Market Views : Negative Rates, Pillow Talk and Gold


What we wrote in 2014.

“We all struggle to rationalise in our heads.

1. Is spending a lot more than you earn a good thing ?
2. Is printing money the most efficient way to create Employment and Inflation ?

Authoritarian is all we know now in the marketplace. Much as we like to think that we are still in control, the truth is that central bank forces have managed to engineer a perfect market at this moment.

  1. “Why Nations Fail – The Origins of Power, Prosperity And Poverty. The authors conclude that prosperity cannot be engineered even through authoritarian growth. History is peppered with failed experiences.”
  2. Debts have to be repaid and we know the easiest way is to inflate the debt away because 1 dollar today is worth half tomorrow.
  3. Debt occurs for 3 reasons, according to the Minsky’s Financial Instability Hypothesis :
    – to generate additional profits to pay off the loan (hedge)
    – to roll over loans (speculative)
    – to make capital gains (Ponzi)

Megalomaniac 1 – Mario Draghi

“(Reuters) – National central bankers in the euro area plan to challenge European Central Bank chief Mario Draghi on Wednesday over what they see as his secretive management style and erratic communication and will urge him to act more collegially, ECB sources said.

Megalomaniac 2 – Haruhiko Kuroda

“TOKYO-After firing its latest monetary bazooka, the Bank of Japan isn’t just an influence on financial markets. It is also a huge player in them.” WSJ


Back to the present. CREDIBILITY more important ?

Market Views : Negative Rates, Pillow Talk and Gold 1

Even ex PIMCO, El Erian thinks Kuroda has gone batty !

Market Views : Negative Rates, Pillow Talk and Gold 2


And if you live in Sweden, Switzerland, Denmark and Japan, the safest place for your money is probably under the pillow (and locked doors) as we speak as the world moves on to NIRP (Negative Interest Rate Policy) from ZIRP (Zero Interest Rate Policy).

Why not under the pillow when the bank is charging customers for deposits ?

It is almost sinister when we read that the European Central Bank is planning to dump the €500 note which makes it even more difficult to hoard the pillow and mattress cash.

The question to ask is if holding cash is criminal ? As policy makers put it, “There is a pervasive and increasing conviction in the world of public opinion that high denomination banknotes are used for criminal purposes … It’s in this context that we are considering action”

Or simply, because holding cash in a NIRP world “could encourage people to take their savings out of the bank and hoard them in cash. This could slow, rather than boost, the economy…. Andy Haldane, a member of the Monetary Policy Committee (MPC), the UK’s equivalent of the FOMC suggested that to achieve properly negative rates, the abolition of cash itself might be necessary. ”

If we think that things are not that bad because a 12% drop in the STI for Jan-Feb 2016 is not the worst we have seen, considering the 16% drop back in Aug-Sep 2011 not to mention the 56% fall over 6 months in 2008, well, you could be a little misled.

That is because this time, central bankers appear to be running out of options.

And we need the common sense of people like Bill Gross and even Donald Trump to tell us that “Today’s Fed and other model based central banks are, to my way of thinking, the ones that have more and more become “increasingly addled”…..  They all seem to believe that there is an interest rate SO LOW that resultant financial market wealth will ultimately spill over into the real economy. I have long argued against that logic and won’t reiterate the negative aspects of low yields and financial repression in this Outlook. What I will commonsensically ask is “How successful have they been so far?””

What has happened in 2016 is that Lower Rates Now Lead to Asset Crashes ! The cycle has turned and markets are rejecting the negative rate maxim and Japanese banks are keeping rates at zero for depositors as they worry about systemic troubles without the systems that can handle negative rates as we note that Microsoft Excel still does not have the ability to compute those negatives for us

And few borrowers are emerging for the free money.

In the region, the mood is catching on as a friend recounts an encounter with a stranger at the beach who knew little about what is going on in the markets but enough to advise him that central banks have lost their minds and when rates are negative, it is time to buy gold (zero yielding).

QE has been a great experiment that is starting to look like global fiasco now. It started with Ben Bernanke, the father of modern economics textbooks, but is now carried to new extremes by his groupie central banker followers, as a former bank strategist friend puts it. And the friend is in the league of folks that smaller central banks offer deputy governor jobs to, although, to be certain, none of them are Bernanke material.

He says it is like “handing surgical tools to a bicycle mechanic and him thinking he is qualified to do surgery”.

QE is indirectly responsible for the Arab Spring or rather, fanned the flames of despair in the Middle East with the USD weakening abruptly causing food inflation (for many of them run on USD pegs) which led to dissent, riots and the state of the Middle East today.

And so the Swedish Riksbank “attributed a strengthening Swedish economy and falling unemployment in the country to the bank’s very loose monetary policy. Sweden’s key interest rate has been negative since February 2015, with four rate cuts in the past year alone.”

And the Standard & Poor’s rating agency “recently reaffirmed the country’s triple AAA sovereign rating, remarking on the benefits it derives from “ample monetary policy flexibility”.

Noting that the Riksbank had introduced both negative interest rates and quantitative easing, S&P said that “should inflation rates stay low or the krona appreciate materially, the central bank could lower the repo rate further”.

It does look like they have made their addled beds, refusing to admit to their failures so far in their policy actions and continue to justify themselves as long as we have “Leaders like Obama who are typically not economics trained and unable to understand the complexities or repercussions of the actions of the central bankers.

The Loss of Credibility and The Feedback Loop

NIRP = money floods into bonds and zero yielding Gold and, if I may add, why not zero yielding Oil ? or the housing bubble in Denmark and Sweden ?

NIRP will make people unhappy, no doubt, and maybe pissed off too and all the central banking models out there are not designed to capture the Panic in market psychology, as highly intelligent as central bankers are.

Reporters will soon come around to the Gold story or Oil and other commodities even, and they will surely be chastised for spreading panic. But it is inevitable, as even the man on the beach knows it is time to buy Gold and friends are keeping that extra cash at home in preparation for the remotely potential bank runs and upset depositors.

Leaving with a chart for Bitcoin, Gold and Oil, all out of central bank control, for now.

Market Views : Negative Rates, Pillow Talk and Gold