Negative interest rates take investors into surreal territory

[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.

 

- - -  o 0 o - - -

 

- 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.

 

[Spekulatius]

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.

 

I think this is a very good way/ mental model to look at this issue. Negative interest rates imply lack of growth or even shrinking GNP, which can’t be good for stocks.

[RuleNumberOne]

Look at CSX, reported earnings this week, 8% fall in revenue, 8% fall in operating income (only due to big expense reductions in fuel and materials). CSX took on even more net debt and bought back stock. The company has more than $15 billion of net debt.

 

2020 revenue outlook is flat to down 2% compared to 2019. The stock ended the week $3 higher than where it began the week.

 

 

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.

 

I think this is a very good way/ mental model to look at this issue. Negative interest rates imply lack of growth or even shrinking GNP, which can’t be good for stocks.

[RuleNumberOne]

The main reason interest rates cannot go up in Europe is Italy. Interest rates there will stay negative so that Italy can continue to refinance forever.

 

Italy's fertility rate is 1.32 (lowest in the EU) according to the latest data. That is only because immigrant mothers had a fertility rate of 1.9. Native Italians had a fertility rate of 1.2.

 

There is no way Italy's $2.3 trillion debt can ever be paid. Which implies there is no way French banks are not bankrupt. But the Eurocrat coverup continues.

 

Italians hate their plight and keep voting for Salvini. But the Eurocrats won't allow general elections in Italy because Salvini will win easily. The world would be better off without the Euro. The Euro has destroyed or distorted everything.

[Spekulatius]

The main reason interest rates cannot go up in Europe is Italy. Interest rates there will stay negative so that Italy can continue to refinance forever.

 

Italy's fertility rate is 1.32 (lowest in the EU) according to the latest data. That is only because immigrant mothers had a fertility rate of 1.9. Native Italians had a fertility rate of 1.2.

 

There is no way Italy's $2.3 trillion debt can ever be paid. Which implies there is no way French banks are not bankrupt. But the Eurocrat coverup continues.

 

Italians hate their plight and keep voting for Salvini. But the Eurocrats won't allow general elections in Italy because Salvini will win easily. The world would be better off without the Euro. The Euro has destroyed or distorted everything.

 

Government debt will never be repaid. If any government on earth needs to repay debt, and can’t roll it over, they will default. This applies to the US as well. We are running 5% deficit as a percent of GDP in one of the hottest economy ever 10 years plus into a recovery, how would we ever repay debt?  Give it a recession and we run at 10% GDP deficit quickly. Government debt is never repaid, it is only rolled over.

[RuleNumberOne]

Italy cannot even afford the interest on its massive debt.

 

Italy is allowed a deficit of just 0.8% of GDP by the EU. It has debt of 135% of GDP and GDP growth has been zero for a long time. Unless the rates are close to zero, Italy cannot even afford the interest. With a fertility rate of 1.2, Italy is headed for certain extinction, like one of those civilizations that got buried under the sea in folklore.

 

Unless Germany gifts 100 billion Euros every year to Italy forever, year after year, the Euro won't work. This is what California has been doing forever - gift a massive amount annually to places like Alabama/Mississippi that will never have any growth. German government spending is already higher than the US as a percentage of GDP, so Germany is right that there is no need for it to spend anymore on its own citizens. (Germany has a surplus because it also has higher taxes.)

 

When laid out this way, anyone in either Germany or Italy can see that the Euro is an insane idea.

 

Italy's government-seized steel plant churns out toxic waste and fumes. The nearby schools are closed on windy days. Italy cannot even afford a cleanup. Italy is allowed just enough by the EU to survive and pretend that French banks are not bankrupt.

 

The Emilia-Romagna regional elections are a week from today, lets see what happens.

 

Regarding US debt, I agree it looks worse than it did in 2007 when a higher Fed rate kept the government disciplined. But the US has competitive advantages that no other country has.

 

The main reason interest rates cannot go up in Europe is Italy. Interest rates there will stay negative so that Italy can continue to refinance forever.

 

Italy's fertility rate is 1.32 (lowest in the EU) according to the latest data. That is only because immigrant mothers had a fertility rate of 1.9. Native Italians had a fertility rate of 1.2.

 

There is no way Italy's $2.3 trillion debt can ever be paid. Which implies there is no way French banks are not bankrupt. But the Eurocrat coverup continues.

 

Italians hate their plight and keep voting for Salvini. But the Eurocrats won't allow general elections in Italy because Salvini will win easily. The world would be better off without the Euro. The Euro has destroyed or distorted everything.

 

Government debt will never be repaid. If any government on earth needs to repay debt, and can’t roll it over, they will default. This applies to the US as well. We are running 5% deficit as a percent of GDP in one of the hottest economy ever 10 years plus into a recovery, how would we ever repay debt?  Give it a recession and we run at 10% GDP deficit quickly. Government debt is never repaid, it is only rolled over.

[Castanza]

Italy cannot even afford the interest on its massive debt.

 

Italy is allowed a deficit of just 0.8% of GDP by the EU. It has debt of 135% of GDP and GDP growth has been zero for a long time. Unless the rates are close to zero, Italy cannot even afford the interest. With a fertility rate of 1.2, Italy is headed for certain extinction, like one of those civilizations that got buried under the sea in folklore.

 

Unless Germany gifts 100 billion Euros every year to Italy forever, year after year, the Euro won't work. This is what California has been doing forever - gift a massive amount annually to places like Alabama/Mississippi that will never have any growth. German government spending is already higher than the US as a percentage of GDP, so Germany is right that there is no need for it to spend anymore on its own citizens. (Germany has a surplus because it also has higher taxes.)

 

When laid out this way, anyone in either Germany or Italy can see that the Euro is an insane idea.

 

Italy's government-seized steel plant churns out toxic waste and fumes. The nearby schools are closed on windy days. Italy cannot even afford a cleanup. Italy is allowed just enough by the EU to survive and pretend that French banks are not bankrupt.

 

The Emilia-Romagna regional elections are a week from today, lets see what happens.

 

Regarding US debt, I agree it looks worse than it did in 2007 when a higher Fed rate kept the government disciplined. But the US has competitive advantages that no other country has.

 

The main reason interest rates cannot go up in Europe is Italy. Interest rates there will stay negative so that Italy can continue to refinance forever.

 

Italy's fertility rate is 1.32 (lowest in the EU) according to the latest data. That is only because immigrant mothers had a fertility rate of 1.9. Native Italians had a fertility rate of 1.2.

 

There is no way Italy's $2.3 trillion debt can ever be paid. Which implies there is no way French banks are not bankrupt. But the Eurocrat coverup continues.

 

Italians hate their plight and keep voting for Salvini. But the Eurocrats won't allow general elections in Italy because Salvini will win easily. The world would be better off without the Euro. The Euro has destroyed or distorted everything.

 

Government debt will never be repaid. If any government on earth needs to repay debt, and can’t roll it over, they will default. This applies to the US as well. We are running 5% deficit as a percent of GDP in one of the hottest economy ever 10 years plus into a recovery, how would we ever repay debt?  Give it a recession and we run at 10% GDP deficit quickly. Government debt is never repaid, it is only rolled over.

 

Say the euro goes extinct. What does that even look like? What is the path forward from there for European countries? Italy will still have its issue regardless of the euro at this point right?

[RuleNumberOne]

No, Italy can pursue whatever fiscal policies it wants if it leaves. I mean even developing countries are much better off, they are not headed for extinction.

 

I think we can get a 2008-sized meltdown in Europe when Italy leaves with entertaining contagion in European banks. European banks stocks will be worth less than zero unless their respective governments bail them out, which leads to even higher debt-to-GDP ratios in places like France. It will be a real thriller like 2008. If US banks have derivative contracts with European banks, they will go down too.

 

Salvini has raised a lot of big hopes in Italy with a lot of daring talk, so he has got to do bold stuff when he wins. Like Boris Johnson of the UK, he has gained a lot of popularity very quickly for his anti-EU, big nationalist talk and will have to deliver.

 

https://www.axios.com/matteo-salvini-chance-to-become-prime-minister-715082d5-bfc6-4f19-8590-9d4485f2a5ce.html

 

"Where things stand: Any sighs of relief from Salvini's foes, who include French President Emmanuel Macron and many in Brussels, now appear premature.

 

Salvini and the League have only grown more popular in opposition and lead the PD and Five Star by 10+ points in national polls.

With elections looming on Jan. 26 in the left-wing stronghold of Emilia-Romagna, polls show the League neck-and-neck with the PD, something that would have been unthinkable not long ago.

 

What to watch, per the FT:

 

“If the PD lose in Emilia-Romagna, it 100 per cent has the potential to bring down the national government and set Salvini on course to become prime minister,” says academic Daniele Albertazzi.

“This coalition is already so fragile that the only thing gluing it together is their fear of Salvini,” says Erik Jones of the Johns Hopkins School of Advanced International Studies in Bologna. “If they lose it is hard to see how they make it through the spring.”"

 

 

Italy cannot even afford the interest on its massive debt.

 

Italy is allowed a deficit of just 0.8% of GDP by the EU. It has debt of 135% of GDP and GDP growth has been zero for a long time. Unless the rates are close to zero, Italy cannot even afford the interest. With a fertility rate of 1.2, Italy is headed for certain extinction, like one of those civilizations that got buried under the sea in folklore.

 

Unless Germany gifts 100 billion Euros every year to Italy forever, year after year, the Euro won't work. This is what California has been doing forever - gift a massive amount annually to places like Alabama/Mississippi that will never have any growth. German government spending is already higher than the US as a percentage of GDP, so Germany is right that there is no need for it to spend anymore on its own citizens. (Germany has a surplus because it also has higher taxes.)

 

When laid out this way, anyone in either Germany or Italy can see that the Euro is an insane idea.

 

Italy's government-seized steel plant churns out toxic waste and fumes. The nearby schools are closed on windy days. Italy cannot even afford a cleanup. Italy is allowed just enough by the EU to survive and pretend that French banks are not bankrupt.

 

The Emilia-Romagna regional elections are a week from today, lets see what happens.

 

Regarding US debt, I agree it looks worse than it did in 2007 when a higher Fed rate kept the government disciplined. But the US has competitive advantages that no other country has.

 

The main reason interest rates cannot go up in Europe is Italy. Interest rates there will stay negative so that Italy can continue to refinance forever.

 

Italy's fertility rate is 1.32 (lowest in the EU) according to the latest data. That is only because immigrant mothers had a fertility rate of 1.9. Native Italians had a fertility rate of 1.2.

 

There is no way Italy's $2.3 trillion debt can ever be paid. Which implies there is no way French banks are not bankrupt. But the Eurocrat coverup continues.

 

Italians hate their plight and keep voting for Salvini. But the Eurocrats won't allow general elections in Italy because Salvini will win easily. The world would be better off without the Euro. The Euro has destroyed or distorted everything.

 

Government debt will never be repaid. If any government on earth needs to repay debt, and can’t roll it over, they will default. This applies to the US as well. We are running 5% deficit as a percent of GDP in one of the hottest economy ever 10 years plus into a recovery, how would we ever repay debt?  Give it a recession and we run at 10% GDP deficit quickly. Government debt is never repaid, it is only rolled over.

 

Say the euro goes extinct. What does that even look like? What is the path forward from there for European countries? Italy will still have its issue regardless of the euro at this point right?

[Spekulatius]

 

 

Say the euro goes extinct. What does that even look like? What is the path forward from there for European countries? Italy will still have its issue regardless of the euro at this point right?

 

When Italy had its Lira, they had high inflation and high interest rates. yes, they will have problems either way, one thing they will happen is they there will be an immediate and substantial loss in buying power though currently devaluation, which will make Italian goods cheaper, important more expensive and for new debt the cost much higher. Then there is also the issue that on day one, Italy’s debt will still be denominated in Euro, which then will be even harder to pay back. The only option for Italy’s government is to pull an Argentina and immediately default and cause an exchange of the current debt into Lira notes.

 

Of course any of the above doesn’t solve the demographically issues (low birth rate etc. ) either.

[RuleNumberOne]

No, I think if they want to support birth rates, they could give subsidies and stuff like that if they leave the Euro. Right now their budget has to be approved by the EU because of their massive debt. The purpose of Italy's whole existence is to pretend European banks are solvent. It is like being a prisoner that is allowed a slice of bread and a glass of water everyday.

 

They will default immediately when they leave and can start from a clean slate. Presumably they will get a special trade deal from the US because Salvini is part of the Bannon-Trump-Bolsonaro club.

 

I think the youth in Italy need a fresh debt-free country. Right now they have already lost one generation of youth with their 50% youth unemployment. There may be temporary disruptions, just like Brexit, but they will be better off long-term.

 

The rest of Europe will then feel the pain. Of course, US hedge funds like Ray Dalio's team, are already on top of all this. They profited from Italy-related disruptions in 2018.

 

 

 

Say the euro goes extinct. What does that even look like? What is the path forward from there for European countries? Italy will still have its issue regardless of the euro at this point right?

 

When Italy had its Lira, they had high inflation and high interest rates. yes, they will have problems either way, one thing they will happen is they there will be an immediate and substantial loss in buying power though currently devaluation, which will make Italian goods cheaper, important more expensive and for new debt the cost much higher. Then there is also the issue that on day one, Italy’s debt will still be denominated in Euro, which then will be even harder to pay back. The only option for Italy’s government is to pull an Argentina and immediately default and cause an exchange of the current debt into Lira notes.

 

Of course any of the above doesn’t solve the demographically issues (low birth rate etc. ) either.

[SharperDingaan]

You might want to re-familiarise yourself with how the Greek Government Debt Crisis was resolved. The EU already has a template, and Italy is little different to Greece. https://en.wikipedia.org/wiki/Greek_government-debt_crisis

 

Like it or not, the EU experiment is breaking up. The UK exit will be followed by others, and there is little the EU can do beyond jawbone loudly. Re outstanding debt, all a sovereign need do is declare a debt moratorium, and announce the new repayment terms. Iceland and Greece are just the more recent examples.

 

SD

[John Hjorth]

Boersen.dk [February 5^th 2020] : Ringkjøbing Landbobank A/S [RILBA.CPH] CEO John Fisker : "Negative interest on deposits sends bank customers on cottage hunting: "It's not because I stand and want to sell real estate".

 

It makes a lot of sense to me, if the customer is affluent. Great time of the year to be a buyer in that particular market here in Denmark. Not sure though, if it's a great time to be a buyer in that particular market, taking the whole & overall picture right now into consideration. Instead of suffering from minus 0.75 percent annually, plus the drag from inflation [YoY ~1.5 percent here in Denmark as of now], why not get at least some joy out of the capital, perhaps even some rental income from the season, if you're not there in that period? [Like rkbabang has done recently.]

 

No matter the entry point and time of entry during the cycle [well, almost], this kind of capital allocation will likely kill holding cash dearly long term.

[John Hjorth]

Germany :

 

Bundesverfassungsgericht - Judgment of May 5^th 2020 : ECB decisions on the Public Sector Purchase Programme exceed EU competences :

 

https://www.bundesverfassungsgericht.de/SharedDocs/Pressemitteilungen/EN/2020/bvg20-032.html.

 

What? [ 0_0 ] - This has potential for absolute havoc written all over it.

[petec]

Germany :

 

Bundesverfassungsgericht - Judgment of May 5^th 2020 : ECB decisions on the Public Sector Purchase Programme exceed EU competences :

 

https://www.bundesverfassungsgericht.de/SharedDocs/Pressemitteilungen/EN/2020/bvg20-032.html.

 

What? [ 0_0 ] - This has potential for absolute havoc written all over it.

 

Bloody hell! How much power does this court have?

[John Hjorth]

Pete,

 

I really hope to see Spekulatius [and perhaps also other German [or with German roots, and thereby insights] CoBF members] to chime in on this later today, or later, because I don't know.

 

- - - o 0 o - - -

 

 

Meanwhile, I'm taking the [usual] escape route [mentally] to the garden - I have a ton of self seeded & -grown Lavandula Angustifolia under our now six year old Taxus Baccata front hedge, that I'm in the process of sweeping and planting other places in the garden.

[Spekulatius]

Germany :

 

Bundesverfassungsgericht - Judgment of May 5^th 2020 : ECB decisions on the Public Sector Purchase Programme exceed EU competences :

 

https://www.bundesverfassungsgericht.de/SharedDocs/Pressemitteilungen/EN/2020/bvg20-032.html.

 

What? [ 0_0 ] - This has potential for absolute havoc written all over it.

 

Bloody hell! How much power does this court have?

 

It‘s the equivalent of the US Supreme Court in Germany. There is nothing above it.

[John Hjorth]

It‘s the equivalent of the US Supreme Court in Germany. There is nothing above it.

 

Thank you for elaborating, Spekulatius,

 

What does that imply in this particular context?

 

 

[SHDL]

It‘s the equivalent of the US Supreme Court in Germany. There is nothing above it.

 

Thank you for elaborating, Spekulatius,

 

What does that imply in this particular context?

 

Some helpful commentary here:

 

https://www.wsj.com/articles/ecb-faces-renewed-legal-pressure-over-bond-purchases-11588685562

 

I’m not too familiar with European politics but the story is consistent with my general sense that we may be reaching the political limits of these massive central bank interventions.

[Spekulatius]

It‘s the equivalent of the US Supreme Court in Germany. There is nothing above it.

 

Thank you for elaborating, Spekulatius,

 

What does that imply in this particular context?

 

It means they depending on the goal of the QE, the ECB actions are Not consistent with the German constitution. It’s seems that the ECB can do QE (buying sovereign bonds) to stabilize the monetary system, but they wouldn’t be allowed to buy bonds with the stated goal to bail out a foreign ECB member government. What happens with this verdict depends on what the German politicians do with it. I see it more likely thwt after this verdict, the “whatever it takes “ policy of the EVB could run into resistance from German politicians.

 

This verdict is a result of a lawsuit from the CSU (the conservative sister party from Bavaria ) which have been critical of Draghi in the past.

 

This all dates back to the time the Bundesbank was governing the Deutsche Mark and per German constitution, their only goal was monetary stability, not low unemployment or increasing growth, at least not when monetary stability would be impaired.

[Cigarbutt]

^Unsolicited noob's take becoz this is so fascinating.

The German High Court is basically sending a message of conditional love in the asymmetric relationship.

 

The ECB is looking for creative ways to engage in monetary financing of national budget deficits, which is verboten at this point.

The idea is to present the solidarity project as a continuation of Good Ole QE.

 

The Supreme Court supports the cooperation but is also asking the Brussels' people for a more detailed risk-benefit analysis.

Typically, the ivory-tower money authorities suggest that a without-QE would-have-been world would have been absolutely catastrophic, an assumption impossible to verify.

 

Just like when giving insulin to a diabetic or heroin to a drug addict may be life saving, in a way, is it not reasonable to wonder about fundamentals once in a while?

 

FWIW, i just finished Changing Fortunes (1992) by Mr. Paul Volcker (and Mr. Toyoo Gyohten) and it's incredibly relevant to the German high judicial opinion. To make a long story short, international cooperation is critical and central banks need to fill the vacuum as a lender of last resort but the outcome is always related to the underlying fundamental solvency of the situation. As Mr. Volcker explains, national solvency is an elusive concept but in the end why risk having to deal with an even larger problem? Of course, there is never a good time to ask such a question.

 

The following link is relevant and recent. It also has the advantage of having been published before the German judgement.

https://www.project-syndicate.org/commentary/ecb-needs-to-embrace-covid19-monetary-financing-by-paul-de-grauwe-2020-03