How to protect yourself from negative rates

With central banks going ever deeper into NIRP and with so much mainstream media noise out there, I thought it would be timely to write a post on how to protect yourself and come out on the winning side of these truly extraordinary times.


Physical Cash: Start withdrawing physical cash and store it somewhere safe. As we’ve seen in Greece recently, once the shit hits the fan .. banks will close for a “long weekend” or if open, only allow 60 EUR per day. Don’t wait until’s too late. And fear not Government’s intention to abolish cash because people will find creative ways to bypass them entirely (by trading goods and services directly with physical cash). Also old people are so used to using cash, that it will  take 5-10 years to phase it out. There’s also 20+ countries where you can use US dollars (Panama, Ecuador, Mexico, Canada, Cambodia, Liberia, Vietnam, Bahamas, Barbados, Bermuda, the Cayman Islands to name a few), so worse case you go on holidays and spend it there.


Gold / Silver: Buy as much as you can. Not only physical (my preferred choice) but also mining stocks. Gold and silver rallied 10-15% in the last 2 months alone. Mining stocks dropped 90% from 2011 to end of 2015, and are now up ~75% in the last 2 months. With negative rates at -3 or -5% where do you think people will go to? Gold and silver as its real money for 5000 years and they preserve value (unlike fiat paper). I urge you to put some money in solid mining companies, believe me you won’t regret it. All you need to do.. is to be willing to withstand short-term pain/volatility, the upside may be 500-1000%+ from here. I’ve done extensive research, give me a shout if you want to know some names you should invest.


Debt: Consider paying down debt, particularly if you have high interest rates. Why pay 4% debt when at the same time you get negative rates at your savings account? Your money might erode overtime but real estate doesn’t, it’s actually likely to rise (see below). But don’t pay it back, only the most expensive. In case we get QE4 and hyperinflation .. you want to have debt because it will be wiped out by inflation.


Real Estate: I can only see house prices go higher and higher. Look at Nordic countries, since they introduced negative rates .. house prices moved up 30-60% since 2012. When and if negative rates come to Europe or US .. you know where house prices will go.


Bonds: Might be a good idea to buy some long term AAA-AA bonds (Germany, Netherlands, US treasuries, Switzerland, etc). You may not get much coupon but they’ll appreciate in value as rates drop to negative territory. Or at the very least you’ll be protected from the annual -3 or -5% haircut from electronic money in your bank account.


Electronic money: Keep this to a minimum, 3-6 months of financial needs. There’s a good chance you’ll be taxed 3-5% a year in the next crisis (they’ll call it negative rates but in reality these are taxes). Not only that but you run a big risk that your savings will be used to fund a possible banks’ bail-in. Did you know that the laws changed recently so that derivatives rank higher than your deposits in case of a bank collapse? And if you trust your 100k government guarantee, think twice. Also bear in mind counterparty risk, I wouldn’t trust bankrupt governments (particularly from the PIIGS) to backstop banks going down.


Stocks: It may not be a bad idea to keep some money in stocks but only very specific companies/sectors. Mining companies (as explained above), gun and military manufacturers (though they already rallied 10X since 2012, SWHC for example), food companies, utilities, oil related stocks may also be good given today’s low oil price. But if you’re invested in index ETFs, this may be the last opportunity you have to sell close to the heights (with S&P500 trading around 2000 today). There’s also the possibility that the FED embarks on QE4 in which case stocks could rally in the short term. Ultimately they’ll revert to the mean and fall significantly, it’s just a question of better to miss out a potential 10-20% gain than get a 50-90% correction.


Bitcoin: Do yourself a favour and buy at least 1 bitcoin. When banks close doors and governments impose capital controls, guess what’s going to happen? I’d say there’s an 80% chance bitcoin will become obsolete and worthless in a few years time, but a 10-20% it will be worth anything between $1,000 to $1,000,000. As such, expected value is around 10-20k (vs $415 current price).


Final note:

There’s a good chance we won’t actually see negative rates. The system might  implode before that happens. Or we may have QE4 and consequently inflation (and stocks rallying again). Things change very quickly in this strange economic environment we’re in. But either way, the above recommendations should still hold. Also, if the tide changes and we get a Depression, Governments will probably be forced to confiscate your wealth, which will be made much easier if you hold electronic money. Think its far fetched? It wouldn’t be the first time, Franklin Roosevelt in 1933 issued one of the most controversial orders in U.S. history, Executive Order 6102 -whereby the US Government confiscated gold from its citizens. Desperate times require desperate measures, fasten your seat belts and try to be ahead of the curve.


Follow me @ricardo_afonso_


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