Monday, February 8, 2016

We need another round of QE

I've long argued that the Fed's three Quantitative Easing episodes were never really about "stimulus." Instead, I thought QE was the correct response to a surge in the world's demand for money, money equivalents, and safe, risk-free assets that followed in the wake of the financial crisis of 2008. In recent months I have argued that the Fed was justified in raising short-term interest rates, because the world's demand for money and safety appeared to be slowly declining.

Unfortunately, it looks like both I and the Fed have been wrong of late. I'm not sure what the exact underlying cause of the latest "panic attack" to hit the markets is, but signs point to 1) the ongoing slowdown in the Chinese economy, 2) the collapse of oil prices, 3) rising geopolitical tensions in the Middle East, and 4) a sense that policymakers are clueless. In this latter category we have the rise of Bernie Sanders and Donald Trump, and the apparent tone-deafness to all these problems on the part of the Fed, as reasons for investors to worry about the future economic and policy direction of the U.S. economy. At a time when major economies appear to be wallowing in turbulent seas, it's terrifying to think that the ships' captains might be clueless.

Many commentators have argued that we're also in trouble because central banks are "out of ammunition" since rates are at or near zero. Those who believe this were cheered when the Bank of Japan announced negative interest rates.

However, I think that's the wrong way to think about monetary policy, because it assumes that moving rates up or down is a way of slowing down or goosing economic activity, respectively. As we've seen, central bank purchases haven't had the intended effect on interest rates, and they have not resulted in any meaningful stimulus to any economy. It bears repeating that monetary policy cannot create growth out of thin air: growth only happens when productivity rises, and productivity rises only as a result of more work and more investment. Fiscal policy needs to focus on increasing the rewards to risk and investment; lower interest rates are not the cure-all for chronically weak economies.

Trying to manipulate interest rates hasn't helped, but the Fed's provision of additional reserves to the banking system via QE has addressed liquidity issues and systemic risk issues. U.S. banks have effectively invested $4 trillion in deposit inflows into bank reserves, bolstering their balance sheets in the process. More QE purchases can be a good thing, especially in times like these when markets are very nervous, because the demand for money and safe assets has increased meaningfully. What's needed now is not lower interest rates, but more T-bills (aka bank reserves in an IOR regime).

Things began to heat up beginning right around the end of last year. Since then—just over 5 weeks ago—gold is up some $130, HY spreads are up 150 bps (led by HY energy spreads which have spiked to 1850 bps), crude oil is down 20%, 10-yr Treasury yields have dropped 55 bps, real yields on 5-yr TIPS are down 30 bps, and global equity markets are down 10-20%.


The chart above shows the total of retail money market funds, one of the components of M2. After declining for years, it has spiked by over $100 billion in the past few weeks. Thanks to the fact that the Fed is paying interest on bank reserves—which has been extended, via reverse repo agreements, to non-major banks and other financial institutions—money market funds now pay some interest whereas before they paid almost nothing. That may be the reason for the huge increase in demand for these funds, but it may also be that a lot of money is fleeing China and Europe and these funds look like easy-to-get, attractive safe havens.


The chart above shows required reserves (reserves that the Fed requires banks to have to collateralize their deposits). This component of the monetary base has soared at an annualized rate of 350% in just the past month!  It also explains why the much broader measure of money supply, M2, is up at an annualized rate of 15% in the past month, after growing for 6-7% per year for the past several years.

When the world rushes for the risk exits and into the welcoming arms of banks and money market funds, central banks need to respond by increasing the supply of money. If the Fed doesn't accommodate increased money demand with increased money supply, that can lead to deflation and other sorts of nasty consequences.

Fortunately there are some offsetting factors which today make the situation less than critical. Total Bank Credit (now $11.8 trillion) is rising at a relatively strong clip (8-10%) in recent months, and Commercial & Industrial Loans (now over $2 trillion) are rising at double-digit rates. Oil prices are still weak, but the CRB Raw Industrial commodity index (no energy included) is up over 6% in the past few months. Meanwhile, the dollar has declined because the world figures that the likelihood of further Fed rate hikes has gone down dramatically—and a weaker dollar should provide good support for all commodity prices.

Still, it would be very helpful if the Fed were to make it clear that at the very least, rate hikes are off the table for the foreseeable future and that it probably makes sense to fire up another round of QE. Adding more risk-free money to the system at a time when risk aversion has spiked is just what the monetary doctor would order.


The chart above tells the big-picture story of money demand: the ratio of M2 to nominal GDP. Think of this as being roughly equivalent to the percentage of the average person's annual income that is held in liquid form (cash, savings accounts, checking accounts, money market funds). I've been expecting this ratio to top out for the past several years, but it just keeps growing. The world just keeps stockpiling cash and cash equivalents for a variety of reasons, with fear and uncertainty likely topping the list. People want to hold more and more money, even though it pays a paltry rate of interest. We won't be out of the "fear" woods until this ratio stops rising and starts declining.


The chart above tells the story of the Fed's three rounds of Quantitative Easing. The Fed always told us that the purpose of massive purchases of notes and bonds was to depress interest rates, which in turn was supposed to stimulate borrowing and thus boost the economy. But that's not what happened. Note that during each period of QE (green bars), interest rates actually rose. I think that was because the bond purchases—which effectively transmogrified notes and bonds into T-bill equivalents—was just what the world needed. QE satisfied the world's demand for safe assets, and that lubricated the wheels of finance; rates rose because risk aversion declined and the market felt more comfortable about future growth prospects. But after QE1 and QE2 were discontinued, yields plunged, which was a sign that the Fed hadn't done enough, and/or had ended its QE purchases prematurely. Recall that the periods between QE1, QE2 and QE3 were dominated by the emerging PIIGS crisis in the Eurozone. There was a lot of panic in Europe and a lot of money that fled to the U.S. as a consequence. Each time the Fed started a new QE program, markets breathed a sigh of relief and interest rates rose as a result.

Note that interest rates were relatively stable following the end of QE3. Until recently, that is. I think the recent decline in yields on 10-yr Treasuries is the market's way of saying "Help!" to the Fed. We can only hope that Janet Yellen and her fellow Fed board members hear this and respond before too much time goes by.


I've been showing the chart above for a number of years, since it helps to visualize the market's demand for safe assets (and by inference, the market's level of FUD). The red line is the price of gold, while the blue line is a proxy for the price of 5-yr TIPS (I use the inverse of the real yield on TIPS as a proxy for their price). Demand for safe assets has been declining ever since the PIIGS crisis was resolved in 2012, but it has jumped since the end of last year (i.e., the price of gold and TIPS has jumped). The jump is significant, but it's still relatively tame compared to what we saw back in the 2010-2012 period.


The chart above is also helpful, since 2-yr swap spreads are a good proxy for financial market liquidity and systemic risk. As two wrenching episodes of the PIIGS crisis unfolded in 2010 and 2012, swap spreads soared, especially in the Eurozone. Fortunately, today swap spreads are well-behaved, and that suggests that systemic risk is low and liquidity conditions are still healthy.

With a some more QE help from the Fed and some more time for markets to adjust, there's reason to think we can survive the current crisis.

56 comments:

William said...

Here is what Esther George said about the Fed's purpose:

“While taking a signal from such volatility is warranted, monetary policy cannot respond to every blip in financial markets,” George, who votes on policy this year, said in prepared remarks in Kansas City, Missouri. “The recent bout of volatility is not all that unexpected, nor necessarily worrisome, given that the Fed’s low interest rate and bond-buying policies focused on boosting asset prices as a means of stimulating the real economy.

And the Fed has certainly accomplished those goals. Unfortunately, the effect has not produced a return to a reasonable level of self sustaining economic growth in any country. What it did produce was tremendous mal-investment which is now coming home to roost: over indebtedness of natural resource companies, emerging market countriesand the biggest credit boom (and bust) of all China. In the meantime, the extremely low interest rates have seriously damaged savers of all types: individuals, insurance companies, pension plans, annuities plans, etc.

Now the ECB as well as the Bank of Japan have gone to NEGATIVE short term interest rates which have destroyed the basic banking model i. e. banks must pay their Central Banks for the privilege of having reserves. Please notice how bank equities around the world - including the US - have plummeted in value this year and their CDS spreads are rising dramatically along with those of natural resource companies.

Why you and Benjamin are urging more of the same failed policies is beyond me. Thanks to Central Banks policies the total of private and public debts of developed and developing countries - much of it proving to be very bad - has sky-rocketed in both by 35% since 2008.

It's every man for himself as far as I am concerned - if you folks want to believe that Central Banks can save you go ahead. I don't believe it. Negative interest rates and the the total destruction of banking systems is next.

elmer fudd said...

unbelievable that you advocate more "proven to ultimately fail" monetary policy.

William said...

One reason stock selling is so persistent is NYSE margin debt which peaked at over $500 billion a year ago. At the end of December 2015 margin debt was $461 billion - the most recent month reported.

The prior peak was $430+ billion in mid 2007 which compared to $385 billion in early 2000. Margin interest is just another example of the speculation and bubble inflation induced by unprecedented low interest rates for an extremely long period of time.

Scott wrote that he can't see any good reasons for what is happening other than "nervousness" as he wrote a couple weeks ago. How about bubbles are bursting like high yield bonds and darling stocks with no earnings like Tesla falling 50%.

Good margin debt charts here: http://www.advisorperspectives.com/dshort/updates/NYSE-Margin-Debt-and-the-SPX.php

Benjamin Cole said...

Gadzooks! Heavens to Mergatroy!

I agree with Scott Grannis on monetary policy!

I think Scott Grannis is right, but let's hope he is wrong. The Fed will not "go back" to QE until we see another recession.

10-year Treasuries at 1.75%. The market says inflation is dead.

Scott Grannis said...

William: the market cap of US equities is in the neighborhood of $20 billion, while margin debt currently totals around $450 billion, which is slightly more than 2% of total market cap. Please explain how even a substantial increase in margin debt could cause a significant overvaluation of the equity market.

Scott Grannis said...

Oops. Market cap is in the neighborhood of $20 trillion

William said...

Scott, I believe my note was regarding "One reason stock selling is so persistent", not about a "cause of significant overvaluation of the equity market."

Scott Grannis said...

Let me modify my question. How can any meaningful change in margin debt, which represents a very tiny fraction of market cap, contribute to a significant rise or decline in stock prices? Suppose margin debt were to decline by half. Could the selling of 1% of the value of equities cause a 10% decline in the value of those equities? my point of course is that margin debt cannot be a significant contributor to market rallies or sell offs.

Scott Grannis said...

Also: why do you believe that stocks are a bubble that is bursting, when PE ratios never got to an extreme valuation and corporate profits are still extremely high relative to GDP?

Kevin Erdmann said...

Kudos, sir. Respect.

Benjamin Cole said...

"As we've seen, central bank purchases haven't had the intended effect on interest rates, and they have not resulted in any meaningful stimulus to any economy."---Scott Grannis.

Well, I have to pick at something, so I will pick at this.

The QE program is more than a swap of reserves for Treasuries. After all,the investors who sold Treasuries to the 22 primary dealers (who in turn sold them to the Fed) received cash for their bonds.

So, $3 trillion of Fed QE purchases results in $3 trillion of reserves AND private-sector bond sellers get $3 trillion newly digitized cash. The oddity is, no one knows what bond sellers did with the cash they received for the bonds.

We know investors who sold into QE must have done this with their $3 trillion--

1. Spent the money.
2. Put the money into commercial bank accounts.
3. Invested in securities.
4. Invested in property.
5. Converted the digital cash into paper cash.

The last one is not so laughable; cash in circulation has increased from $800 billion to $1.4 trillion since 2008. Yes, there is $600 billion more in paper money out there. If half is overseas in suitcases, fine, that leaves $300 billion circulating, How many times a year does cash circulate? No one knows. If 10 times, that is another $3 trillion of economic results in the cash economy. I hope so; this means we are doing better than the official stats show.

I suspect QE was stimulative, and not only that, but wiped out $3 trillion in federal debt, lifting that debt-monkey from taxpayers' backs.

Now, monetizing debt is one of those cardinal sins we all learned about in college. Third World banana republic fare. Print your way out of debt.

Yet, the Fed's QE rounds may have only deferred deflation. It is a great time to monetize the national debt, and stimulate the economy.

A last quibble: The problem with looking at nominal interest rates and concluding anything about QE is that rates are relative. If QE looks like it will make a stronger economy, that tends to raise nominal interest rates, even as the QE bond-buying offsets that and depresses rates. A very reasonable conclusion is that QE stimulated the economy, while holding rates more or less constant, although---keep reading---

Another observation: There is a global market for government securities. There seems to be bottomless demand for US debt, and heavy "super-abundant" supplies of capital. We have to think about global markets when discussing the Treasury market. So QE is operating within a global environment. Any effect QE might have on rates is swamped by global flows of capital.

But I contend QE is stimulative, so keep doing it. In fact, I would keep paying of the national debt for as long as we can get away with it. Japan is pursuing QE and yet has to face inflationary outlook.

BTW, I would not yet clump Trump with Sanders. Trump, with a business background, might turn out to be a good-for-business president. Of course, we still have the Congress and Supreme Court, and local government and property zoning, but Trump might be a plus. Sanders seems like a nice guy, but possibly not a good President.

Boy, a Sanders-Trump election battle will make the WWF wrestling league look like tame sissy-stuff.




Clinton Condo said...

Ignoramus here.. Scott, can't a simple explanation cover some of these topics?

Why so much demand for money?
Retail, investors, etc. have been blown out of the water in 01' then again in 08' and almost a third time in 2011, just when demand started to rise strongly. Is this not enough? And I haven't mentioned the 2010 and 2012 scares.

Why the persistent selling?
Given machines control the market (70% according to some data out there), why not assume algos are stuck in their selling inertia and nothing can revert this unless there is a shock that will change core direction, like a QE announcement?

Sorry for my simple mind.

steve said...

I find it absolutely incredulous that any policy by the fed would be met with anything but absolute failure. Their track record is nearly perfectly-wrong. More QE? The reason we're where we are now is all this nonsense! the fed should be lead by intelligent business people not pinhead economists who imperiously think they can manipulate the markets.

Kenneth said...
This comment has been removed by the author.
William McKibbin said...

The markets are very messy right now -- most accredited investors are losing big right now, me included -- transportations are being routed -- foreign equities have been destroyed -- oil prices are in collapse -- and gruesome earnings are being reported -- I am afraid of the markets right now -- regardless, I am doubling down on my long-standing investment policy -- buy and hold dividend and rent-earning equities -- bluntly, I do not trust either our monetary or fiscal policy makers -- I am at a loss as to where to find value right now -- cash seems to be the only recourse in the short-term, but even cash doesn't seem very smart long-term.

Houston Advisor said...

IMHO, the global demand for US debt is a free pass to monetize our problems away. The Fed's balance sheet helps show the nice double-entry accounting of how the process occurs, but in a world of fiat currency and 10 U.S. Aircraft Carrier Groups, who's really going to call us out? Fed should ease away.

Scott Grannis said...

Reminder: QE does not mean the Fed is "printing money." For a full explanation, see this post:

http://scottgrannis.blogspot.com/2013/03/the-fed-is-not-printing-money.html

QE essentially boils down to this: The Fed buys notes and bonds and pays for them with bank reserves. Bank reserves are not money because they can't be spent anywhere. They are functionally equivalent to T-bills, since they are default-free and pay a floating rate of interest. With QE the Fed effectively transforms notes and bonds into T-bills, which are the world's go-to safe asset.

By adding bank reserves to the financial system, the Fed opens up the possibility of "money printing" since the banks can use their reserves to support virtually unlimited lending. Only banks can create money through this process. To prevent an unlimited expansion of money, the Fed pays interest on reserves, which gives banks a reason to hold them as assets instead of making more loans. The key to monetary success in the future will be finding the right interest rate to pay on reserves that will keep money expansion in check. This is not materially different from the balancing act the Fed had to perform prior to QE, when it had to add or subtract reserves as needed in order to target the overnight Fed funds rate, which is what banks charged each other to borrow reserves (which were in limited supply).

Scott Grannis said...

One more point: QE does not absolve Treasury of the need to repay the national debt. It does not make federal debt disappear or become less onerous. Treasury must pay interest to the Fed for the notes and bonds it holds, and the Fed must use that money to pay interest on the bank reserves it has created. Any excess is returned to Treasury. Last year that excess was about $100 billion, so QE has reduced the burden of our national debt by a little, but it is not a significant amount. It is quite possible that someday the Fed will pay out more interest than it receives (if IOR exceeds interest income), at which time it will be operating at a loss.

At the end of the day, the Fed is simply changing the composition of outstanding Treasury debt: reducing notes and bonds and increasing T-bills. This effectively offsets what Treasury decided to do some years ago, which was to increase the issuance of notes and bonds and reduce the issuance of T-bills.

Houston Advisor said...

Thanks for the clarity.

John said...

Why does all of this sound a little bit like a Ponzi scheme?

Scott Grannis said...

It may be convoluted but it's not a Ponzi scheme, in the sense that the Fed needs to keep doing QE forever. But it's not riskless either. There are several ways the Fed can screw up: not raising rates enough when the demand for money eventually declines, and/or raising rates so much that the yield curve flattens or inverts and the Fed begins to generate losses; that could trigger a loss of confidence in the Fed and the dollar.

Another problem that is brewing is that the Fed may be thinking that it is actually more powerful than it really is. Indeed, many people may be looking to the Fed for solutions the Fed is unable to provide. If the past 8 years have taught us anything, it is that monetary policy has major limitations. The Fed can't boost the economy all by itself. Fiscal policy is desperately needed. Unfortunately, the political class would prefer to have the Fed do the heavy lifting, rather than recognize that our problems revolve around too much spending and too much taxing and too much regulating.

William McKibbin said...

Need some help from anyone -- what are we to make of Japanese 10-year bonds going negative? What does that mean? How do I process this information into investment decisions? The data that is coming out is very strange for this old investor...

http://www.wsj.com/articles/japan-markets-shaken-as-investors-seek-shelter-1454997661

Thinking Hard said...

Scott - I agree, but would like to see some zombies die first. Would like to see QE4 in about 9-12 months with some energy sector bankruptcies and other zombies not getting another round of flesh in the form of QE. Sometimes it's good to clean out the closet. We are too tight and have been for a bit, and I still don't think we will see the FFR above 1% this tightening cycle. Don't you think zombies need to occasionally be taken out?

Scott Grannis said...

Thinking Hard: I agree that zombies need to be taken out at times. But I don't see why another QE would prevent or derail this process. QE doesn't create new money, it just changes the composition/maturity profile of existing Treasury debt in a way that accommodates an increased demand for safe, short-term assets. Perhaps that avoids/mitigates panic, which in turn is beneficial to everyone, including zombies, but where is the harm in that?

Another way to think about QE is that it facilitates liquidity during times when zombies are being terminated. It helps the market get through periods of uncertainty.

Benjamin Cole said...

https://www.stlouisfed.org/publications/central-banker/spring-2013/is-the-fed-monetizing-government-debt

See above. If the increase to the Fed's balance sheet is permanent, then QE is in fact monetizing the debt, and printing (digitizing) money.

Fine by me. The increase to the Fed's balance sheet can certainly be permanent, and in fact should be much larger than today.

Everyone certainly wishes for a reduction in structural impediments in the economy. However structural impediments were worse in the 1950s and 1960s, yet the economy boomed. A look at the Federal Reserve policies of the era is probably instructive.

It is true we reached double-digit inflation by the late 1960s, barely. Never even close to hyperinflation.

They said could have a very positive role to play in the years ahead, the opposite of the role it played in the Great Depression, when monetary policies led to a long-term contraction in economic output, as chronicled by Milton Friedman.

Benjamin Cole said...

The Fed could have a very positive role....

John said...

"Sounds like socialism to me."

Lawyer in NJ said...

Why have rising Middle East tensions not produced an accompanying rise in the oil price fear premium?

Scott Grannis said...

Because many of those countries (e.g., Iran) are desperately in need of $$ and will pump as much oil as they can. Besides, there is lots of excess oil supply capacity in the world today, and that exerts a powerful downward pressure on oil prices.

John said...

How do the cascading negative effects of low household formation rates factor into building a "wall of worry?"

Rick Weldon said...
This comment has been removed by the author.
Rick Weldon said...

We haven't even experienced a truly serious correction much less a panic and already the calls are out for more QE morphine drip.
A market that can't sustain itself without aid isn't a true market.
Maybe it should be made official: the Fed's mandate is to support the stock market.

Benjamin Cole said...

Rick W--times change. A a baseball manager who looks at his starting pitcher getting bombed, but does nothing, in fact is not doing nothing.

QE by necessity is conventional policy, if one wants low inflation rates. At higher, moderate rates of inflation then higher interest rates might be possible.

Note to Scott Grannis: the Bank of Japan has gone to negative interest on excess reserves.

marcusbalbus said...

quisling

jm said...

We must destroy the free market system, eh Brutus, in order to save it.

Scott Grannis said...

Rick W: I don't believe that QE is equivalent to a morphine drip. It supplies risk-free assets that nervous investors seek. It's not stimulative, it doesn't increase the money supply, and it doesn't bail anyone out. It helps prevent a market meltdown such as we had in 2008, and gives the market time to sort things out.

Benjamin Cole said...

Why is it when the Fed raises interest rates, or halts QE, or pays interest on excess reserves, no one ever says those are "artificial" actions?

The Fed now pays interest on excess reserves, a highly activist, unprecedented and radical policy. And in fact the Bank of Japan has gone to paying negative interest on excess reserves, so there are highly intelligent central bankers with a different take on the right policy choices.

Would you trust Haruhiko Kuroda (BoJ), or Janet Yellen, Ester George, and Loretta Mester (Fed)?

Indeed, it appears the Fed today is artificially propping UP short-term rates, for what reason I do not know. Moreover, through the mysterious reverse repo program (another type of untested, radical Fed activism never seen before) the Fed is draining liquidity from the banking system, to try to keep short-term rates near 0.50%.

The market may "want" negative rates, but is flummoxed by the Fed.

The world is awash in capital and excess capacity.

Central bankers need to adjust.

Bring on the QE, and don't stop until we are wiping our rear apertures with Benjamin Franklins. I exaggerate a little, but it was fun to write that.

Rick Weldon said...

"Risk free"

Rick Weldon said...

"Risk free"

Ross Paul said...

Booo! When you give an alcoholic more alcohol what does it do? Kills the patient. We need sound money with structural reforms. Two thumbs down for this article.

Johnny Bee Dawg said...

If Saudi Arabia were smart, they would first borrow hundreds of millions of more dollars, and buy S&P contracts.
Then they would announce they are shutting down the pumps for "repairs" for a few weeks.
They'd make more money than oil.

That would be better than any QE program, and cure a lot of risk aversion.
Saudi Arabia should call me.

Matthew Grech said...

Benjamin: Right again.

Johnny: Like your style and your trade recommendation for Saudi.

valuelurker said...

I respectfully disagree with Scott's post that we require more QE, more QE will only result in more mal-investment. What is happening in the markets is the adjustment to the post Fed induced recovery. Stop mispricing risk by intervention and just let markets clear. We can handle it. The world will not end. And if the world does end after a 25 bps rate rise, it was going to no matter what they do.

randy said...

@valuelurker... bingo. It is a terrible place to be, when FED actions, or perceptions of FED actions, or simply bets on FED action, overwhelmingly displace fundamentals of - is this new equipment a good investment; should I hire for this new opportunity; is the US economy fundamentally sound; etc. Greenspan got us in this mess. The only way out will involve the pain of gradually reducing the role of the FED. I respect the decisions in the 2008 crisis, but at some point the crack has to stop.

William McKibbin said...

I'm flying my battered plane through the flack and will not depart from my investment policy and mission -- fortunately, I am cash-flowing so I am lucky -- but I am going to accumulate some cash in the coming months -- should the markets, real estate, and commodities continue to plummet, I am ready -- bluntly, I see very little hope for upside in 2016, and lots of indications for more downside...

Matthew Grech said...

Hooray for Ron Insana. Just a moment ago, on CNBC, he became the first Talking Head that I've heard to suggest the Fed take the IOER to zero and incent the banks to actually lend to customers. I have been shocked - shocked, I tell ya - that more hasn't been made of the fact that the Fed RAISED the IOER in its last move. More and more people realize the Fed has been too tight but then most wring their hands over what to do (since nobody seems to want to engage in another round of QE). Do the easy thing, at least, and drop the IOER. Heck, even a quarter point decline would be a step in the right direction. What is even the theoretical reason for having this IOER program if not to inhibit lending? Talk about shooting yourself in the foot, America!

Clinton Condo said...

Yesterday, high yield spreads widened to 862 surpassing 2011 peak. Are things getting worse?

Nudge said...

MC MB Index on Bloomberg

Look it up. The increase in retail Money Market Funds came at the expense of Institutional Money Market funds. Maybe explain this in your next post for all the noobs.

William McKibbin said...

The Fed telegraphed yesterday that negative interest rates are on its radar. I view negative interest rates as a monetary experiment at public risk -- prudent investors will beware of the markets until we have results data. Be careful out there...

Scott Grannis said...

Nudge: Thanks for pointing this out. Evidently some institutional money market funds were reclassified as retail MMFs. That undermines my argument to some extent (since I interpreted the rise in retail MMFs as a sign of increased demand for safety), but I think it is still valid. There is a panic rush for the exits unfolding, and the demand for safe assets must be extremely strong right now.

Kenneth said...

Scott,
Why do you think the stock prices of many European banks are BELOW their financial crisis levels and what are the swap spreads looking like currently? Are they still relatively calm? Hard to feel good about anything right now particularly after seeing Janet Yellen ramble on with her views on the economy which place too much emphasis on statistics like the unemployment rate and too little on how Fed policy has raised the dollar and contributed to lower commodity prices and increased credit risk.

Scott Grannis said...

Kenneth: Eurozone swap spreads are normal and have been for some time.

Kenneth said...

I don't put much value on the work of most economists and strategists besides you Scott but I can't help but notice some of the really bearish commentary because it is so effectively presented such as the stuff that Bill Bonner puts out with his teaser ads and so forth. So it makes me try to look into it so I do know the bear case and can decide for myself if it makes sense or it is more like great marketing. The low level of swap spreads is very encouraging but I would like to know if the debt outstanding among corporations, governments , etc that is dependent on higher commodity prices (most notably oil) has grown substantially since the financial crisis and is now large enough to create a massive downward spiral of defaults? Since swap spreads are currently normal the market apparently isn't worried about this if i am interpreting swap spreads correctly but is there enough debt out there to justify such a worry? I remember a few years ago during the Eurozone crisis you presented data that showed the worries were considerably greater than the amount of debt justified. Would appreciate your thoughts.

Johnny Bee Dawg said...

More to pile on the wall of worry:

Death of Scalia will increase lawlessness of government policy. There is no way this Congressional leadership will insist on a Constitutional textualist...much less a conservative to be appointed. We are going to get more of this "Living Constitution" BS. Supreme Court is re-writing the Constitution, term by term. All by fiat.

Marxists prefer coercion to persuasion and due process. The Constitution says what it says...if you don't like it, then persuade enough others to get it AMENDED. The new way is just to trample over the words, and make it say whatever they want it to say. Scalia's defense of the Text and Process will be sorely missed. Lack of this defense will increase risk aversion.

Scott Grannis said...

agreed

Scott Grannis said...

Kenneth: If the Fed were to continue to raise rates despite all the turmoil that one rate hike seems to have generated, then we could see further appreciation of the dollar that could trigger further commodity price weakness and more risk of default of debt that is dependent on commodity prices. But I don't see that happening. I think the Fed is chastened by all the turmoil, and at the very least is likely to avoid doing anything for the foreseeable future to exacerbate this situation.