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Negative interest rates take investors into surreal territory


Viking
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Is this where North America is headed. Do we care if negative rates are here to stay? How does this change the investment process?

 

https://www.ft.com/content/09360f2e-98b4-11e9-9573-ee5cbb98ed36?ftcamp=traffic/partner/feed_headline/us_yahoo/auddev&yptr=yahoo

 

Beginning of article: “This summer, Germany’s housing market has turned into Alice in Wonderland: the yield on five-year bonds issued by mortgage banks slid to minus 0.2 per cent, compared to a level of plus 5 per cent a decade ago.

 

That means investors are essentially paying for the privilege of lending money into Europe’s largest property sector. Economic logic — or gravity — has been turned on its head.

 

If that were not bizarre enough, consider this: in Denmark, some financial institutions are offering borrowers “negative” mortgages that pay interest; treasurers of major German companies are muttering about their bonds trading with negative yields; and yields on 10-year government bonds in France and Sweden have fallen into negative territory too, joining Germany and Japan.

 

Overall, the global pile of negative yielding debt has swelled above $12.5tn, breaking the record set in 2016. Even in America, the yield on 10-year Treasuries recently fell below 2 per cent. That might not look dramatic since it is still positive in nominal terms. But when adjusted for core inflation (about 2 per cent) it equates to a near-negative real rate. This is remarkable given that the US just notched up an economic growth rate of 3.1 per cent in the first quarter.”

 

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Well I will be getting a mortgage if this happens.

 

I think boring slow to no growth companies with large dividends should do ok. Telecom companies come to mind.  REITs could do ok. The dividend looks better and they can refinance at better rates.  Really all equities are undervalued in this case but I really like dividends as I could see investors getting desperate and bidding them up. 

 

I think the hard question is what does this imply for economic growth.

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In Europe, home prices have been on a tear for years. They are going up faster than Silicon Valley.

 

Though housing is 40% of the CPI, disgusting governments and central bankers have created  negative mortgage rates in Denmark, 0% 10-year in France, 0.5% 10-year in Portugal and Spain.

 

All these countries have zooming house prices. Faked inflation numbers have given central bankers an excuse to blow a housing bubble, just like they did in the US in 2008.

 

How do they report 0.5% inflation when the biggest CPI component is climbing 7% a year? "Imputed Rents"

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I see Denmark mentioned in the quote by Viking in the starting post in this topic.

 

This post is about my personal perception of Danish interest rate conditions, based on my actual cursory knowledge about the Danish market for mortgage bonds etc.

 

Finans Danmark : Bond rates.

 

Translation of legend :

 

Red: Short Euro rate

Brown : Short rate [DKK]

Grey [sort of] : Long rate [likely DKK]

 

So the long [likely 30 years] fixed interest rate is right now 1.647 %. On top of that you have to pay a spread of ~1 % to the mortgage institution, in Danish "reservefondsbidrag" [translates to "reserve fund contribution"], which is the mortgage institutions running earnings on the mortgage. The spread can be a bit lower, based on your rating.

 

Mortgages with variable interest are typically rolled over after 1, 3 or 5 years. In Danish called "flexloans" - F1, F3 or F5. Refinancing rates are set under bond auctions at certain dates. What happens if the Danish mortgage bond market is - perhaps more or less - frozen at the dates of the future auctions? What happened to GGP comes to mind here.

 

To buy a home with mortgage [generally max. 80 % in mortgage] you have to have 5 % of the price as available cash, which can't be borrowed money, and after all other personal debt deducted [i think student loans in this particular calculation is excluded though.]

Based on your personal budget and a standardized minimum available amount of money for consumption based on the household composition, you are eligible for the mortgage for the house, if you can afford a mortgage with repayments over 30 years [likely depending on your age also] with fixed rate. [in this budget you naturally have to include the load of repayment of student loans.]

 

This practice is set by the Danish FSA - so to say as a "soft", but still de facto standard, meaning your bank can provide the last 15 % of the price as second layer financing, if it's willing to make a loan provision for the deviation.

 

I'm not up to date on the actual standards for minimum available amount of money for consumption for now some years, but last time I asked about it, I was surprised how high they were.

 

You can opt for a "punch card" on your mortgage with ten punches [each punch is a year without repayment, subject to that the mortgage is held within agreed duration], if the economic situation for the total household changes to the worse, compared to the budget [unemployment etc.].

 

This practice makes a lot of sense to me.

 

So the "free" debt, that really isn't free [but still cheap], is certainly not available for everybody here in Denmark.

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^ the above provisions seem easier than the provisions for a conforming mortgage in the US. However on the other hand, who is going to say that with a 1.6% interest rate, a 2.5% cap rate isn’t reasonable? This would presumably make the interest cost of a home the same than owning, even if you include the cost of maintaining the house (~1% of purchase price).

 

There ar pretty cheap (relative to NAV) real estate stocks one can buy in the UK for example. U.K. will probably follow down the EU it’s interest rates over time.

 

Of course banks and life insurance companies are screwed.

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10% home price rise with an 80% mortgage, is a 50% return on investment within one year.

 

Draghi wants to ease even more.

 

Volcker has a simple suggestion: if you don't want deflation, don't blow bubbles.

 

^ the above provisions seem easier than the provisions for a conforming mortgage in the US. However on the other hand, who is going to say that with a 1.6% interest rate, a 2.5% cap rate isn’t reasonable? This would presumably make the interest cost of a home the same than owning, even if you include the cost of maintaining the house (~1% of purchase price).

 

There ar pretty cheap (relative to NAV) real estate stocks one can buy in the UK for example. U.K. will probably follow down the EU it’s interest rates over time.

 

Of course banks and life insurance companies are screwed.

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10% home price rise with an 80% mortgage, is a 50% return on investment within one year.

 

Draghi wants to ease even more.

 

Volcker has a simple suggestion: if you don't want deflation, don't blow bubbles.

 

RuleNumberOne,

 

Perhaps I misinterpret your post here, but please try to invert your post, by assuming a 10 percent price decrease instead. Draghi & Volcker do not set market prices on real estate - buyers and sellers do.

 

This post is not meant condescending towards you. I assume we all know about the mechanics of the use of leverage, actually.

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Draghi & Volcker do not set market prices on real estate - buyers and sellers do.

 

 

Yes, but a central bank controls the growth path of the unit of account, which is the main measuring stick for those "buyers and sellers". 

 

The central bank can almost completely dictate the size of the nominal economy going forward.

 

The below table kinda shows that housing (as % of nominal GDP) has been relatively constant.

 

So at a high level, can't Draghi and Volcker largely determine the nominal price of housing over a decently long time frame?

 

https://www.nahb.org/-/media/Sites/NAHB/research/housing-economics/housings-economic-impact/housing-contribution-gdp-q1-2019-0426.ashx?la=en&hash=DB4820E7942613C16F65F3BF6739E0462AC168EE

 

 

(Would add that there's no iron law that housing must be a fixed % of GDP - Its just that with various zoning laws, it's (imo) likely to stay relatively constant.  Without those laws, there's a (good?) chance that housing would represent an ever decreasing % of GDP, much like food has done over the last century)

 

https://cdn.theatlantic.com/static/mt/assets/business/1900%201950%202003.png

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Over the long-term, CB's will do everything thet can to ensure that the nominal value of housing does NOT decline. If only because municipal taxes are an annual % of value, & DIY/Construction/Hard Goods etc. rely on the nominal value of property continually rising. At the macro level, for housing to fall in real terms; inflation would have to continuously exceed targeted growth in money supply (2% in most cases). Very unlikely, and for quite some time.

 

The reality of course is that the higher property values go, the less a conventional mortgage works.

In todays environment, cashflow for debt service is static (or declining, re the 'gig' economy); under conventioal mortgages, higher property values, can only be financed if rates are lower. Solutions to date, have been to change the physical asset (size, location, shared ownership, etc.); not the method of financing.

 

A conventional mortgage with a negative rate, means the banker pays you to borrow! Not going to happen.

The solution of course is to seperate the land and dwelling values; the bank buys the land and leases it to you for the useful life of the dwelling, you just buy the dweling to live in. At end of land lease the dwelling is demolished, and replaced with new build of highest & best use at the time. Essentially a version of the existing UK approach, but where pension funds ultimately own the land, you live in the most up-to-date dwelling practical, and we all benefit from systemic baked-in economic growth/recycling.

 

People just need an affordable place to live & raise families; they don't need to own the land that the dwelling stands on.

 

SD

 

 

 

 

 

 

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No idea what to make of it, but my 30 year mortrage runs at minus 0,43 pct. at the moment (floating rate, changes a couple of times a year) with the first 10 years being non-amortizing, but since the rate is negative I actually do pay down the loan.

 

Means there's quiet a bit more to invest each month (coming from 3 pct. amortizing fixed 30 year), but strange times indeed.

 

Couple of weeks ago banks here in Denmark opened a new mortgage bond fixed 30 year at 1 pct. And Austria are looking to sell a 100 year bond that pays 1,2 pct. annually. Strange times indeed. I could see the attraction in loaning at 1 pct. for 30 years, but the risk/reward from the other side looks pretty poor I'd think. Since I'm not very interest rate sensitive I'll stick to ultrashort duration (which has been a winner for a looong time), but if rates actually DO go up a 1 pct. loan would be big.

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Aren't home prices in Denmark going up a lot though? Netherlands has issued a lot of interest-only mortgages over the last few years and home prices are going up 10% a year.

 

The central planners claim inflation is low in Germany. Yet, Berlin passed a five-year rent freeze a few weeks ago because rents were going up a lot (7-10% a year for the last few years.)

 

http://www.bbc.com/capital/story/20190226-berlins-radical-plan-to-stop-rocketing-rents

 

Insurers and other such bondholders are the ones who are getting robbed by the central planners. It is safe to say nobody from the Bundesbank will ever be the chief of the crooked ECB, poor Weidmann.

 

We had negative amortization and interest-only mortgages in 2007 in the US too. But we haven't had them for the last 10 years, US regulators have been very strict.

 

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Home prices in Denmark is very divided. I live in a flat in Copenhagen which has basically doubled since 2011, and it's more expensive in Copenhagen than it was in 2007, but prices have actually come down in the last year - anectodally around 10 pct. But that's due to Danish politics (stricter lending requirement, down payment of 5 pct., expected increase in property taxes on apartments). Other parts of the city are still way below 2007 levels.

 

Rates being where they are the housing market here doesn't look expensive. I ran the math the other day since a combination of falling RE prices plus falling rates got me interested, and if I put down 20 pct. LTV cash and borrow 80 pct. at 1 pct. 30 year loan (amortizing) I could probably get a 8-10 pct. (levered) return from paying down the loan since the cost of renting is "way" higher than the cost of buying.

 

Now I don't wanna go long RE atm (and I am somewhat already with our own flat) - espescially with all hassle involved - but the math is interesting since the Danish RE system is a bit unique. So you can be wayyy technically insolvent and the debt still isn't possible to call for the lenders (it's a bond) as long as you pay on time. So the risk is you can't find someone who'll rent your place or rents drop massively, but all trends point to increased urbanization.

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Great that you shed some light and nuances on the Danish situation about real estate prices, kab, thank you,

 

I have a couple of more technical questions about how your mortgage with negative interest works :

 

1. In your post about your mortgage you indicated, that the negative interest isn't paid out to you, but is booked as a repayment on the principal [,so despite you have a standing loan/mortgage for the first ten years, the balance of the mortgage is going down over time with the negative interest payments]. Have I understood this correctly? [Cigarbutt actually also posted about this phenomen recently here on CoBF not so long ago.]

 

2. I suppose you are still charged reserve fund contributions, and are paying them. Have I understood this correctly?

 

- - - o 0 o - - -

 

Yes, indeed, the whole thing is very weird.

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Great that you shed some light and nuances on the Danish situation about real estate prices, kab, thank you,

 

I have a couple of more technical questions about how your mortgage with negative interest works :

 

1. In your post about your mortgage you indicated, that the negative interest isn't paid out to you, but is booked as a repayment on the principal [,so despite you have a standing loan/mortgage for the first ten years, the balance of the mortgage is going down over time with the negative interest payments]. Have I understood this correctly? [Cigarbutt actually also posted about this phenomen recently here on CoBF not so long ago.]

 

2. I suppose you are still charged reserve fund contributions, and are paying them. Have I understood this correctly?

 

- - - o 0 o - - -

 

Yes, indeed, the whole thing is very weird.

1) Yes, the negative rent reduces our outstanding loan balance - even with the first ten years being "interest only". I think they struggle somewhat with the implications of paying to lend me money so they reduce debt outstanding instead.

 

2) Yes, in practice I do pay a bit after all costs and taxes. So the interest is what it is (-0,43 pct. now), but then the mortgage servicer charges some 80 basis points for servicing the loans which is variable depending on loan type (lower on fixed rate loan than floating), LTV etc. My mortgage servicer is Nykredit which is membership owned, so if you have your mortgage loan through them (which is actually a bond, then you get a discount on the servicing (like 15 basis points of discount I think). And then they pay you 250 DKK each quarter as well. :) It's pennies but so is the payments on the mortgage. No wonder banks are struggling.

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More Internet searching found:

 

ECB covers up banking problems at Monte Paschi:

https://www.bloomberg.com/graphics/2019-opinion-monte-paschi/?srnd=premium

"The manner in which the ECB tackled the Italian lender’s problems, its first big test as a banking regulator, threatens to undermine its credibility. ECB President Mario Draghi has yet to win over the many analysts, politicians and others who remain skeptical of the authority’s ability to act as a strong, strict and independent supervisor. To restore investor faith in Europe’s banks, the regulator needs to be more accountable and transparent. This bailout suggests that the ECB may not be up to the task."

 

IMF warned that Portugal has a real estate bubble again.

https://www.theportugalnews.com/news/imf-warns-of-risk-of-real-estate-bubbles-in-portugal/46330

 

Dutch central bank warns housing market is a risk

https://nltimes.nl/2019/06/05/dutch-housing-market-biggest-stability-risk-netherlands-central-bank-warns-hard-brexit

 

Spain property prices tripled between 1996-2003. Needs more reflation before recapturing the peak

https://seekingalpha.com/article/4266705-busted-housing-bubble-1-morphs-housing-bubble-2-spain

 

 

ECB says it will keep rates low for another year. I think the re-bubbling will continue for a while even as they pretend there is no inflation. The ECB is a banana central bank.

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https://www.bloomberg.com/graphics/2019-opinion-monte-paschi/?srnd=premium

 

To get an idea of what the ECB is capable of and why they need zero rates for at least another year (or maybe for the next 100 years), these are some quotes from the article. Draghi was chief of Italy's central bank before he became ECB chief.

 

"The bank took to masking its burgeoning losses with a series of complex derivatives deals. Those transactions were hidden from public view until I later reported on them. Once they were disclosed, Monte Paschi had to restate its accounts twice."

 

To pass muster with regulators, firms need a ratio of at least 4.5%—or more than seven times what the report estimated Monte Paschi had at the time.

 

In short, the ECB knew in 2016 that the Italian lender appeared to be insolvent. Neither party disclosed this critical assessment, even as the bank’s bonds and shares were trading publicly

 

It looks like Monte Paschi had a severe capital shortfall around the time of its bailout. EU rules should have disqualified it from getting the so-called precautionary recapitalization it received.

 

But 17% of its loans are still classified as nonperforming, a figure that is almost twice as large as the average for Italy’s top nine banks, according to Bloomberg data.

 

"State and nonprofit ownership had made the bank vulnerable to local political interference. It frequently lent money to court power. In doing so, it tended to overlook credit risk."

 

Monte Paschi’s failings included:

Accounting for collateral twice, or even multiple times, with different values;

 

 

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Lots of possibilities here ...

 

Monte Paschi evidences that the impact of a European CB put on a DSIB (Domestic Systemically Important Bank); is much, much higher than most would expect. The DB, or a Monte Paschi, that suffers a market crises of confidence is not going to be allowed to fail - no matter what. So when the sh1te seriously hits the fan, use the opportunity to buy a longer dated call at a low strike, on said bank ;)

 

In most places only a domestic citizen, can buy domestic RE using a domestic mortgage; however it is not particularly onerous to get around the restriction if you hold 'dual' (EU/UK) citizenship. Put up the equity on that Danish property, let the property appreciate 20%, remortgage to pay yourself back, and let the bank pay down your mortgage at 0.49%/yr ;)

 

... and if it were a Danish bank that got into trouble, much of that equity you put up would be profit!

 

SD

 

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Lots of possibilities here ...

 

Monte Paschi evidences that the impact of a European CB put on a DSIB (Domestic Systemically Important Bank); is much, much higher than most would expect. The DB, or a Monte Paschi, that suffers a market crises of confidence is not going to be allowed to fail - no matter what. So when the sh1te seriously hits the fan, use the opportunity to buy a longer dated call at a low strike, on said bank ;)

 

In most places only a domestic citizen, can buy domestic RE using a domestic mortgage; however it is not particularly onerous to get around the restriction if you hold 'dual' (EU/UK) citizenship. Put up the equity on that Danish property, let the property appreciate 20%, remortgage to pay yourself back, and let the bank pay down your mortgage at 0.49%/yr ;)

 

... and if it were a Danish bank that got into trouble, much of that equity you put up would be profit!

 

SD

 

I beg to differ on the long dated call. the ECB will not let a larger bank fail, but they will have no problem to make the equity a zero and run it as a state old bank or put it into the fold of an existing bank. In Europe, having the government own and run a bank doesn’t have the same stigma. If the German government would have to take over DB, nobody in Germany would give much of a hoot about it.

 

If we do get European style interest rates here, the US banks all will suffer greatly from reduced profitability, as will pension funds and insurance companies.

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Lots of possibilities here ...

 

Monte Paschi evidences that the impact of a European CB put on a DSIB (Domestic Systemically Important Bank); is much, much higher than most would expect. The DB, or a Monte Paschi, that suffers a market crises of confidence is not going to be allowed to fail - no matter what. So when the sh1te seriously hits the fan, use the opportunity to buy a longer dated call at a low strike, on said bank ;)

 

In most places only a domestic citizen, can buy domestic RE using a domestic mortgage; however it is not particularly onerous to get around the restriction if you hold 'dual' (EU/UK) citizenship. Put up the equity on that Danish property, let the property appreciate 20%, remortgage to pay yourself back, and let the bank pay down your mortgage at 0.49%/yr ;)

 

... and if it were a Danish bank that got into trouble, much of that equity you put up would be profit!

 

SD

 

I beg to differ on the long dated call. the ECB will not let a larger bank fail, but they will have no problem to make the equity a zero and run it as a state old bank or put it into the fold of an existing bank. In Europe, having the government own and run a bank doesn’t have the same stigma. If the German government would have to take over DB, nobody in Germany would give much of a hoot about it.

 

If we do get European style interest rates here, the US banks all will suffer greatly from reduced profitability, as will pension funds and insurance companies.

 

It's really just a variant of a vega trade, there's no intent to own for any significant length of time. Simply buy when uncertainty/volatility is high, & the financial press is daily making the case that XYZ bank is about to collapse. Sell when the CB announces it support, and uncertainty/volatility declines. The more financial press/political machinery involved, the better it works. Granted there's always the possibility of outright nationalization, but it's usually telegraphed, and still a 'dead cat' bounce.

 

High maintenance, but relatively low risk

 

SD

 

 

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... ... So at a high level, can't Draghi and Volcker largely determine the nominal price of housing over a decently long time frame? ...

 

Hi Jim,

 

It's a personal pleasure for me  to "meet" you for the first time here on CoBF.

 

Here I'm just grabbing a post by RuleNumberOne in the WFC topic in in Investment Ideas forum :

 

Denmark has negative mortgage rates and booming house prices. Governments and central bankers in Europe are far more crooked than the US. Throughout Europe you have rock-bottom interest rates and booming house prices. Debauchery of the currency is a mild description. How long can this go on?

 

https://www.globalpropertyguide.com/Europe/Denmark/Price-History

 

"Denmark´s negative interest rates continue to work their dangerous magic on both the housing and mortgage markets.

 

The price index of owner-occupied flats in Denmark rose by 7.88% (7.25% when adjusted for inflation) during the year to February 2018, an acceleration from last year´s growth of 6.87% (5.81% when adjusted for inflation), according to Statistics Denmark."

 

[Embedded quotations in RuleNumberOne's post omitted here for less dense posting.]

 

Please note the following in the article linked to by RuleNumberOne:

 

... Effective January 1, 2018, the government introduced tighter lending regulations, in an effort to reduce the share of more risky interest rate and repayment-free mortgages on the overall mortgage lending portfolio of banks. Banks will be limited from offering housing loans that do not have fixed interest rates, or monthly installments. Moreover, the number of mortgages available to households seeking to borrow more than four times their income, or more than 60% of the value of the property will be heavily restricted.

 

"These are reasonable guidelines that should ensure that homeowners are more robust," said Lars Krull of Aalborg University.

 

The move is also supported by Nordea economist Jan Storup Nielsen, who believes that the move "represents a major departure from previous policies and will likely help reduce the risk of a new housing bubble."

 

In the past recent years, the International Monetary Fund (IMF) had been urging the Danish government to reverse its negative interest rates mandate and introduce new policies to avoid a disastrous housing bubble. ...

 

Add to that the 5 percent down payment of non-borrowed money imposed requirement mentioned by kab60 earlier in this topic. Please also note that most of the numbers mentioned in the article are YE2017 numbers. A lot of water has run through the river since then, and the imposed regulation has had effect, to avoid speculation, home-flipping and other similar kinds of folly going on, because a lot of interested buyers has been pulled out of the market, because they have lost the ability to bid in as prices have gone up, creating what I percieve as a high equilibrium - which was the purpose of the new regulation.

 

So for tiny Denmark, - in short - the answer to your question is actually : No. Draghi [et al.] does not decide or have jurisdiction/power over supplementary national regulation.

 

When looking on what's going on in EU with interest rates etc., you can't just look at it as whole. The economic situations & financial systems are only to various degrees similar among european countries.

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... . Do we care if negative rates are here to stay? How does this change the investment process? ...

 

I'm sorry for double posting here in this topic. Now back to Viking's starting post here, ref. the quote above.

 

I think it's important here to distinguish with regard to geographical areas. [For my part : Between US banks and European banks - I own both.]

 

US Banks :

 

There seem to be a general sentiment as of now, that US interest rates will be lowered [also here on CoBF - at least partially] - perhaps even so the steering interest rates may end up near zero, or even negative. With regard to that, I'm in the same camp as Jurgis [posted by Jurgis somewhere else here on CoBF recently] : Why should the FED lower interest rates, when USA is running at low, but still a fairly steady & positive clip, combined with a public deficit? [i don't get it, but then again : What do I know.]

 

European Banks:

 

I can here only speak as Danish citizen, what I can say is that the pressure on Net Interest Margin in Danish banks is very real, and as a Danish bank customer, I can feel & see it as being very real.

 

The consequences are already here and visible : The reach for non-interest earnings in Danish banks has become more aggressive, and to me it has already crossed the line of sound, healthy, prudent & most of all : honest banking. [To me "honest banking" is in the interest the customer, not the bank.]

 

I'll document it here, with anecdotal stuff, based on personal experiences and documentation. Stuff about Danske Bank however will go to the topic I started about Danske Bank A/S in the Investment Ideas forum today.

 

- - - o 0 o - - -

 

This naturally matters for investing in both US Banks & European Banks. I may be wrong about the future development of US interest rates, and what's going here may be relevant for a judgement about what will happen with the behavior of the US Banks.

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... . Do we care if negative rates are here to stay? How does this change the investment process? ...

 

I'm sorry for double posting here in this topic. Now back to Viking's starting post here, ref. the quote above.

 

I think it's important here to distinguish with regard to geographical areas. [For my part : Between US banks and European banks - I own both.]

 

US Banks :

 

There seem to be a general sentiment as of now, that US interest rates will be lowered [also here on CoBF - at least partially] - perhaps even so the steering interest rates may end up near zero, or even negative. With regard to that, I'm in the same camp as Jurgis [posted by Jurgis somewhere else here on CoBF recently] : Why should the FED lower interest rates, when USA is running at low, but still a fairly steady & positive clip, combined with a public deficit? [i don't get it, but then again : What do I know.]

 

European Banks:

 

I can here only speak as Danish citizen, what I can say is that the pressure on Net Interest Margin in Danish banks is very real, and as a Danish bank customer, I can feel & see it as being very real.

 

The consequences are already here and visible : The reach for non-interest earnings in Danish banks has become more aggressive, and to me it has already crossed the line of sound, healthy, prudent & most of all : honest banking. [To me "honest banking" is in the interest the customer, not the bank.]

 

I'll document it here, with anecdotal stuff, based on personal experiences and documentation. Stuff about Danske Bank however will go to the topic I started about Danske Bank A/S in the Investment Ideas forum today.

 

- - - o 0 o - - -

 

This naturally matters for investing in both US Banks & European Banks. I may be wrong about the future development of US interest rates, and what's going here may be relevant for a judgement about what will happen with the behavior of the US Banks.

 

“There seem to be a general sentiment as of now, that US interest rates will be lowered [also here on CoBF - at least partially] - perhaps even so the steering interest rates may end up near zero, or even negative. With regard to that, I'm in the same camp as Jurgis [posted by Jurgis somewhere else here on CoBF recently] : Why should the FED lower interest rates, when USA is running at low, but still a fairly steady & positive clip, combined with a public deficit? [i don't get it, but then again : What do I know.]”

 

John, i really enjoyed reading your post, especially the part i quoted above. It looks to me like the globe might be slowly slipping into a deflationary spiral. What will stop the slow spiral we are seeing? China seems more constrained in options than in 2010. Japan to the rescue? No. How about Europe? They look to be following down Japan’s path. US? Trump has already slashed taxes and is running very large deficits so spending more (and running even bigger deficits) is likely not an option. The Fed can cut rates. Which is wherevwe are at.

 

I am watching to see if the global slowdown continues or if it improves in Q3/Q4. If we actually get a recession in the US in 2020 we will be in unchartered waters in terms of what central banks will do and the impact those actions will have on the larger economy over time.

 

I think we also could see a shift from Trump from a focus on tarriff war to currency war. It this happens we will get a brand new layer of instability. Interesting times :-)

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