Tuesday, June 28, 2016

Who to Really Thank for Today's Stock Market Rally

I would never ask for myself, but I do think my fellow bearish bond anti-vigilantes deserve a round of applause. In the past week, the 30-year treasury yield has fallen from 2.50% to 2.27%. The yield held its ground today, in spite of the rising interest rate environment we find ourselves in, and in spite of the stock market rocketing higher. That's an amazing amount of spite and support for our fragile financial system. We're there for you. We've got your backs.

Not only will we continue to support future stock market valuations, but we also pledge to continue ruthlessly attacking the evil New York bank net interest margins on your behalf (as seen in the chart below), just as we ruthlessly attack the future returns of this country's many underfunded pension funds. It's all for you. Enjoy this era of permanent modern prosperity! Please don't let it go to waste!

Click to enlarge.

February 17, 2016
The Telegraph: Negative interest rates a 'dangerous experiment' for the world as monetary policy hits buffers

Commercial banks are at particular risk from negative rates, which have been described as a tax on the banking system.

Sub-zero rates reduce the profit made on interest, while increasing the cost of capital for borrowers. Japan's banking sector has seen its net interest margin (NIM) fall to 25-year lows as a result of the Bank of Japan's unprecedented monetary stimulus, according to data from Morgan Stanley.

Sometimes, in order to save a thing too big to fail, one must first nearly destroy a thing too big to fail.

Source Data:
St. Louis Fed: Net Interest Margin for Banks in New York


Blissex said...

Most people don't really understand negative nominal interest rates, and yet they are so simple.

Nominal interest rates are neither inflation-adjusted nor *risk-adjusted*.

Currently inflation is fairly low so it does not make a big difference.

But nowadays risk has both a wide range, is often opaque, and the high part of that range covers a lot of big, important borrowers.

Therefore a lot of nominal positive interest rates are in effect negative if risk-adjusted.

Therefore essentially risk-free borrowing by very low risk, highly transparent entities needs to compete with the *risk-adjusted* rates to entities that are probably high risk, highly opaque.

So the mystery is not that borrowers that are acting in effect as custodians receive nominal negative interest rates, which are in effect safe-deposit fees.

The real mystery is why the risk-adjusted interest rates to risky or opaque borrowers are in effect negative, while being nominally positive.

And the most likely answer to the real mystery is that central banks are eager to lend immense amounts to politically favoured risky (often bankrupt for several years) and opaque (often with fraudulent accounting) borrowers at what effectively are risk-adjusted negative rates.

IIRC currently in the USA inter-bank lending market the only lender is the USA central bank, and it is also the case in many EU countries that the Euro central bank is the only lender to banks.

If the major central banks are supplying loans in large quantity at negative *risk-adjusted* interest rates, it is hard for other lenders to do otherwise.

Stagflationary Mark said...

Yeah, the global economy is chugging along on riskier and riskier debt. Doesn't inspire much confidence at this end.