Negative interest rates take investors into surreal territory

[UK]

http://brontecapital.blogspot.com/2019/08/thinking-aloud-about-bank-margins-part-2.html

 

"But there are outliers - and some of them are surprising. The Irish Banks look in Ireland pretty darn profitable. The Scandinavian banks are alright too - despite (say) Swedish interest rates going negative before everyone else.

 

Even some French regional banks are okay.

 

And these banks are profitable even in a negative interest rate world.

 

Swedish banks faced negative rate early - and they came out kind of well."

[John Hjorth]

Quotation of post by Cigarbutt in the topic Rosenberg is more bearish than usual :

...

...This round just closed was the biggest in history. 80 percent of all mortgages decided refinanced [measured in DKK, not number of mortgages] were decided rolled from negative short term refinancing rates to long term fixed rates [the majority is likely mortgages with 30 years annuity profile], at ~1 percent interest rate, locking in the "advantage"/historical opportunity for the long term. This is only possible because the debtors do not have to buy the underlying bonds related to the existing mortgage in the market, but have the right to redeem at par at any time.

I would submit that the above bolded part is obscene (from a financial point of view) :) ...

Quotation of post by Cigarbutt in the topic What are you selling today? :

 

Sold another portion of the residual TLT (20-30 yr US gov. bond ETF) position.

Moving away from macro trends as this position makes less and less sense from a long term (and fundamental) point of view.

Have kept a smallish position in case the reflexive crowd takes over before the whatever it takes modern fiscal stimulus crowd does.

An interesting aspect is that the pre-defined trigger (price) for the sale of that portion was met before actual economic deterioration made it to the surface, a combination of divergence I never thought possible when this theme was developed in my portfolios years ago.

What is unfolding is absolutely fascinating.

No comments from me here about Cigarbutt's use of the word "obscene" above. [ ; - D] - Congrats! [ : - D ]

 

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That said, I'm now very close to capitulation towards my fierce resistance here on CoBF of all the talks about negative interest rates for Danish mortgage bonds. [My main point has all the time been that this has to judged based on fixed interest rates over the whole annuity.] We now have available twenty year zero [& fixed] coupon, 20 years annuity mortgage bonds, that can be sold at ~0.96 of par, implying something like ~0.36 percent in effective interest rate.

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I have never in my life seen anything like this.

[jschembs]

Some months ago, Warren Buffett said on CNBC that if there was a way to short the 30-year US Treasury and buy the S&P, he would do it.

 

It is a good thing there wasn't such a way, or the poor guy would be tearing his hair out right now.

 

Buffett missed out by keeping his stash in T-bills. All he had to do was to ride with the robots.

 

It is not too late to get on the 30-year train with the robots - the ride from 2% to 0% gets you a 70% capital gain. If Buffett doesn't have the nerve, he can get off at 0.25% and still make a capital gain of 50% on his stash. There is trillions to be made by coat-tailing the robots.

 

Euro-Hero Mario Draghi (aka the "hero who saved the Euro single-handedly") backs the robots all the way.

 

Considering what happens on the other side of this is one of the scariest parts of the rate conundrum. WSJ articles will start referencing convexity a lot more frequently.

[Spekulatius]

Some months ago, Warren Buffett said on CNBC that if there was a way to short the 30-year US Treasury and buy the S&P, he would do it.

 

It is a good thing there wasn't such a way, or the poor guy would be tearing his hair out right now.

 

Buffett missed out by keeping his stash in T-bills. All he had to do was to ride with the robots.

 

It is not too late to get on the 30-year train with the robots - the ride from 2% to 0% gets you a 70% capital gain. If Buffett doesn't have the nerve, he can get off at 0.25% and still make a capital gain of 50% on his stash. There is trillions to be made by coat-tailing the robots.

 

Euro-Hero Mario Draghi (aka the "hero who saved the Euro single-handedly") backs the robots all the way.

 

Considering what happens on the other side of this is one of the scariest parts of the rate conundrum. WSJ articles will start referencing convexity a lot more frequently.

 

Yeah, it’s a one way street. Once we are in that zero or negative interest rate hole, we can’t get out of it, without bankrupting virtually the entire financial system.

[John Hjorth]

http://brontecapital.blogspot.com/2019/08/thinking-aloud-about-bank-margins-part-2.html

 

"But there are outliers - and some of them are surprising. The Irish Banks look in Ireland pretty darn profitable. The Scandinavian banks are alright too - despite (say) Swedish interest rates going negative before everyone else.

 

Even some French regional banks are okay.

 

And these banks are profitable even in a negative interest rate world.

 

Swedish banks faced negative rate early - and they came out kind of well."

 

The whole line-out here is ridiculous. Where are the data to support the opinion? Let me just mention, that every Danish bank has a price list [available on its website], indicating what you can expect of price, based on the banks assessment of your credit worthiness/credit score. Where is the analysis & data to support this line of conclusions?

 

Personally, I think a lot people confuse Danish mortgage bonds rates with rates related to being a lending customer at a Danish bank.

[UK]

Just look at what multiples to BV SEB or Swedbank, even after the recent scandal, trades, while both also in negative/zero interest rate environment, and then compare them to german banks. Also negative rates, but very diffeent margins and valuatios. So perhaps interest rate environment alone does not explain such situation. Maybe competetive situation/market structure also matters.

[RuleNumberOne]

Politicians want the housing bubble to inflate until their term ends.

 

https://www.ft.com/content/6d5ee188-e292-11e9-9743-db5a370481bc

 

"European central bankers have expressed their frustration at politicians’ reluctance to introduce tighter regulations in the region’s mortgage market to shield banks and households from the risks linked to rising house prices.

 

Francesco Mazzaferro, head of the secretariat at the ESRB, told the FT: “We wanted people to understand that we are back to pre-crisis peaks in the housing markets of a lot of countries — roughly half of those in Europe.”

 

Klaas Knot, head of the Dutch central bank, said at an ESRB event on Friday that the country’s politicians were reluctant to take action on the “very important vulnerability” in its housing market. He pointed out that the Netherlands had the highest level of household debt in the eurozone, at more than three times income.

 

“The political cycle is simply not synchronised with the economic cycle and politicians will never solve a problem they do not have, so politicians will only start to focus on it when they see the problem . . . and only when it is too late,” said Mr Knot."

 

[John Hjorth]

Det systememiske risikoråd [October 1^st 2019] : Recommendation - Increase of the countercyclical capital buffer rate.

 

["Det systemiske risikoråd" translates from Danish to : "The Systemic Risk Counsel]

 

Definition af "recommendation" in this context :

 

When the Council finds that the countercyclical capital buffer rate should be changed, it publishes a recommendation addressed to the Minister for Industry, Business and Financial Affairs. The Minister is responsible for setting the buffer rate in Denmark. The Minister is required, within a period of three months, to either comply with the recommendation or present a statement explaining why the recommendation has not been complied with.

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Finans.dk [september 29th 2019] : FSA CEO [Jesper Berg] : Supervisory director Jesper Berg's daughters curse their father far away: "It's financial stability at stake"

 

 

I suppose Jesper Berg's daughters can't get a mortgage because of their fathers - so far successful - interventions in the Danish mortgage underwriting.

[RuleNumberOne]

Over the last 7 quarters, Italy's GDP growth rate has been either -0.1% or +0.1%. Isn't that strange?

 

At the peak of the Eurozone debt crisis, sometime in 2010-2012, Italy's GDP office refused to announce the GDP growth rate to stem the panic. So anything is possible with Italy's GDP office.

 

https://tradingeconomics.com/italy/gdp-growth

[RuleNumberOne]

Permanent capital loss for momentum speculators in less than 6 weeks!!! It will take him/her 33 years to recover the lost amount - assuming the bond prices don't go down further and inflation is zero. LOL.

 

AAA-rated Sovereign debt is not supposed to lose 20% in a month. The buyer got a yield of 0.61%/year. These are the so-called "institutional investors" such as pension funds and insurance companies and banks.

 

The FT has 100% love for Mario Draghi and 100 % hate for Trump/Brexit. FT hasn't said a word about the bond bubble implosion, instead they gave breathless coverage about the Trump impeachment. I terminated my subscription with them.

 

 

Barrons Nov 7 edition:

"By late August, the Austria “century” bond hit a price of 210 as the total amount of negative-yielding global bonds hit a peak of $17 trillion. Austria’s bond at that price provided a yield of 0.61%, at least with a positive sign. That bubble has been deflating, although not bursting, in recent weeks. By Wednesday, the bonds were down to a price of about 168, which results in a yield of just over 1%."

 

Barrons Sep 27 edition:

"In not quite three months, that 1.08% yield to maturity has fallen to 0.72%. The price has reciprocally rallied—no, the word is leapt—to 197.7 from 161, up by 22.9%. You’d think that the bond was a stock."

 

https://www.barrons.com/articles/jim-grant-theres-trouble-ahead-for-austrias-100-year-bonds-51569615760

 

https://www.barrons.com/articles/the-bubble-is-deflating-for-100-year-bonds-51573122603

[John Hjorth]

RuleNumberOne,

 

Please tell us all how to ride this wave, so that we make more money!

[Guest]

rule, how are you positioned? all cash?

[RuleNumberOne]

I am fully invested right now. I think this cycle will be prolonged as long as possible because the wipeout of the European project is what happens at the end of the cycle.

 

My guess is the stock market goes higher and things get crazier.

 

The European banks look dead, their economies seem to be dying, but they blame Trump for everything.

 

rule, how are you positioned? all cash?

[Cigarbutt]

^What Rule#1 is saying basically (if I get it right) is to consider jumping off the plane while leaving many questions unanswered. The easy thing is just to ignore as jumping off the plane is the wrong thing to do most of the times but the inputs perhaps incentivize to ask some relevant questions:

1-How much risk can you afford to take?

2-How much risk do you need to take?

3-How much risk are you willing to take?

4-How much do you care about keeping up with the market?

5-Is there a way to make money here?

 

If the inputs make you go through the first three or four questions then the next logical step is to hope for a complete financial striptease which may be too much to ask.

The above was inspired by a link read this AM:

https://humbledollar.com/2019/12/imagining-worst/

Speaking of humility, one has to wonder about the environment when there seems to be an unusually high number of pilots expressing that flying an airplane is simple AND easy.

-----

Who knows what this all means but this thread went from an environment where fund rates were supposedly and decisively going higher to neutral and, against all odds, to easing although the Fed has difficulty finding the right vocabulary. In reply #101, Spekulatius noted: "Maybe they are too deep in? If rates increase, the value of those low/no/ negative interest rates bonds would drop and the bagholders owning them wouldn’t broke. Maybe all that can be done at this point is dig deeper." While not being relayed really by the press (even the financial press), there continues to be a very unusual confluence of circumstances where the Repo market has participants refusing to enter "risk-free" arbitrage opportunities and where massive support is now simply integrated into a new normal.

https://ig.ft.com/repo-rate/

And the Fed now put in place 42-day facilities to make it through year-end. This is extremely complex but there is something REALLY weird going on and I wonder if there is a link between the tiny rise in interest rate that occurred since last August and the stress seen at the core of the financial plumbing because, as Rule#1 reports, this tiny change likely had a huge impact on the portfolios' mark-to-market value and these are the typical portfolios that foreign financial institutions use as collateral to enter the US Repo market. Obviously this may be some kind of temporary technical noise but it's eerily similar to the noise heard from the wholesale funding market in 2007, when it was felt that the brutal forces of the market would be contained.

-----

Today, I plan to analyze Tech Data in order to do some inversion work. It will likely be a learning experience. However, I doubt that it will be possible, even in retrospect, to find an attractive entry point along the way because there appears to be too much competition as the graph showing competition to outcome is bell-shaped

 

 

[RuleNumberOne]

Negative rates proving to be useless in the real economy, though they have ended up boosting the US stock market.

 

https://www.ft.com/content/a1a14220-1801-11ea-9ee4-11f260415385

 

"Germany’s sprawling industrial sector is suffering its steepest downturn for a decade, underlining how the engine of the eurozone’s biggest economy is sputtering.

 

“Far from bottoming out, Germany’s industrial recession may be getting worse,” said Andrew Kenningham at Capital Economics. “The latest data support our view that a recession is still more likely than not in the coming quarters.”"

 

[RuleNumberOne]

Even the eurozone consumer may be slowing down. Negative rates didn't change anything, why?

 

https://www.ft.com/content/f4e045da-1734-11ea-8d73-6303645ac406

 

" However, there was a worrying sign consumers pulling back in October when eurozone retail sales fell 0.6 per cent in October, a steeper decline than the monthly 0.2 per cent fall in September, according to figures published on Thursday.

 

“The second monthly fall in a row shows that uncertainty regarding the economic outlook may be starting to weigh on consumers’ spending decisions,” said Rosie Colthorpe at Oxford Economics, while forecasting that eurozone retail sales would still rise for the fourth quarter overall."

 

[TwoCitiesCapital]

Even the eurozone consumer may be slowing down. Negative rates didn't change anything, why?

 

https://www.ft.com/content/f4e045da-1734-11ea-8d73-6303645ac406

 

" However, there was a worrying sign consumers pulling back in October when eurozone retail sales fell 0.6 per cent in October, a steeper decline than the monthly 0.2 per cent fall in September, according to figures published on Thursday.

 

“The second monthly fall in a row shows that uncertainty regarding the economic outlook may be starting to weigh on consumers’ spending decisions,” said Rosie Colthorpe at Oxford Economics, while forecasting that eurozone retail sales would still rise for the fourth quarter overall."

 

Pushing on a string.

 

 

[John Hjorth]

What does all that tell the stock pickers here at CoBF, RuleNumberOne?

[wabuffo]

Negative rates didn't change anything, why?

 

Maybe because negative/low rates hurt savers (in terms of lost interest income) than they "help" debtors.  It's a tax basically and destroys the banking sector (which probably also hurts debtors - so no gain).  I remember an analysis that Einhorn did a while back during Bernanke's drive for zero short term rates that used US Household data from the Fed to quantify the negative net impact (savers vs borrowers).  The US was heading in the same direction, but then cut federal taxes which helped to offset the impact to savers by increasing after-tax incomes.

 

wabuffo

[TwoCitiesCapital]

It's hard for me to imagine how negative rates are a plus for anyone outside of the govt sector.

 

Negative rates destroy the financial system. For fractional reserve banking systems that then pull back on lending, I'd have to imagine liquidity and credit dry up which will harm the remainder of the real economy.

 

Haven't parsed through European data to see if that's happening yet, but I can't imagine negative rates are a long term positive...

[John Hjorth]

Danish minister of Industry, Business & Financial Affairs Simon Kollerup - reply to the parliamentary business committee - Reply to the Danish Parliament about contra-cyclical capital buffers for banks within the EU [December 19^th 2019].

 

It's unfortunately only available in Danish [AFAIK], - please just focus on the table included in the document. [Translation help here : "Aktuel buffer" [<- Danish] -> "Actual buffer" [<- English], & "Vedtaget buffer" [<- Danish] -> "Buffer decided" [<- English][at some point in time in future]].

 

To me, the document is quite striking. Capital buffers raised in the Nordic countries [where - at least to me - the systemic risks are lower than in - at least - some other parts of Europe].

 

In short, there seem to exist in Europe an inverted correlation between perception of systemic risks in the national financial systems among European countries and what's actually going on.

 

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- How is it, that I'm not surprised. [-The last idiot is not born yet.]

[RuleNumberOne]

Some things will never change.

 

https://www.wsj.com/articles/governments-in-europe-find-workarounds-to-bail-out-ailing-banks-11577966400

 

"It is a continuation, critics say, of Europe’s old habit of injecting public money into the financial system as a first resort, many times keeping zombie banks alive and prolonging the painful cleanup of the sector.

 

Nowhere is this clearer than in Italy, where the sector continues to be bogged down by an anemic economy and huge piles of bad loans. While nine banks have got into serious trouble since 2015, none have gone through a proper resolution under the rules.

 

The country’s government is keeping Popolare di Bari afloat by putting money in a state-owned bank that will, in turn, save it."

[Castanza]

Stumbled upon this old thread. Discussion seemed relevant and interesting enough to bump.

 

https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/impact-of-low-interest-rates/50/

 

 

[Gregmal]

So..... obviously the market has been crazy of late, and Ive been notably bearish(although still more than 100% long), HOWEVER, did Mr. Buffett not long ago state something to the effect of "if interest rates are permanently lowers, then the Dow should be at 100,000"? Or something to that effect. I say this wondering, because Ive been amazed by the run in a lot of things like AAPL and MSFT. But at the same time, looking just moments ago at MSFT, I ask myself, is MSFT really out of place trading at a 1.25% dividend yield and a 3-4% earnings yield against the backdrop of a 1.8% government 10 year?

[scorpioncapital]

I would look at interest rates as a bell curve.  Too low means economic problems and certainly not stocks to the moon. It's the combination of low rates and recovering economy. Too high rates also will snuff out the high valuations. So it's like the habitable zone in exoplanet hunting. It's a range and either side of that range is dangerous.