30 Jul SOME THOUGHTS ABOUT THE FED AND NEGATIVE INTEREST RATES
It is a forgone conclusion the FRB will lower interest rates tomorrow. Consensus is expecting a 0.25% decrease. Friday’s data lowered the probability of a 0.50% cut. There are few who think the Fed will not act.
Guggenheim stated yesterday the Fed should increase rates in anticipation of potential overheating. Wow! If this was indeed the case—no rate cut –the markets could potentially sell off dramatically. If there was an increase, markets would be crushed.
Speaking of living in an unexpected environment, anyone involved in the financial industry for more than ten years would have thought the idea of negative interest rates as completely absurd. It would never happen.
Today there are reputable people discussing the probability of a negative yield on Treasuries. As noted several times there is over $13.5 trillion of negative yielding debt. The ECB is discussing the probability of further experimenting with yet even greater negative yields.
As noted last week, twenty five percent of the Barclays Global Investment Grade Index now has a negative yield. Wow! I cannot yet fathom this environment. It offers no fixed income payments and guarantees a loss if held to maturity.
It is my belief the world’s central banks are the only buyers of such debt, probably the result of having the power of effectively printing money to buy assets and don’t particularly care what price they pay. Is this MMT in its infancy?
Is the Fed and other central banks taking the path of least resistance, a result of paralyzing identity politics that is prohibiting any meaningful fiscal policy? Is the Fed or world’s central banks fearful of the political fallout if any other course of action is taken?
In any regard I think the Fed is promoting Wall Street over Main Street; the Ph.Ds and big business versus Mom and Pop and small business/savers.
Governments are not complaining about being to borrow for nothing. I still cannot yet comprehend that less than pristine countries such as Italy, Greece and Slovakia’s can borrower at a lower interest rate than the US Treasury—the global benchmark that is regarded as the most secure and liquid investment in the known universe.
I should also write that I believe mega money managers will not complain about negative yields if gargantuan sized capitalized companies continue to rise, offsetting the impact of extremely low yields in the traditional 60-40 account.
It is frightening to think negative yields are now considered normal, something believed as impossible less than 10 years ago. In my view whenever something that is/was view as unthinkable much less unsustainable is now viewed as something that will never end is petrifying. Natural laws are being violated. Unfortunately the longer these natural laws are violated, the worse the ramifications.
Last night the foreign markets were mixed. London was up 0.08%, Paris down 1.04% and Frankfurt down 1.76%. China was up 0.39%, Japan up 0.43% and Hang Sang up 0.14%.
The Dow should open nominally lower on trade, profit and monetary policy concerns. The 10-year is up 5/32 to yield 2.05%.