I wish I could take credit for the the title of this post “The Stupid is Not Impossible” but it comes via an email from Albert Edwards at Society General. In turn, Edwards credits Breaking Views columnist Andrew Lapthorne.
In his post, Edwards comments that Japanese bonds are the only asset class to not suffer a decline since 2007. That analysis is deeply flawed since it does not factor in the decline of the Yen.
Yet, the bulk of Edwards’ post I agree with.
The title of Edwards email was “Forget Equities. Forget Smart Beta. Buy JGBs for the long run!” Edwards provided this chart.
The problem with the chart is it’s in “local currency”, the Yen. At these interest rates, yen-hedged, such advice will yield absolutely nothing.
Buying Japanese bonds now is a strict endorsement of buying the Yen. That’s not a recommendation I am willing to make.
Let’s move along to things in Edwards’ report I agree with. From Edwards ….
I commend a recent article by Edward Chancellor, now at Breaking Views. He writes “the markets appear to have woken up to the fact that this radical monetary trick fails to deliver on any of its promised benefits. On the contrary, negative rates undermine bank profitability, threaten the stability of bank liabilities, force households to save more, and discourage credit creation. If carried further, negative rates may threaten an unwarranted intrusion of the state into the private lives of its citizens. It’s time for politicians to try rein in their overzealous central bankers and kill this dangerous policy before it wreaks more damage.”…”It’s not just that the theoretical case for negative rates is flawed. Europe’s recent experiment with them shows some worrying developments. Independent economist Andrew Hunt argues that “negative rates are exceptionally toxic to any country’s banking system,” as they hurt bank profitability. Negative rates also appear to be contributing to the flight of long-term deposits from Germany’s banking system. When banks can’t attract long-dated liabilities to match assets of a similar duration, the financial system becomes less stable. “What is bad for banks is bad for credit growth,” says Hunt. Since Swiss rates turned negative, the country’s credit growth has halved.”
But as Andrew Lapthorne pointed out to me, “The Stupid is Not Impossible”. I believe that the next recession will bring deeply negative rates, however damaging it might be to bank profits, and I see central banks implementing restrictions for holding cash. And as Vincent Chaigneau, SG’s head of bond strategy, pointed out to me a few days ago when the US 10y Note was 1.68%, If in one year that same note (then a 9y) trades at minus 0.32% (down 200bp) then the T-Note will have delivered a total return of 19%. Not bad indeed.
Just Negative
The article to which Edwards refers is Just Negative.
Chancellor’s article is blocked from snipping, but it’s worth a read in entirety. “Just Negative” accurately debunks the stupidity of negative interest rate policy. Please give it a read.
Mike “Mish” Shedlock
“Buying Japanese bond now is a strict endorsement of buying the Yen. That’s not a recommendation I am willing to make.”
We’ll see.
I’ve long thought yen would strengthen 100 yen to $US as carry trade unwinds … and realization that BOJ outta bullets to weaken … and throw in (massive) devaluation of yuan?
Hhmm, wonder how Kyle Bass’s 240 yen to $US trade working ?? ….
The basic disconnect is that the goal of your average person on the street and small business isn’t to generate economic activity, but to create economic stability and safety for themselves. They have no incentive to participate and in fact must actively circumvent the desired actions (by saving more money) just to stay in the same place. The groups able to benefit from negative rates don’t really participate in the economy except where they act as a tax on economic activity.
Also, doesn’t negative interest rates create deflation? If banks aren’t creating loans (Because why should they lend money when they can get a risk free return?) all that money (in the form of credit) being created by their regular activities disappears. If banks are “paying” negative rates to their depositors, they are getting less money from customers in which to create loans. If banks are paying negative interest rates on their holdings, they don’t want the money to create loans. Every part of the banking system now destroys money vs creating it via credit.
It’s the other way around. Deflation creates Negative interest rates. Interest is the price a borrower pays to borrow money. When the demand decreases while supply stays the same or increases, the price decreases. I like to use Robert Prechter Jr’s definition of inflation as the growth of credit and deflation as the contraction of credit.
If the market set the interest rates I would agree with you, but they aren’t. These negative rates are by fiat and result in a decrease in the money supply. (i.e. Deflation.)
He writes “the markets appear to have woken up to the fact that this radical monetary trick fails to deliver on any of its promised benefits.”
Why is it that the market wakes up to something that has been the case all along? Bernanke wrote in 1988, that QE doesn’t work.
The term “pushing on a string” wasn’t invented in 2015. Pushing on a string has never worked. Japan and Europe are pushing harder on the string, with negative interest rates.
“The Stupid is Not Impossible”. Turns out, the stupid is a given.
To ‘snip’ from the website just disable the javascript for that website.
In Chrome its under the 3 bars icon in the top right corner. Click Settings. Select Show advanced settings (at the bottom). Under privacy select Content Settings. Under javascript select manage exceptions. Then type in the website name in the format given and select ‘block’. Then you can freely copy the text. Useful for sites that also have nag screens after reading 10 articles and requesting that you sign up to their service to read any more.