As Paul Krugman always likes to recount, strange things happen at the zero bound. Macroeconomics gets weird. Liquidity traps prevail. And a whole slew of paradoxes come into being.
And that’s largely because below the zero bound things get even stranger still.
What you think should happen, doesn’t, and what you think definitely won’t happen, does. Furthermore, negative interest rates don’t just kill off the traditional point of banking, they encourage bad incentives and dubious market practices for all purveyors of capital. Read more
About time we familiarise ourselves with a new three-letter acronym: NIM. It’s bank parlance for “net interest margin”. And all you need to know about NIM is that once you strip out all the other stuff banks do after lending, it’s probably the best measure we have of how profitable a bank’s core business is.
The problem these days is that a negative carry universe doesn’t sit well with NIM. Not only are you having to pay people to borrow from you, unless you’re particularly well funded or in the banking elite, you’re probably having to borrow at more than zero. So, unless you’re a bank that has a habit of err, creating false markets or artificial scarcities — which we know has been severely constrained in the new post-crisis regulatory climate — NIM compression is a bit of a big deal.
And small surprise, bankers are beginning to worry, especially now that negative rates are a Eurozone-wide thing. (FWIW FT Alphaville’s “negative carry” tag takes that concern back as far as 2012.) Read more
Kudos to Krugman for attempting to explain to Pimco’s Bill Gross that return on capital is not something that can be taken for granted.
His comments follow remarks from Gross that capitalism “needs carry” to survive. Read more
Gary Jenkins writing in Credit Matters this week gets to the heart of the matter when it comes to what investors should do with their money (our emphasis):
Is nowhere safe? The natural reaction to this is that fi nancing for banks should become more expensive. We are already seeing this reaction in the market to some degree. But what does this mean for a product like Cocos? How does an investor monitor the risk of conversion if the ECB could, on any given day, decide to withdraw liquidity unless the bank were to improve its capital position?
Remember the whipsawing days of 2008? The days when commodity prices couldn’t get crazier?
By now, everyone is familiar with the mantra that QE is [arghh!] money-printing and that a major unintended consequence could be a chronic and uncontrollable inflation. (One could call this the goldbug, Austrian, Republican case).
Less well known, perhaps, is the theory that QE could be just as unexpectedly deflationary — because long-term micro yields come to threaten a number of financial sectors outright, as well as general expectations of risk-free returns which lead to capital destructive feedback loops. Read more
FT Alphaville has presented its case on negative rates and zero deposit rates here and here (amongst other places).
What we believe is that rather than stimulating the lending market — and the economy along with it — such a rate policy could have a disastrous impact on collateral markets and money market funds, not to mention the net interest income of lending institutions. All of which could unleash a protracted deflationary spiral. Read more
A little update on what short-term rates are pricing in when it comes to BoE meetings this fall courtesy of ICAP’s Nick Middleton.
As he observes, something of a 25 bps cut definitely being eyed to some degree: Read more
Here’s an interesting factoid by way of Bartosz Pawlowski from BNP Paribas’ CEEMEA team — Eurozone yields aren’t the only ones being haunted by negativity.
As it turns out, euro-denominated non-eurozone debt is also treading perilously close to the zero mark. Read more
Okay. It’s true. We’ve become slightly obsessed with negative yields at FT Alphaville. Especially with regards to what they signify for the financial industry.
Though, for a long time we’ve felt very much alone with this obsession. Weirdly enough, nobody else has seemed too bothered about it. (Note, we even had to go to the ECB directly to ask Draghi what he thought about it.) Read more
Finding out that you are dealing with a terminal disease is never easy.
The natural reaction is to seek out a cure, no matter how bleak your chances. You will, for the most part, do almost anything to live. That includes changing your habits, your lifestyle, your friends, your profession or, for that matter, doing things you never previously considered doing. Whatever it takes to get just one more day of life. Read more
A while ago we observed that negative gold leasing rates were potentially signalling something awry with the Libor rate.
That judging by gold forwards, the Libor component of the gold lease rate calculation (Libor-GOFO = Lending rate) was coming in much lower than what might otherwise be expected. Read more
Low yields in the context of epic supply may baffle some people, but not UBS’s Chris Lupoli.
Lupoli, part of Global Macro Team, seems, if anything, to subscribe to our negative carry shift theory — the idea that a more permanent curve transformation may be under way. Read more
Here are some charts we knocked up (in our usual MS paint, so excuse the pixelation) to try and explain why the banking system’s biggest problem may lie in ‘negative carry’ — a phenomenon that would make investment-focused lending unprofitable, pushing the onus instead on pariah-profits extracted from economically destructive practices.
We begin with the following (click to expand): Read more
This is a follow-up to our post on “base money confusion“, which incorporates some of the ideas we’ve raised in our “beyond scarcity” series.
Let’s assume a few truths (we’re sure they’ll be up for debate, but here goes anyway): Read more