Negative Interest Rates Become the Anti-dote to Potential Contagion?
POTUS just can’t seem to the the Fed in line. Just drop rates 100bps and everything will be fine. He might be right as scary as that is to think about. Germany’s 30-year bond issuance (2 billion Euros) was less than a spectacular success this week to say the least. Over half went unsubscribed which is somewhat understandable since the yield was -.15% . You pay 103 and get back 100 in 30 years. Prepare to get used such a thing. The market is in uncharted territory: The State of the the Great Disconnect. Stocks, bonds, currencies, commodities.
Global negative interest rates, now over $16 trillion in outstandings leave the Fed in a bit of a dilemma. As the US Treasury yield curve has inverted, it’s still not yet in negative territory but something that was unthinkable after Trump’s election has returned as a credible possibility. This dilemma is second only to the pickle POTUS has let himself get trapped into with China.
While Fed Chair Powell frets over Trump’s hardball tactics (who knew the real enemy of the people is the the Fed?) it is not clear that looking at traditional market reports, metrics and general indicators of a healthy economy, these statistics numb the markets into complacency. The Fed has to understand in a world with a loose cannon at the helm (you know who) they must be in position to address the real risks confronting the markets: contagion risk, loss of confidence and no bid. Been there, done that, no fun.
With no other tools left in the central banking toolkit, negative interest rates become the default prophylaxis, the hail Mary intervention and don’t forget about the $700 trillion in notional derivative floating around out there.
While the trade war rages and the two things that markets hates most- uncertainty and distrust– abound, get used to being uncomfortable. The Dollar is too strong on a relative basis and the safe yen and other carry trades have gone the way of the buggy whip, what’s trader to do? It depends. Perhaps go out and buy some Depends is a safe play just in case.
Be on the look out for Trump’s cat’s meow.