The Race to Hell is On!



Posted by Ed 3 mths ago
Financial World Gone Nuts: $15 Trillion Negative Yielding Debt
12 countries with negative 10-year yields. A race to hell.
Every day brings new indications that the financial world is going from already nuts to even nuttier. According to Bloomberg, the total amount of bonds outstanding globally that are trading with a negative yield exceed for the first time $15 trillion. This includes government and corporate debt, and also some euro junk bonds that have joined the elite group:

A chart like this, of markets and central banks chasing each other further and further into the negative-yield absurdity, is crying out loudly: “Somebody has got to put a stop to this race to hell.”

The Fed was dabbling in trying to stop this race that is now leading ever deeper into negative-yield absurdity, and had even tried to reverse it, and got shouted down as can be seen in the above chart. 


Ed 3 mths ago
The ECB Is Dragging Us Deeper Into Madness
With markets already pricing in a cut into even deeper negative rates, the yield curve is collapsing. This is alarming for the real economy.
The European Central Bank will doubtless cut its overnight deposit rate even deeper than the current -0.4% at its next meeting in September. That doesn’t mean it’s the right way to try to breathe life into the euro zone economy. It might just make things worse.

By the time the ECB’s governing council gets around to making the cut official, it’s highly likely that the benchmark yield on 10-year German bonds will already be deeper in negative territory than the central bank’s deposit rate.
HSBC analysts reckon 10-year bunds will end 2019 at a mind-boggling -0.8%. You now have to pay to hold any kind of German debt from the shortest maturities right out to three decades. As my colleague Mark Gilbert wrote this week, the bond market has gone through the looking glass.

Ed 3 mths ago

 Trading Sardines: The Case Of Currency Hedged Negative Yielding Bonds

You might have heard the story about the three traders who decided to go into the business of trading sardines. The first trader bought a can of sardines for $5. He sold the same can of sardines to the second trader for $10, doubling his money. The second trader again doubled his money by selling the can of sardines to the third trader for $20.
The third trader, knowing very well that he was overpaying for the sardines said to himself that “if the market for sardines crashed, at least I will be able to open the can of sardines and eat it”. The market did crash, and he opened the can to find that the sardines were rotten. He promptly went to the trader who had sold him the bad sardines and said “these sardines are no good!”, to which the second trader responded “of course they are no good for eating – they are trading sardines”!

Almost 10 trillion USD worth of the world’s government bond market is currently like these sardines. When a bond has negative yield, like a majority of the bond market in Germany and Japan today does, the bonds are being bought for trading, not for holding as investments, unless we undertake some financial alchemy to figuratively turn garbage to gold (and vice versa).

When, and if yields rise, a ten year German Bund trading today at -0.25% nominal yield will almost certainly lose a good part of its principal, and for those who hold it to maturity, will also likely provide no income for their investment. In other words, unless the current holders of the bonds are able to trade them to someone else before they lose value, they will likely find that these bonds were neither a good long term investment nor a diversifier.


The things that seem to make the system work so far for bond funds seem to be (a) the fact that interest rates have been headed down, so asset prices have tended to rise (b) there are other buyers who want to get into this business of hoping for asset gains (c) the big positive interest rate differential to the US$ from the currencies that sell these negatively yielding currencies, and (d) a relatively favorable price for using derivatives to hedge against the possibility of a shift of US$ wiping out these gains.

By the time these negatively yielding bonds are hidden inside bond funds, few realize where they are. As soon a investors see a problem, they start pulling bonds out. But if the bond fund is committed to a certain distribution, it will need to keep buying regardless of how rates are going.


Of course, other parts of the system could break as well. Currency hedges look vulnerable, with the big changes we have been seeing likely, such as the changes in the value of the Yuan. Indirectly, they would seem to affect other currencies as well, since (for example) cheap goods from China would tend to adversely affect European sales of goods.

Ed 3 mths ago
The Helicopter is Warming Up 
BlackRock has just published a paper detailing what it expects the guardians of monetary stability to do next. Here’s the key recommendation from the paper, which is entitled “Dealing with the next downturn: From unconventional monetary policy to unprecedented policy coordination.” 
An unprecedented response is needed when monetary policy is exhausted and fiscal policy alone is not enough. That response will likely involve “going direct”: Going direct means the central bank finding ways to get central bank money directly in the hands of public and private sector spenders.
What’s incredible about the BlackRock policy prescription is that three of the paper’s four authors are former central bankers who now work for the asset manager. Hildebrand is the former head of the Swiss Central Bank, Stanley Fischer did stints at the Federal Reserve and the Bank of Israel, while Jean Boivin is ex-deputy governor of the Bank of Canada.

Ed 3 mths ago
Negative interest rates are coming and they are downright terrifying
What if I said I wanted to borrow $100 from you and pay you back $99 five years later? Would you do it?

Hell no!

And yet this is exactly what’s happening right now in the banking systems of Japan, Germany, France, and other European countries.

Negative interest rates — where the lender gets paid back less than they’ve loaned — now add up to 30%, (and counting), of the global tradable bond universe, according to JPMorgan (JPM). You may have seen for instance that Germany just sold the first negative yielding 30-year bond issue.

In case you’re wondering, yes, this is crazy.

“It’s really unusual and really distorting the global financial system,” says Torsten Slok, chief economist at Deutsche Bank Securities (DB). “I spend all my time talking about it.”

This is not going to end well
Negative rates are counterintuitive, unprecedented — and to my mind — mind-bendingly insane and downright scary. They are like a parallel universe where everything you’ve ever learned about finance and human behavior is turned upside down.
Worse, negative rates are being normalized by economists, bankers, and commentators.

Worst, I have a funny feeling this will end badly. Negative interest rates have all the hallmarks of serious trouble for the financial markets; an anomaly growing in scale which seemingly came out of nowhere that is under-recognized, poorly understood and dismissed as not consequential. (Flashing red lights here.);_ylt=AwrC0F9qS2BdRj4AQQ.ZmolQ;_ylu=X3oDMTByOHZyb21tBGNvbG8DYmYxBHBvcwMxBHZ0aWQDBHNlYwNzcg--

Ed 3 mths ago
How Even “Low” Interest Rates Screw Up the Economy 

Ed 3 mths ago
When the next recession hits, we'll have a hell of a time clawing our way out of it
Negative interest rates are a sign of economic malaise, a desperate move by central banks to stimulate moribund economies. But they are beneficial for borrowers. Here’s how it works: at minus one per cent interest rate, a bank lends $100 and pays $1 to the borrower who would then have $101 after one year.

“In 2008 to 2009, the Fed cut rates by five percentage points and it was not enough. Today, there’s far less room to respond to a recession. And elsewhere Japan and the European Union are headed toward a recession with their central bank rates already below zero.

“So, what happens then?”

Ed 3 mths ago
Down, down they go: Emerging central banks deliver most rate cuts in a decade
 LONDON (Reuters) - Emerging market policymakers slashed interest rates in August, taking their lead from major central banks including the U.S. Federal Reserve and the European Central Bank and joining in efforts to shore up their economies.
Interest rate moves by central banks across a group of 37 developing economies showed a net fourteen rate cuts last month - the largest number since policy makers ramped up measures to kickstart economic growth in the wake of the financial crisis.

In July, developing market central banks recorded a net eight rate cuts. Some of the August interest rate cuts - like in Mexico and Thailand - took markets by surprise.

The seventh straight month of net rate cuts follows a tightening cycle that ended in early 2019. Then, interest rate hikes by emerging market central banks outstripped or matched cuts for nine straight months as they battled the fallout from a strong dollar, rising inflation and softer currencies. 

Ed 3 mths ago

Here's a complete list of the recent emerging market central bank policy decessions:

  • PARAGUAY - The central bank cut its policy rate by 25 basis points to 4.25% on Aug. 21.

  • INDONESIA - The central bank, hoping it can spur faster growth at home despite a global slowdown, surprisingly cut its key interest rate for a second time in two months on Aug. 22.

  • MEXICO - Policymakers cut on Aug. 15 the key lending rate by 25 basis points to 8.00%- the first reduction since June 2014, citing slowing inflation and increasing slack in the economy, and fuelling expectations that further monetary policy easing could be on the way.

  • EGYPT - Egypt's central bank cut the overnight deposit rate by 150 basis points to 14.25% on Aug. 22, its first cut since February, after July inflation figures came in significantly below expectations

  • MOZAMBIQUE - The central bank cut its benchmark interest rate by 50 basis points on Aug. 14 to 12.75%.

  • JAMAICA - Jamaica's central bank cut its interest rate by 25 basis points to 0.50% on Aug. 28.

  • NAMIBIA - Policymakers reduced the lending rate by 25 basis points to 6.5% on Aug. 14.

  • MAURITIUS - The central bank on Aug. 9 cut the repo rate by 0.15 basis points to 3.35%.

  • PERU - The central bank cut the benchmark interest rate to 2.5% on Aug. 9 amid growing expectations for an economic slowdown in the world’s No.2 copper producer, but stressed its decision did not necessarily mean the start of an easing cycle.

  • SERBIA - The Serbian central bank surprised markets by cutting its benchmark interest rate another 25 basis points to 2.5% on Aug. 8, the second cut in as many months, to further bolster lending and growth.

  • THE PHILIPPINES - The central bank cut its benchmark interest rate on Aug. 8 and kept the door open for further easing to buttress the economy after growth slipped to its weakest in 17 quarters, hurt by tepid government spending and private sector investment.

  • BOTSWANA - The central bank cut the lending rate by 25 basis points to 4.75% on Aug. 29.

  • INDIA - The Reserve Bank of India (RBI) lowered its benchmark interest rates for a fourth straight meeting on Aug. 7 with a slightly bigger than expected cut, underscoring its worries about India's near-five year low pace of economic growth.

  • BELARUS - The central bank said on Aug. 7 it was cutting its main interest rate to 9.5% from 10% with effect from Aug. 14 and that the intensity of inflationary processes had slowed in the second quarter.

  • THAILAND - Policymakers unexpectedly cut the benchmark rate on Aug. 7, expressing worry about strength of the baht and aiming to help support faltering growth.

  • JORDAN - The central bank of Jordan reduced its main rate in early August by 25 basis points to 4.5%.

  • HONG KONG - The Hong Kong Monetary Authority (HKMA) cut its base rate charged through the overnight discount window by 25 basis points to 2.5% on Aug. 1, its first cut since late 2008, in line with the U.S. Federal Reserve's move. Hong Kong's monetary policy moves in lock-step with the Fed as its dollar is pegged at a tight range of 7.75-7.85 per dollar.

  • MOLDOVA - The central bank raised its main interest rate to 7.5% from 7% on July 31 to fight rising inflation caused by wage increases and higher food prices.

  • SAUDI ARABIA / BAHRAIN / UNITED ARAB EMIRATES - Central banks of Saudi Arabia, Bahrain and the United Arab Emirates - whose currencies are all pegged to the U.S. dollar - cut key interest rates to preserve monetary stability on July 31 after the Federal Reserve lowered U.S. interest rates for the first time in over a decade.

  • BRAZIL - In its first rate cut since March 2018, the central bank cut its benchmark interest rate to a new low of 6.00% on July 31, an aggressive first move in a widely anticipated easing cycle to inject life into a moribund economy and prevent inflation from slipping too far below target.

  • AZERBAIJAN - The central bank said on July 26 it had cut its refinancing rate to 8.25% from 8.50%.

  • RUSSIA - Policymakers cut the key interest rate on July 26 and flagged that one or two more cuts were possible later this year as Russia faces sluggish economic growth and slowing inflation.

  • TURKEY - The central bank slashed its key interest rate by a bigger-than-expected 425 basis points to 19.75% on July 25 to spur a recession-hit economy, its first step away from the emergency stance adopted during last year's currency crisis.

  • SOUTH AFRICA - The central bank cut its main lending rate as expected on July 18, but struck a cautious tone that suggested future cuts in borrowing costs were not a foregone conclusion despite benign inflation.

  • UKRAINE - Policymakers cut the main interest rate by half a percentage point to 17% on July 18, citing a downward inflation trend which is expected to continue in coming months and could pave the way for further monetary easing.

  • SOUTH KOREA - The central bank delivered a surprise interest rate cut on July 18, and shaved this year's growth forecast to the lowest in a decade, as a brewing dispute with Japan piled more pressure on the trade-dependent economy.

  • PAKISTAN - Policymakers hiked the main interest rate by 100 basis points on July 16 to 13.25%, citing increased inflationary pressures and a likely near-term rise in prices from higher utility costs.

  • DOMINICAN REPUBLIC - Policymakers cut interest rates by 50 basis points to 5% on June 30.

  • COSTA RICA - The central bank cut the key policy rate to 4.50% from 4.75% from June 20.

  • CHILE - Chile's central bank unexpectedly cut the benchmark interest rate by 50 basis points to 2.5% on June 7 as it braced for a sharper economic slowdown because of the U.S.-China trade dispute.

  • SRI LANKA - The central bank cut its key interest rates by 50 basis points on May 31, as widely expected, to support its faltering economy as overall business and consumer confidence slumped following deadly bomb attacks.

  • TAJIKISTAN - The central bank reduced the refinancing rate to 13.25% from 14.75% on May 31.

  • KYRGYZSTAN - Policymakers in the Central Asian nation cut the benchmark rate to 4.25% from 4.50% on May 28, citing slowing inflation.

  • ANGOLA - Angola’s central bank cut its benchmark lending rate by 25 basis points to 15.5% on May 24.

  • ZAMBIA - The central bank in Lusaka raised the benchmark lending rate to 10.25% from 9.75% on May 22 to counter inflationary pressure and support macroeconomic stability.

  • MALAYSIA - The central bank on May 7 became the first in Southeast Asia to cut its key interest rate this year, by 25 basis points to 3.0%, moving to support its economy at a time of concern about global growth.

  • RWANDA - Rwanda’s central bank cut its key repo rate by 50 basis points on May 6 to 5.0%.

  • MALAWI - Malawi’s central bank cut its benchmark lending rate by 100 basis points on May 3 to 3.5%.

  • CZECH REPUBLIC - The Czech National Bank raised interest rates on May 2, using a window of opportunity created by easing economic risks abroad to stem rising domestic inflation by fine-tuning a tightening cycle it had paused at the end of 2018.

  • KAZAKHSTAN - Policymakers cut the policy rate by 25 basis points to 9.00% on April 15 in an expected move taken after President Kassym-Jomart Tokayev ordered them to make credit more affordable.

  • NIGERIA - In a surprise move, the central bank cut its benchmark interest rate to 13.5% from 14% on March 26 as part of an attempt to stimulate growth in Africa's biggest economy and signal a "new direction".

  • GEORGIA - The central bank cut its refinancing rate to 6.5% from 6.75% on March 13, citing forecasts suggesting that annual inflation would stay close to its 3% target this year.

  • TUNISIA - Policymakers in Tunisia raised the key interest rate to 7.75% from 6.75% on Feb. 19 to combat high inflation - the third such hike in the past 12 months.

Panny745 3 mths ago
This info thread is so good and well guides for me.

Ed 2 mths ago
The Inevitable Bursting of Our Bubble Economy
Financial bubbles manifest three dynamics: the one we're most familiar with is human greed, the desire to exploit a windfall and catch a work-free ride to riches.
The second dynamic gets much less attention: financial manias arise when there is no other more productive, profitable use for capital, and these periods occur when there is an abundance of credit available to inflate the bubbles.
Humans respond to the incentives the system presents: if dealing illegal drugs can net $20,000 a month compared to $2,000 a month from a regular job, then a certain percentage of the work force is going to pursue that asymmetry.
In our current economy, corporations have sunk $2.5 trillion in buying back their own stocks because this generates the highest work-free return. This reflects two realities:
1. Corporations can't find any other more productive, profitable use for their capital than buying back their own shares (enriching the managers via stock options and the 10% of American households who own 93% of the stocks)
2. Thanks to the Federal Reserve and other central banks injecting trillions of dollars of nearly-free credit into the financial sector, corporations can borrow billions of dollars to play with at near-zero rates that are historically unprecedented. 

Ed 2 mths ago
The ECB Is Preparing to Inflict More Pain on Banks
  • ECB expected to cut deposit rate to at least minus 0.5%
  • Lenders such as Deutsche and UBS say policy is ruining finance
The European Central Bank is about to turn the screws again on financial institutions by diving even deeper into negative interest rates.

Lenders including Deutsche Bank AG and UBS Group AG are bracing for another blow to their profitability after five years of sub-zero monetary policy. While the ECB’s strategy is to boost growth and inflation by lowering borrowing costs for companies and households, squeezing banks too much could hamper their ability to supply the credit that fuels the economy.

“The interest-rate policy is an enormous burden,” Christian Sewing, chief executive officer of Deutsche Bank, said at a conference in Frankfurt last week. “In the long run, negative rates ruin the financial system.”

Ed 2 mths ago
The ECB reduced the deposit rate to minus 0.5% from minus 0.4%, and said it’ll buy debt from Nov. 1 at a pace of 20 billion euros ($22 billion) a month for as long as necessary to hit its inflation goal. 
The approval of such broad measures is a win for Draghi in his penultimate meeting. Governors from core economies including Germany and the Netherlands pushed back against the resumption of quantitative easing, saying it should be a last resort in case the outlook worsens.
Hours before the decision, industrial-production figures showed the third quarter off to a weak start with euro-zone output dropping 0.4% in July, more than expected. 
Is the ECB at the last resort stage? 

Ed 2 mths ago
The Fed Is Trapped in the Twilight Zone
“You are traveling through another dimension, a dimension not only of sight and sound but of mind. A journey into a wondrous land of imagination.” 

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