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Out of the Box: Your Latest Trick

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And we’re standing outside of this “Wonderland”
Looking so bereaved and so bereft
Like a Bowery bum when he finally understands
The bottle’s empty and there’s nothing left
I don’t know how it happened
It was faster than the eye could flick
But all I can do is hand it to you
And your latest trick
-Dire Straits

I would suggest that you be out in front of this one. The United States is sticking out like a red thumb, and it may not be that way for long. With our interest rates currently positive, we are about the last man standing in the above Zero zone. In the Eurozone, Switzerland, Japan and Scandinavia, official interest rates are negative. The Fed may not wish to go here but I assert that the economic pressure, from the other major central banks, may force our hand.

You can forget President Trump and you can forget the Socialism of some of the Democratic Presidential contenders. That is nothing more than “show and tell” and tweet to your heart’s content. There is now acute pressure, in my opinion, on the Fed to protect America and remain competitive both in raising money and in maintaining our economy, when confronted with $14.1 trillion of negatively yielding sovereign and corporate debt, including some High Yield names. The United States is under the gun and, as the Dollar gains momentum, this will become even more clear.

In a little more than a month’s time the strain is going to get worse as the European Central Bank announces its new measures, it’s “latest trick.” Last week, Mario Draghi, President of the European Central Bank, suggested that it was “unquestionable” that fiscal measures would be required if the Eurozone economy deteriorates further. I am expecting “shock and awe,” at the next ECB meeting, as I believe their Quantitative Easing program will be expand, their balance sheet will get levered up, once again, their purchase of corporate bonds program enlarged and possibly even equity purchases by the ECB to commence.

In a new book, “The Case for People’s Quantitative Easing,” by the economist Frances Coppola, he proposes that ECB should send out money to households and they would finance the monetary transfers by creating electronic money, as it does with QE. You can’t get much more Socialist than this, when everyone gets free money, created by the ECB from thin air, and you don’t have to work one whit to get it.

Margret Thatcher once said, “The problem with socialism is that you eventually run out of other people’s money.” This was certainly true, in the old days, when people tried to create wealth, and pay taxes, but when money becomes some form of “Fairy Tale Currency “then no one is poorer for the experience, though the value of your currency could, one day, become nonexistent.

Another policy, already being practiced by the Bank of Japan, and the Swiss National Bank, and recently advocated by a fund manager at the investment firm, BlackRock, is that central banks consider buy stocks to maintain the value of the equity markets. This might work for the ECB, though I am afraid that America’s Democratic socialists would be screaming from the rafters. Congress would undoubtedly have to pass some law, allowing this, and I don’t see a shot in Hell of this happening in America, from either side of the aisle.

The ECB, itself, has also recently come out with their own new radical departure to save the Eurozone, once again, as they economies in many European countries, including Germany, are cratering. The fancy words that the ECB uses for it are “targeted long-term refinancing operations.” What this is, at its baseline, is a policy of dual interest rates which involves giving money to both borrowers and savers. The ECB is proposing to cut the interest rate, on money they lend to banks, subject to the money being lent to individuals, and that they raise the interest rate paid on deposits, to individuals.

I point out, once again, that the European Union, who controls the ECB one hundred percent, is engaging in all of these tactics because they nations of Europe cannot afford their own budgets, or social programs without raising taxes, which they cannot do without political upheaval. So, they have taken the lessons they learned from the financial crisis of 2008/2009 and expanded them, and enlarged them, so that they can pay for stuff with “manufactured money,” all created from a wink and a blink and a nod.

This is “Wonderland,” I tell you. We have fallen down the rabbit hole and a place that we once thought only lived in a children’s book has become the new norm and reality. I wouldn’t put one penny in European investments now and while governments can drag things along for years there will come a day when “Time’s Up.” In my humble opinion, the nations in Europe and Japan have gone “mad.”

“But I don’t want to go among mad people,” Alice remarked.
“Oh, you can’t help that,” said the Cat: “we’re all mad here. I’m mad. You’re mad.”
“How do you know I’m mad?” said Alice.
“You must be,” said the Cat, “or you wouldn’t have come here.”
-Lewis Carroll, Wonderland

Mark J. Grant
Chief Global Strategist, Fixed Income
Managing Director
B. Riley FBR Inc.
U.S. 954-468-2366

Information herein is for general use; is not unbiased/impartial; is current at publication date, subject to change; may be from third parties; and may not be accurate or complete. Opinions are the Author’s, not B. Riley FBR, Inc., or their respective affiliates or subsidiaries. This is not a research report or solicitation or recommendation to buy/sell the subject securities. Investment factors are not fully addressed herein. B. Riley FBR Inc. and their affiliates may have a proprietary position in the subject securities. Redistribution/reproduction of this material is prohibited. See additional disclosures at:

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