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%.

kent
The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.