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Transformational Markets: History Being Made

No-Bond World And The Risk Of A Daily Liquidity Crisis

Rates hit new lows this month. Symbolically, the 50-year swap rate in Europe dived into negative territory. Bonds as an asset class are in extinction, a major shift in modern finance as we know it, inadvertently turning ‘balanced portfolios’ into ‘long-equity portfolios’. The ‘nocebo effect’ of enduring negative interest rates is such that negative rates are deflationary, hence self-defeating. Meanwhile, they have potent unintended consequences for systemic risk, which spreads around, leading the market into an historical trap. A ‘Daily Liquidity Crisis’ may result. All the while as markets get off the sugar rush of Trump rate cuts, and Europe has his banking sector at risk of implosion.

History Being Made

It must be a great thing to witness history being made during the span of your career, to find yourself in a market where so much happens for the first time in the history of finance, and close to everything else is at an extreme over the past decade. Nothing much is left around us which is trading regularly, or around historical averages.

In no particular order: the whole of the US interest rate curve dropped below 2% in mid-August, for the first time in history. The whole of the German interest rate curve dropped below zero. The Swiss, Swedish, Japanese curves are also negative for their entirety or whereabouts. The 10yr Swiss government bond yields a mind-blowing -1.2%, a sure bet to make no less than 12% in capital losses by maturity. Peripheral Europe joined in: the 10yr Portugal government bond is close to 0% yield now, about to dive in negative land too.

…click on the above link to read the rest of the article…

Save The World By First Saving Yourself

August 25, 2019

Save The World By First Saving Yourself

We each have a role to play in how the world recovers from the coming crisis

Ripped from today’s headlines:

From news reports like these, it’s understandable to think that our future looks bleak.

At this point we can only ride out the consequences as the systems we depend on collapse and then ebb away — exposing that the structure of our modern way of life is really a just an edifice built of sand.

That may be true. But not necessarily.

I’m here with some good news today. There remains a multitude of options that each of us can and should do to prepare for what lies ahead. And in so doing, we can help to avert the worst of it, as well.

But only if enough of us try. Critical mass is key here.

Yes, the world is busy collapsing around us. That’s true.

But collapse is a process, not an event. It can be ameliorated and even reversed, depending on the actions we decide to take from here.

And there’s still time left to change our fate. Not much, mind you. But enough to matter.

The good news is that more and more people are heeding the call and taking action. The bad news is that too many still aren’t.

And the worse news is that the many entrenched powers of the status quo are working against our future best interests, as they desperately cling to old notions of advantage, wealth, and privilege.

…click on the above link to read the rest of the article…

12 Reasons Why Negative Rates Will Devastate The World

August 18, 2019

12 Reasons Why Negative Rates Will Devastate The World

It has been a thesis over 20 years in the making, but with every passing day, SocGen’s Albert Edwards – who first coined the term “Ice Age” to describe the state of the world in which every debt issue ends up with a negative yield as capital markets and economies collapse into a deflationary singularity – is that much closer to having the victory lap of a lifetime. Although, we doubt he is happy about it.

Commenting on the interest rate collapse he has been (correctly) predicting ever since he first observed Japan’s great bubble bust of the 1980s and which resulted in both NIRP and QE, and which he (correctly) expected would spread across the rest of the world, leading to a “Japanification” of every major bond market…

… Edwards said that what bond markets are telling us is “that the cycle is ending with the central banks having failed to drive core CPI inflation higher. So Japanese-style outright deflation lies ahead at a time when western economies have piled debt sky high.”

Needless to say that’s not good, not least of all because we now live in a world in which the bond universe with negative yields continued to grow at an exponential pace, rising rapidly over the past two weeks and reaching a record $16.4 trillion…

… rising significantly above the previous mid-2016 record high of around $12.2tr. The expansion of the universe of negatively yielding bonds as a percentage of total is shown below: as of the last week, this proportion increased further to around 30.0%, above the mid-2016 record high of 25.8%.

…click on the above link to read the rest of the article…

IMF Recommends “DEEP” Negative Interest Rates as the Next Tool

August 12, 2019

IMF Recommends “DEEP” Negative Interest Rates as the Next Tool

The IMF has continued to assume that the zero-bound on interest rates can be a serious obstacle for fighting recessions on the part of the central banks. The IMF maintains that the zero-bound is not a law of nature; it is a policy choice. The latest in the IMF papers argue that tools are available to allow central banks to create deep negative rates whenever needed to reverse recessions. They claim that maintaining the power of monetary policy in the future to end recessions within a short time will require deep negative interest rates.

It is really quite astonishing how these people with NO REAL-WORLD EXPERIENCE keep trying to maintain the Marxist-Keynesian theory when more than 10 years of negative interest rates have failed. This is the same theory that dominated medicine for so long. They assumed there was a toxin in the blood, so the cure was to bleed you. If you died, they assumed the reason was that they did not bleed you sooner.

These idiots fail to comprehend that negative interest rates have wiped out pensions. The instruction manual for life was to save for your retirement to be able to live off the interest of your savings. The problem was, those days were based on 8% interest rates. Moving negative will not force people to spend, it merely bankrupts the people.

Global Central Banks “Are Trapped By Their Own Inflation Targets”

July 17, 2019

Global Central Banks “Are Trapped By Their Own Inflation Targets”

Negative Rates Would Lead To #Chaos

Central bankers attending the G-7 meeting are sounding remarkably coordinated in their message. The global economy is growing but inflation isn’t. And that, along with the oft-cited global headwinds, means they’re ready and able to add more liquidity to the system. In the case of the U.S. they have virtually promised that it’s underway. They can assure markets that they’re “ready.” But the far more important assertion is driving home that they’re still “able.”

Inevitably, and understandably, the question of whether they’re running out of ammunition to conduct further monetary easing has been the subject of debate. But the last thing they can afford to let happen is for investors, corporations or consumers to conclude that they’re near the end of the line.

Monetary policy is a transmission mechanism that largely works through expectations. Nothing will crater inflationary expectations, alter the spend-versus-save dynamic, affect capital-investment decisions and tighten financial conditions faster than the admission that little more is possible.

They’re in fact trapped by their own inflation targets. No one realized that it’s easier to get inflation down than up. Therefore, central bankers need to keep considering, and in some cases delivering, more and more extreme forms of easing.

Zero rates begot quantitative easing which led to negative rates. While financial markets give the appearance of stability through asset bubbles, higher asset prices haven’t led to them fulfilling their mandates.

There is a reason there’s so much academic interest in discussing the potential benefits of policies like helicopter money and modern monetary theory — ideas that would have previously been dismissed out of hand. Officials need to convince themselves of the potential efficacy of these notions in order to get the rest of us to believe they’re legitimate options. The truth is, they really don’t know why inflation has remained such a problem. Therefore the proper cure remains elusive.

…click on the above link to read the rest of the article…

Negative Interest Rates Spread To Mortgage Bonds

May 25, 2019

Negative Interest Rates Spread To Mortgage Bonds

There are trillions of dollars of bonds in the world with negative yields – a fact with which future historians will find baffling.

Until now those negative yields have been limited to the safest types of bonds issued by governments and major corporations. But this week a new category of negative-yielding paper joined the party: mortgage-backed bonds.

Bankers Stunned as Negative Rates Sweep Across Danish Mortgages

(Investing.com) – At the biggest mortgage bank in the world’s largest covered-bond market, a banker took a few steps away from his desk this week to make sure his eyes weren’t deceiving him.

As mortgage-bond refinancing auctions came to a close in Denmark, it was clear that homeowners in the country were about to get negative interest rates on their loans for all maturities through to five years, representing multiple all-time lows for borrowing costs.

“During this week’s auctions, there were three times when I had to stand back a little from the screen and raise my eyebrows somewhat,” said Jeppe Borre, who analyzes the mortgage-bond market from a unit of the Nykredit group that dominates Denmark’s $450 billion home-loan industry.

For one-year adjustable-rate mortgage bonds, Nykredit’s refinancing auctions resulted in a negative rate of 0.23%. The three-year rate was minus 0.28%, while the five-year rate was minus 0.04%.

The record-low mortgage rates, which don’t take into account the fees that homeowners pay their banks, are the latest reflection of the global shift in the monetary environment as central banks delay plans to remove stimulus amid concerns about economic growth.

Denmark has had negative rates longer than any other country. The central bank in Copenhagen first pushed its main rate below zero in the middle of 2012, in an effort to defend the krone’s peg to the euro. The ultra-low rate environment has dragged down the entire Danish yield curve, with households in the country paying as little as 1% to borrow for 30 years. That’s considerably less than the U.S. government.

…click on the above link to read the rest of the article…

The Terrifying Truth About Negative Interest Rates

May 23, 2019

The Terrifying Truth About Negative Interest Rates

Pushing interest rates below zero is both an act of desperation and something that in theory should have a huge, immediate impact of the behavior of borrowers and savers. The fact that negative rates have become the new normal in big parts of the world but haven’t caused the expected behavior change should scare the hell out of everyone.

To understand why this is so, think of the rate of interest as the price of money. It’s what an individual or business has to pay to get credit with which to buy and invest. As with anything else, when the price of money is high, we tend to acquire less of it and when the price is low we acquire more. So making money not just cheap, not just free, but actually profitable to borrow, while making savings unprofitable to hold should, according to conventional Keynesian economics, create a scene in the credit markets reminiscent of those Black Friday Wal-Mart videos where fistfights break out over the last remaining Barbie Doll. Businesses in particular should be borrowing and investing like crazy, igniting an epic capital spending boom.

But that hasn’t happened. In Europe, for instance, negative rates have been in place for five years …

… and instead of a rip-roaring post-Great Recession recovery, the result has been the kind of anemic growth that conventional economics would predict for a tight-money environment. Business capital spending, the engine that in theory should be propelling Europe’s economy, looks like the opposite of a boom.

Europe capital spending negative interest rates

This translates into seriously boring GDP growth:

…click on the above link to read the rest of the article…

Economic Iliad & Odyssey

April 25, 2019

Economic Iliad & Odyssey

The term “iliad” in Greek mean a series of miseries or disastrous events and “Odyssey” meant a long wandering or voyage usually marked by many changes of fortune. Welcome to the Economic Iliad & Odyssey. What we are facing is truly extraordinary. There is absolutely NO economic theory from Adam Smith to Keynes that ever addressed negative interest rates no less sustaining such a trend. There have been four major players who ventured into the negative interest rates territory but the disasters of this policy in Europe and Japan were implemented in hopes to stimulating the economy. In the case of Switzerland, they were seeking to prevent capital flowing into the Swiss franc as a safe-haven.

We are now on the threshold of the most PROFOUND economic event which has never before in history ever taken place. This is where opinion becomes worthless. All we can do is approach this on a collective basis internationally and without bias.

Don’t Be So Negative

March 17, 2019

DON’T BE SO NEGATIVE

“FED’S WILLIAMS SAYS IN A DOWNTURN WE COULD CONSIDER QUANTITATIVE EASING, NEGATIVE RATES.”

Tweet by Reuters’ Jennifer Ablan, reporting on a speech by John Williams of the Federal Reserve Bank of New York at the Economic Club of New York, 6 March 2019.

“Because NIRP worked so well in Europe and Japan ?”

Response by mac on Twitter.

In February 2016, The Financial Times published an article titled ‘Central Banks: Negative Thinking’, co-authored by Robin Wigglesworth, Leo Lewis and Dan McCrum. The piece in question was atypically sceptical of the received wisdom of QE, i.e., that it works. If it was sceptical as to the efficacy of QE, it was doubly so in relation to the policy of maintaining negative interest rates, or NIRP. Some extracts follow:

Online, the mood has turned to rage. Forums have seen a flood of commentary from Japan’s retirees decrying negative rates and the “torture” that the BoJ’s policy is already inflicting. “Raising commodity prices to overcome deflation, raising consumption taxes, lowering interest rates . . . they are all policies that make us suffer,” wrote one..

The Japanese can be conservative at the best of times, and few think these are the best of times.

But Japan is not the only country affected. A concept once only subject to small-talk among economists is now an uncomfortable reality. With quantitative easing seemingly losing its power to dazzle markets, and many governments either unable or unwilling to countenance raising spending, central banks have felt compelled to try new tools.

Sweden, Switzerland, Denmark, the eurozone and most recently Japan — adding up to almost a quarter of the global economy — have all introduced some form of negative interest rate policy in an attempt to fight deflationary forces, weaken their currencies and stimulate growth.

…click on the above link to read the rest of the article…

Europe is so weak it can’t even handle 0% interest rates

March 14, 2019

Europe is so weak it can’t even handle 0% interest rates

Europe’s leading economic policy makers have officially thrown in the towel.

Last week, the European Central Bank admitted economic conditions are so dire that it already has to reverse its monetary policy.

I’ll get back to that in a minute…

Following the Great Financial Crisis in 2008, central banks printed trillions of dollars and pushed interest rates to their lowest levels in human history. Low interest rates (and lots of new money sloshing around the system) mean people should go out and buy things that would otherwise be out of reach… new houses, new cars, businesses, etc.

And, in theory, all of that activity creates jobs and helps the economy grow… in theory.

Ten years into this monetary experiment, central banks did create growth…

US Gross Domestic Product (GDP) was about $15 trillion in 2008. Current GDP is about $22 trillion. That’s $7 trillion of economic growth.

Impressive… until you figure the cost of that growth.

Over the same period, the US national debt increased from $10 trillion to $22 trillion.

So, it took $12 trillion of debt to create $7 trillion of economic growth.

The marginal utility of all of this new debt is decreasing (remember this point for later). And it’s the same story all over the world.

The US economy is so dependent on cheap money, it can’t even handle 2% interest rates (the Fed hiked rates from 2.25% to 2.5% last December and stocks fell 20%).

But Europe is even worse. Europe has negative interest rates. And the European economy is so weak (it grew 0.2% in Q4), it can’t even handle ZERO percent interest rates.

Last week the ECB announced it would keep interest rates negative. And it’s starting its third round of cheap loans to banks (who, in turn, are supposed to lend to businesses and households).

…click on the above link to read the rest of the article…

The Dangers of Negative Interest Rates and a Cashless Economy

January 25, 2019

THE DANGERS OF NEGATIVE INTEREST RATES AND A CASHLESS ECONOMY

The recent gyrations in the stock market and the uncertainties surrounding American trade policies with China and other parts of the world have raised the question of when the next recession will inevitably follow the current economic recovery from the 2008-9 financial crisis. In the face of a future economic downturn, some economic policy analysts are already making the case for central banks to use negative interest rates to dampen and shorten the impact of any economy-wide decline in output and employment that may be ahead.

Not surprisingly, much of the speculation concerning the power of government to mitigate, if not prevent, an economic downturn surrounds the usual debates over the potentials of monetary and fiscal policy. Harvard University economist Kenneth Rogoff, in a recent article, “Central Bankers’ Fiscal Constraints” (January 4, 2019), downplays the efficacy of taxing and spending tools, and highlights, instead, the continuing crucial role of monetary policy and interest rate manipulation.

The Limits on Implementing Fiscal Policy

With nominal interest rates in the United States and some other places around the world still at historical lows (even in the face of recent Federal Reserve rate increases), Rogoff points out that many central bankers hope that more direct fiscal policy will carry the weight of countercyclical activities in the face of any serious recession that may come.

But he points out that in the American system of government, there is little immediate flexibility to enable agreement upon and introduction of tax cuts or spending increases that might be effective in holding back the recessionary trends in a timely fashion. Fiscal changes must work their way through and be passed by Congress, then signed by the president, and finally implemented by various government agencies. The entire process normally can take a long time, during which a recession could get increasingly worse.

…click on the above link to read the rest of the article…

Central Banks Looking at Creating Their Own Cryptocurrencies

November 26, 2018

Central Banks Looking at Creating Their Own Cryptocurrencies

The IMF has recommended that all Central banks should issue their own cryptocurrencies. Indeed, they are looking at using Block Chain to keep track of taxes and to enforce negative interest rates with
cryptocurrencies which would allow them to impose negative interest rates whenever necessary. With adopting cryptocurrencies that governments would control, we will come one step closer to losing all our freedom. Central banks could enforce negative interest rates with cryptocurrencies and thus people would find their accounts just garnished. This technology is also causing those in hunt of tax revenues to lick their lips.

The issuance of digital currencies would allow central banks to remain in control of the money supply far more so than they are today. Sweden is moving forward and there we see that the use of cash is rapidly disappearing.
Cryptocurrency technology would allow also the taxman to just cometh and take whatever he desires in the midst of the economic crisis we face. The Central Banks would be able to maintain greater control over the creation of money through the process of leverage (bank lending).

While policymakers in Canada have already researched the idea. The IMF head Christine Lagarde called on central banks to focus on issuing digital currencies. All of this attention is being applied as the fear of rising interest rates in the marketplace is really beyond the control of central banks. It is true that central banks can control the short-term rates, but long-term rates are established by the free market. This is why the Federal Reserves was buying in 30-years bonds hopefully to impact the long-term rates which the Fed cannot directly control.

Transparent citizens, negative interest rates and other crazy ideas of economic experts

December 17, 2017

Transparent citizens, negative interest rates and other crazy ideas of economic experts

In a March paper, Alexei Kireyev of the International Monetary Fund advises abolishing cash without having the citizens aware of the process. First, large banknotes are to be withdrawn from circulation, next limits on cash transactions are to be imposed, then computerization of the world’s financial system and control of international cash transactions are to be enforced and, finally, private companies are to be encouraged to avoid cash transactions The Macroeconomics of De-Cashing.

Kireyev draws on the ideas of former IMF chief Kenneth Rogoff. In his 2016 book “The Curse of Money”, he advocated the abolition of cash. In his opinion, it would contribute to the fight against crime, tax evasion and the reduction of the grey area. The ECB obliged him and promised not to print the 500 euro note after 2018. The government of India did the same thing: on November 9,2016, it unexpectedly devaluated all 500 and 1000 rupee banknotes over the night – a severe blow against the black economy and corruption. The next day, chaos reigned on India’s streets – crowds of people in front of banks, empty ATMs – everyone wanted to withdraw his money, exchange the old rupees for new, valid ones, and there were even casualties.¹⁾

The other governments eagerly followed this ideas of great economic gurus, not worrying about what was happening in the Indian streets: Australia wants to withdraw its 100 notes from circulation,²⁾and Venezuela has already abolished the 100 bolivar note. France, Italy, Spain and Greece already have ceilings for cash withdrawals, and a ceiling of EUR €5000 is currently being discussed in Germany. In some countries, the renunciation of cash is becoming a means of political struggle. In Poland, Prime Minister Mateusz Morawiecki introduced cashless payments to the state postal service. Soon it will also be possible to pay his tickets directly on the patrol car.

…click on the above link to read the rest of the article…

Too Safe to Fail: Implied Default Rate for European Junk Bond is Negative 1.1%

November 9, 2017

Too Safe to Fail: Implied Default Rate for European Junk Bond is Negative 1.1%

Apparently, European junk bonds are too safe to fail. Fundstrat Global Advisors’ Thomas Lee says the market-implied default rate for a European junk bond sits at a negative 1.1%.

Please consider Investors Price European Junk Debt as Too Safe to Fail, Thanks to Funky Bond Math.

The market’s expectation for an average European high-yield bond to default on its payments stood at negative 1.1% on Oct. 26, versus a long-term average of a positive 5.8%, according to an analysis released Friday by Thomas Lee, the head of research at Fundstrat Global Advisors, who attempted to demonstrate the pernicious consequences of quantitative easing.

“We see this creating a ‘moral hazard’ which allows bad businesses to borrow money and misallocate. After all, wouldn’t anyone want to borrow money at cost of debt less than the U.S. government?” said Lee.

But Martin Fridson, chief investment officer of Lehman Livian Fridson Advisors and a veteran high-yield bond analyst, has criticized the principal way money managers and market strategists like Lee calculate the market’s expectations for the default rate, which uses the option-adjusted spread as a jumping-off point. By his own calculations, the default rate for an average European junk bond should be 0.2%, still a very low level.

Fridson, nonetheless, conceded the ECB was one “root cause” for the seemingly stretched valuations seen in the market for European corporate paper.

Debate Over Risk

Depending on your point of view, the implied default rate on European junk bonds is -1.1% or as high a 0.2%.

Also consider Tracking the Amazing Junk Bond Bubbles in the US and Europe.

One hell of an unwind is coming. I wish I could tell you when.

Hard Assets In an Age of Negative Interest Rates

October 3, 2017

Hard Assets In an Age of Negative Interest Rates

Time is the soul of money, the long-view — its immortality. Hard assets are forever, even when destroyed by the cataclysms of history. It is the outlook that perpetuated the most competent and powerful aristocracies in continental Europe, well up through World War I and, in certain prominent cases, beyond; it is the mindset that has sustained the most fiscally serious democratic republic in the Western world, that of Switzerland (as demonstrated in this article). In this view, the stewardship of money, formerly known as “banking,” is a serious matter of serious wealth management and not a weird-science lab experiment of investment products ultimately designed for hedge fund managers’ tax arbitrage schemes.

More than ever the focus on hard assets is a dire call to arms given the deformed market culture of central banking monetary magic. Despite the early promise of the Trump presidency to reinvigorate the economy, the United States remains mired in economic stagnation built up over so many years of debt-driven policies, easy-money policies, and the ZIRP fiasco fostering a bizarre-world situation in which the actual economy is doing poorly while the market is soaring. In such an environment, the allure of the centuries’-old tried and true has never had more appeal.

In a word, the hard asset vision is about building wealth outside the stock market. It refers to three main strategies overall: 1) land ownership and/or farmland, forestry and agriculture 2) gold, other precious metals, and certain base-metal commodities 3) The (Old Masters/Classic Modern) art market. Where this last is concerned, we mean art as investment and not art-as-commerce, such as that which contaminates today’s insipid and overpriced world of ‘Balloon-Dog’ bad art. The auction world of Rembrandt and Picasso; of El Greco and Gerhardt Richter has been on a tear, is smashing records, and cannot be ignored as an excellent safe-haven vehicle, as outstanding works of art traditionally always have been.

…click on the above link to read the rest of the article…

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