will essentially be free.Why will DNA sequencing be free? Because companies will pay for the information, so you won’t have to.Facebook is free because it sells your valuable personal information to companies all around the world. Similarly, DNA sequencing will be free because companies will pay to have access to the data they collect.Which industry players would want access to DNA data?

Biotechnology and pharmaceutical companies want the data to accelerate their testing and developing of new medicines. This will help bring new products to market more quickly. Drugs will be personalized for individuals. Fewer side effects, better efficacy, more revenue, higher profits.

Health insurance companies want the data for preventive medicine techniques. This will help reduce costs.

Employers have similar interests. DNA-sequencing would help reduce their costs by improving the health of their employees.

Highly personalized and preventive medicine will lead to longer lives. Living to 120 will not be unusual for anyone young and in good health today… 100 will be the new 60.

The DNA-sequencing market is expected to grow to $20 billion by 2020. And right now, Illumina (NASDAQ:ILMN) is the global leader in sequencing equipment.

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Mailbag
The mailbag is once again overflowing with responses to Bill’s two recent Diary issues on billionaire businessman and big political donor Charles Koch (catch up here and here).

I just want to commend you for your article about Mr. Koch… and also for defending him further after all the negative responses you received from subscribers.

I find it hard to believe that people cancel their subscriptions because you wrote a favorable article about the man. If someone disagrees, why don’t they try to refute your story… or just move on and forget it? The irrationality is beyond me.

In any case, great job defending a great American and businessman.

– Chris C.

Instead of offense, I read Bill’s essay on Charles Koch with great interest.

I believe in finding the truth of a person requires more than following the “hive mind” of whatever bumper-sticker campaign rules the day.

Koch is an impressive, thoughtful, and well-read man. If some of your angry readers could develop these attributes, they would be able to have an honest and reasonable conversation about the Kochs and their beliefs.

– Henry M.

Kudos to you for your evaluation and support of Charles Koch. I think he is an exceptional American. I wish we had more like him. This would be a much better country for all.

– Lois D.

What do you mean it has nothing to do with his seeking favors?

Of course it does. Are you so naive to think that he is not trying to buy the corrupt politicians to do what he wants them to do?

Please tell me why should his voice be a thousand times more than mine just because he has so much money?

– Bob J.

I always read your columns, but have never written. I am amazed at the vitriol directed at Charles Koch.

People have been so brainwashed that they hate and fear the wrong people. Freedom is a god-given right that can be taken by mobs and governments…

– Keith V.

Please don’t be upset over the unguided folks who are cancelling. They are just our voters who bring in the people who have brought us to this state of affairs.

All I know of the Kochs is positive, as are their companies. Thanks for your letters.

– Thomas H.

Thanks for the good comments on Charles Koch. I’m in the process of listening to his book Good Profit. About halfway through. It is absolutely awesome! Mr. Koch is a man of integrity!

– Ty L.

Too bad some soreheads who cannot make it on their own are complaining. Keep up your support and good work.

– Bill G.

Congratulations on standing up for Charles Koch. He clearly is one of the good guys. I hope it doesn’t cost you too much business.

It’s clear to me that many of the detractors don’t bother to learn any more than the left-wing sound bites. I wonder how they feel about George Soros.

Keep up the good work. Love your writing.

– Ken L.

Am very much in support of your analysis and support for the character of Charles Koch. Please don’t let those who criticize influence you unduly.

– Tom B.

There is, to me at least, an old saying I think applies to at least a lot of those writing to you: “Don’t confuse me with facts. My mind is made up.”

To those people, the Koch family is, pure and simple, an anathema. There is nothing you or anyone could write that would change their minds.

One thing that is very interesting to me is the value of respect in civilization. Of what does respect consist?

A large part of respect is in allowing others to have different opinions from those considered important, and to communicate civilly even if opinions differ radically, plus maintaining communication.

To cut off communication really requires a lack of respect, yet it is tolerated by those whose self-image is that they know better than others what is truth and what is not.

This is a source of a lot of the failures in civil society today. “Conform, or else.” The implicit use of force is nakedly in view.

– Robert K.

You are right on with your praise of Charles Koch. He, by the way, wrote a book called The Science of Success (2007), which should be required reading by anyone involved with business.

– Joe T.

In a recent hammering of the social engineering wedge to keep us all divided – and therefore conquered – Koch is presented as an über-villain on the RIGHT/RED side of the divide.

My intent is to hold space for the majority middle in my humble sphere of influence. When listening to broadcast news, I listen to NPR (I do prefer the music and soft reasoned voices to the emotional noisy ones).

There was a spate of Koch-hating and even a movie created of all their evildoing in the past year. That may have influenced some of your cancelers.

More cyber ink should be spent on who aims and hammers the wedge… and the power of that influence.

– Laurie F.

Is No. 9 available in the States?

– Patrick O.

Chris comment: Patrick, we’ve done some digging on where to get your hands on a bottle of Downes No. 9. And the only way we know of to get your hands on a bottle is to call in personally to Henry Downes bar. It’s at 10 Thomas Street in Waterford City, right off the old quays.

To talk to someone at Henry Downes, you could also try calling +353 51 874 118. Maybe they ship. Good luck!