What's up, graham, it's guys here so in the midst of a new variant, a rollercoaster stock market and the reveal that inflation may no longer be transitionary. There's a chance that the entire market could soon be preparing for a topic that no one could see coming and that would be negative interest rates now. What makes this so interesting is that, even though the market is pricing in the possibility of this becoming a reality, negative interest rates have never happened before in the history of our economy and bringing rates negative would have such a profound effect on everybody watching. Just imagine getting paid to take out a loan on your home, where you have to pay back less money than you borrow or putting money in a savings account and instead of you getting paid interest, you pay the bank and in a way, even though it seems Like a completely far-fetched idea, that's never going to happen.

It's already beginning to occur here in the u.s and that's what makes it so unique. So, let's talk about exactly what's going on, why some interest rates are beginning to move even lower? How this has the potential to impact, how we save an investor money and then we'll cover the likelihood of this actually becoming a reality, because the more i looked into this, the stranger it gets. But before we begin, you know, what's not strange. Besides this woman, unknowingly using an ancient roman emperor's tile as a coffee table, that's right smashing the like button for the youtube algorithm, because it helps with the channel tremendously.

And if you do me that one little favor, i promise to respond back to as many of your comments with a smiley face. So thank you guys so much now with that said, let's begin alright. So all of this started on november 30th, when bloomberg published an article on what's called the federal funds rate, which is a really fancy way of saying. This is the interest rate that banks charge other banks anytime, they lend each other money see.

Banks are required to keep a certain amount of cash in their systems at all times as a reserve, and if they have less money than they need to. At the end of the day, they could borrow the money that they need from another bank to meet that minimum requirement. In this case, the federal funds rate is the guideline as to how much interest banks could charge one another and that rate will indirectly influence everything from your savings account. Interest rate your auto loan interest rate, or even your mortgage rate, but recently something unusual has started to happen.

Some investors have begun to pricing the chance of interest rates getting so low that they turn negative, which would be like you, depositing ten thousand dollars into a savings account and instead of you getting paid back half a percent in interest. You would be the one paying interest to the bank as a fee for them holding on to your money now, even though that sounds like it's straight out of a sci-fi novel written by the big short michael, bury it's actually what the market is beginning to price. In as we could see right here, welcome to the federal fund raid futures, this is the future price that represents the interest rate banks pay anytime. They lend each other money and this price will fluctuate over time and then settle at the last day of each month.

As it locks in the price, this might all look extremely complicated, but trust me, it's really simple. Once you break it down each contract right here is priced at 100 minus the amount listed right here so as we can see, the november 2021 contract is 99.92. So it's believed that interest rates are going to be 0.08 percent or in other words, you could buy this contract for 99.92 and get paid back a hundred dollars for investing your money. By doing this, banks could lock in their interest rates ahead of time and hedge their position in case the markets move in a different direction but beginning in september of 2022.

Some contracts have begun to price in negative federal funds rates, meaning they're betting, on a scenario where contracts would eventually be priced in above 100, at which point you're, basically just saying i'm willing to lose money just to have a guaranteed safe spot to put my cash. So that, of course lends the question: why would anyone ever invest like this, when the expectation is that you're gon na have less money than you started out with, but there is still a reason why people do this and it's not because they've completely lost their minds. Think of it this way, when you have a lot of money like hundreds of millions or even billions of dollars, and you want to store it somewhere safe. Where do you put it after all, there's no possible way that you could withdraw that money from the bank and then stuff it under a mattress? That's because if you stacked a billion dollars worth of hundred dollar bills, it would be 10 000 feet tall and moving that amount of money would just be impractical.

There's also no way just to keep a cool billion dollars sitting in the bank or within a cd. After all, what happens if the bank goes bankrupt, you're above the fdic limit, and then you lose your money now sure you could go and buy bonds with it, but bond prices fluctuate in value and there's no guarantee they'll be worth more or the same. By the time you go and sell it, you also couldn't go and put it all in the stock markets, because jerome powell could say the wrong thing and lose you a lot of money, while your robinhood stock just keeps falling so for a company or an individual To store hundreds of millions or even billions of dollars in the short term, where do they put it, and the answer is u.s treasuries? In this case, you could loan the government money and get a guaranteed rate of return, depending on how long the agreement is now. Even though you don't make a lot of money doing this, it's pretty much a sure thing.

The government's going to repay its debt, so you're never gon na, have to worry about the government defaulting on your investment, and this is typically where a lot of large hedge funds, banks and investors keep their money. So they don't have to keep it sitting in a bank account somewhere or have to bury it and have it be eaten by rats. But if banks and investors are worried about the short-term outlook in the economy and they want to make sure they got a super safe place for their money, they're going to be buying up these treasuries and the more they buy these treasuries, the less the government has To pay an interest and when rates begin going negative, it's almost as though you're paying the government for the convenience of holding on to your money for you and guaranteeing that you're gon na get it back safely. So that, of course leads to the question: why is it happening now and is there actually a chance of this coming soon to a bank near you? Well until recently, the plan was almost the exact opposite.

Since the beginning of the year, the federal reserve has been facing an uphill battle of inflation, while supply chain issues, low interest rates and stimulus packages have caused prices to rise at their fastest level in well 30 years. As we can already see, food prices are up 8.6 gasoline rose 64 to its highest level in seven years. Rents are up 16.4, this year alone. Home prices are up 19 and the fact is, the situation is so bad that rising inflation is taken away from the average worker's wage increases and then some meaning you're effectively now making less money today than you did before now.

In small doses, inflation is generally encouraged and when it's under control it could be a good thing. The united states has really done its best to maintain safe, stable and consistent inflation annually that, over the last 25 years, has generally hovered around two to three percent a year. For some people, that's great. It means that inflation causes certain assets like stocks, commodities and real estate to rise in value.

So if inflation goes up three percent, so do your investments. Other people say that moderate inflation is necessary to keeping our economy going, because if we know our money is going to be losing a little bit of value each and every year, it encourages more spending which helps out the rest of the markets. The problem, however, is when inflation eats away at the purchasing power of our dollar faster than we can make it and right now, wages simply can't be rising fast enough, leading us to the revelation that maybe inflation is not transitionary. During a recent meeting, jerome powell suggested that it's time to stop describing inflation as transitionary admitting that it now appears that factors pushing inflation upward will linger well into next year.

Even though it's still believed that the majority of these price increases could be attributed to supply chain bottlenecks and labor shortages, at some point, prices will need to come back down and to do that, interest rates will probably have to come back up until now. The plan was that the federal reserve would slowly begin to taper back on their money printing escapades throughout 2022, even mentioning that they might be ready to scale back sooner than expected of which caused the markets to tumble to its worst day in a year. But others believe that the new variant has the potential to cause more travel restrictions, more supply chain shortages and the possibility of negative rates if the economy needs another jump start and that's kind of what's happening here at the core. We really have two types of scenarios taking place at the exact same time.

One believes that the economy is extremely risky in the short term and when institutional money needs a safe place to invest, they'll buy a treasury yields to the point where they turn negative and the second believes that the federal reserve will have to raise interest rates to Combat rising inflation, regardless of what's happening with the changing strains of the virus, so who's right well, one asset manager believes that we could potentially see low or negative interest rates forever, based on history. His research dives into what's known as secular stagnation, which has identified a downward trend in interest rates dating back over 700 years, predicting that real rates could soon enter permanently negative territory. He even goes on to say that so-called secular stagnation and the decline towards negative real rates should not be seen as a temporary event caused by the 2008 great financial crisis. It is, in fact, an irreversible multi-century secular trend, possibly dating back to another major crisis from the 14th century, but others believe that, given rising inflation, the federal reserve is going to have no other choice but to raise rates six times before 2024, while they reduced their Stimulus printing sooner than expected, either way we could have a situation where both are right.

We could see short-term overnight federal funds rates going negative if the outlook on our economy is worsening well, long-term interest rates are expected to rise to combat inflation, but is this actually something that could impact investors on a large scale to start, if and big, if negative Interest rates hit people like you and i it's gon na change, the entire landscape of banking and investing. It would be like you, depositing ten thousand dollars with allied bank and instead of you getting paid 50 a year in interest, you would have to pay them 10. A year to keep your money safe, if that happens, it's going to incentivize people not to hold on to their money and instead spend it. The goal would be to penalize people for saving too much and to encourage them to spend it or reinvest it back into the economy.

Therefore, negative rates in theory should help boost up the economy. In the event we get close to another recession. It also makes the value of currency cheaper relative to other currencies, and that means our exports become more affordable to other countries and that could help drive more demand. It would be kind of like americans going and taking all of their money to canada, where all of a sudden one of our dollars equals a dollar 30 of theirs, but that would also worsen inflation.

Demand would go up, prices of everyday items would skyrocket and we would just be exacerbating the same problems we're seeing today. So realistically, here's what we should probably expect right now. It really just comes down to this. Some investors believe that negative rates are possible in 2022.

If the economy gets worse so by buying negative fund futures they're, basically betting on the fact that rates will be even lower and they'll make money. If not well, then they're wrong and they'll lose money, but that's investing, but that doesn't mean that rates will actually go negative and only time is going to tell how this plays out most likely. This is simply due to the fear of a new variant potentially wrecking havoc in the economy. Markets right now are looking for any excuse to sell off, and that's it not to mention, even if we do end up getting negative rates at some point most likely.

It's not going to impact you unless you have a lot of money sitting in cash. Just take denmark, for example, in 2019, they only charge their customers interest to have a cash balance above a million dollars. Everyone else gets to keep their money in there for free and negative rates are never passed on to the consumer, but on a broader scale. Even though negative interest rates seem very far-fetched for the future, once you account for rising inflation, the real interest rates that we have today are already negative at negative 5.3 percent.

Yes, you heard me correctly: we already have negative rates and it's happening right before our eyes. That's because if you have a two and a half percent fixed rate mortgage with 7.8 inflation, you're effectively gaining 5.3 percent by borrowing money bringing negative interest rates here today, even throughout the next few years. Even if interest rates increase, real rates are expected to remain negative and stand at around negative 3.3 percent in the us 2.7 percent in germany and 3.2 percent in the uk. So, even though summer pricing in negative rates due to variant risks with inflation, we already have negative rates here in the u.s, and if history is any indication, we might continue to see this for quite some time.

Of course, as far as what you could do about this, i've always done my best to lock in low interest fixed fixed-rate mortgages on all of my property, so that way, with inflation, i'm effectively getting paid to borrow money now, even though sure you shouldn't be buying Real estate for the sole purpose of getting a mortgage, if you do own a property locking in a fixed-rate loan, could certainly end up making you money long term. Besides that, i do my best to stay invested, never keep more cash than i need to, and always no matter what smash the like button for the youtube algorithm. So with that said, you guys thank you so much for watching also make sure to subscribe, feel free to add me on instagram and on my second channel, the gram staffing show i post there every single day - i'm not posting here. So if you want to see a brand new video for me every single day, make sure to add yourself to that.

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