The Perfect Storm? Can a unique confluence of externalities shatter investor confidence and morph into the “Big One”?
If the central bank does take emergency action to keep the global economy afloat, we can expect some pretty funky things to happen. The prevailing model for the global financial markets — from its theoretical underpinnings to strange regulatory regimes and obtuse market mechanisms– no longer works as envisioned in this environment of extreme uncertainty suggest. So People Get Ready, as the song goes: we may be headed into some rather stormy weather and into unknown territory. The anomalies continue to mount.
Perhaps the true bellwether of this crisis will be whether the mass confusion/conflation of Corona Beer with the Coronavirus will destroy the company or be the best organic marketing engine imaginable.. Will this confusion force Corona to rebrand- the internet seems to be pushing for Ebola Extra. Stay tuned.
I remember back in 1979 when Walter Cronkite announced that for the first time in history the prime rate was in double digits. Walter’s no longer here, but I can imagine he would take off his glasses and address the nation as a trusted source; we would all know something historic was happening. Like the Kennedy assassination or landing on the moon. The news is no longer a trusted source but I can assure you this is something historic. Negative interest rates are about to become a thing in the United States as it already is a thing around the rest of the globe.
No one knows exactly what realm negative interest rate policy (NIRP) will lead us into but as the central banks confess, NIRP is experimental. The real problem is the words central banking and experimental don’t belong in the same sentence. As the anomalies in the financial system continue to mount, a paradigm shift might not be far behind. But for a true blue Kuhnian paradigm shift to occur it requires 1) a crisis and; 2) a better model. So far we have avoided the crisis… note the use of “so far” and there don’t seem to be any models to replace the current one. Whatever it is, whenever it emerges, we are definitely going to need a bigger boat.
To date, the U.S., unlike most of the globe, has avoided the specter of negative interest rates. But it looks possible or perhaps even likely that given the current confluence of factors– the coronavirus coupled with a collapse of OPEC– a new era is about to be ushered in. Coronavirus is arguably the most deadly contagion since the Black Plague of the sixteenth and seventeenth centuries. A different kind of global contagion might be at hand. Having maxed out last September with global outstandings of $17 trillion of debt bearing negative interest rates, the markets bottomed in February with a reduction to just shy of $11 trillion.
Now things are about to change once again and the inevitability of negative interest rates seems to be unavoidable in the U.S. While the full impact of the Coronavirus (covid-19) is unknown at this time, central banks around the world stand ready to further easing. But with rates outside the U.S. already at zero or below perhaps it could just be a matter of time before the Fed has no choice but to join the fray jumping over ZIRP and going directly to NIRP. This could be the crowning achievement (pun intended)of the Coronavirus as global outstandings have already ratcheted back up to north of $14 trillion. We may be in for a paradigm shift of biblical proportions as the benchmark 10-year Treasury has already dipped below 1% and could be flirting with negative interest rate territory should the impact result of a global recession takes its toll. Markets are skittish and not always rational: 16% of those recently interviewed thought Coronavirus is associated with Corona beer whose stock was down almost 8% due to the conflation of a virus and an unfortunately named beer company.
Rich people trying to deposit money in Danish Banks will now need to pay -.75%. With major central banks (except the US) offering negative interest rates on government bonds one must begin to wonder how long this condition can continue. Currencies be damned, stock prices be damned, common sense be damned.
WB Yeats Second Coming might provide a cautionary tale:
Turning and turning in the widening gyre The falcon cannot hear the falconer; Things fall apart; the centre cannot hold; Mere anarchy is loosed upon the world…
…And what rough beast, its hour come round at last, Slouches towards Bethlehem to be born?
These are certainly strange times and daily discussions by central banks about negative interest rates have become normalized across the globe…. see what CNN Has to say.
Bret Easton Ellis, Paris Hilton and the Kardashians being Recruited by Trump??
Twitter strikes again. Don’t be surprised if Bret Easton Ellis replaces Jay Powell as head of the Federal Reserve. Ellis, immortalized the tagline for negative interest rates– less than zero— wittingly or unwittingly– the title of his best-selling dark coming of age novel back in 1985. The nihilistic zeitgeist portrayed in the novel paved the path for Paris Hilton and the Kardashians according a well-known NY Times reviewer who found Ellis’ work “disturbing”.
As in all things Trump it starts with a tweet:
Trump might be onto something. With a known $17 trillion of global government bonds yielding less than zero, it doesn’t take a rocket scientist to figure out the center cannot hold… or should I say the US central bank cannot hold it together much longer without further distortions and dislocations in the global capital markets.
So Bret Easton Ellis to head the Federal Reserve, Paris Hilton as National Security Advisor and Kim K as Secretary of the Commerce? The new Dream Team for Team Trump. With NIRP now embraced by POTUS: Dow 30,000 here we come.
Negative Interest Rates Become the Anti-dote to Potential Contagion?
Ain’t Misbehavin’? Members of the Feral Reserve refuse to fall in line behind our Fearless Leader or perhaps our Feral Leader
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.
Who’s the real enemy of the American people? Pick one…. (no write-ins for putin please)
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.
Germany has gone negative on their long bond issuing 2 billion Euros in 30 year bonds yielding… well… less than zero.. It seems to foreshadow a sentiment of a deeper rate decline into negative territory. Even at a negative yields, further declines result in capital gains for investors. A bit of a pessimistic thesis but mathematically correct.
President Trump did not waste time or hold back using this German bond issuance to further jawbone Fed Chair to cut rates:
