Author Topic: Negative interest rates take investors into surreal territory  (Read 9293 times)

scorpioncapital

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Re: Negative interest rates take investors into surreal territory
« Reply #40 on: July 03, 2019, 02:36:03 PM »
I think the reason is the Central Providers at the European Collectivism Bank (ECB) will buy homes at 120% of market value in a recession.

Banks lend to homeowners at negative interest rates without bothering about credit risk. In normal banking, they would have to charge a sufficiently high interest rate to compensate for default rates.

But the European Collectivism Bank provides everything - lavish pensions to whoever needs it by buying Greece 10-year at 2.1%, Italian 2-year at 0%.

At the current time, the Central Providers have bought corporate bonds, but it would be a stretch for the Central Providers to enrich stock market "speculators".

If you interview for a job at a European bank, make sure you say you don't know the meaning of the term "credit risk"

TwoCities, my opinion is that interest rates are more tightly coupled to real estate than equities.  It's standard practice to borrow to buy a house, quite rare in fact not to use debt.  With equities it's much less common to use debt and really it's a dangerous thing to do.   Maybe it's just that simple?  I agree that if markets are efficient there shouldn't be such a divergence but perhaps markets aren't that efficient.

I'm not so certain.

Sure most people don't use debt to buy equities, but the equities themselves have every opportunity to to lever up, refinance at lower rates, acquire competitors, fund capital projects, etc to grow revenues and earnings.

I agree the effects might become more apparent more quickly in mortgages, but to have the evidence in one area of the market and not another that should be similarly impacted calls into question the assumptions that it's interest rates driving that. Particularly where the only place globally upholding the "low interest rates = high equity multiples" mantra seems to be the U.S.

What's the end game to free money?


John Hjorth

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Re: Negative interest rates take investors into surreal territory
« Reply #41 on: July 03, 2019, 03:13:04 PM »
What's the end game to free money?

Scorpioncapital,

I [naturally] can't quantify it, but I suppose it'll be unpleasant for somebody - perhaps very. If I knew how to play it, I would certainly do. But I don't.
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RuleNumberOne

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Re: Negative interest rates take investors into surreal territory
« Reply #42 on: July 03, 2019, 06:03:33 PM »
The problem is not the interest rates or yield curve. Banks can lend at zero rates in Europe because they assume the ECB will cover defaults.

Banks in the US know the Fed is not going to cover defaults. So they have to charge a high enough NIM to generate income to account for defaults. WaMu, Wachovia, Lehma, Bear, and many other bank shareholders/bondholders lost money in 2008. There is market discipline here. US banks have to generate enough income to be able to handle defaults, there is a free market in the US.

In Europe, Draghi is a hero. "Whatever it takes" for the "European Project." Rent freezes in Germany to curtail 10% housing inflation?

"Whatever it takes" means it is OK for the ECB to buy up all defaulting homes in a recession. Why would a borrower who can make payments pay in such a scenario? Everyone would default.

(A 1% NIM is fine if default rates are 0, or if the recovery rate is 100% - e.g. high downpayments. OTOH if default rate is 10%, a 5% NIM is not going to save you. US banks set 20% downpayment with high NIM, European banks have interest-only loans and don't care.)

It s easy to bash the European bankers and the ECB, but what will happen to US banks and US insurance companies  when interest rates go the way they did Europe? US bank8ng has structurally less competition so it might be a bit better, but overall, I would expect NIM to compress to near European levels, which probably means ROE<10% and compressing P/tangible book <1.

The US still has a profitable credit card busInes and other niches that donít exist in Europe, but banks have non-bank competitors in those.
 Insurers like BHF or LNC with long tail business or even FFH and BRK will be affected as well. Then we have issues with pension fundís (Hello IBM, GE and many others).

The winners are probably utilities (unless their guaranteed returns gets revised down, as happened in Switzerland ), real estate, infrastructure  and probably solid growth business with or without capital needs that will command higher multiples.
« Last Edit: July 03, 2019, 06:08:11 PM by RuleNumberOne »

RuleNumberOne

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Re: Negative interest rates take investors into surreal territory
« Reply #43 on: July 03, 2019, 06:15:30 PM »
I think the reason is the Central Providers at the European Collectivism Bank (ECB) will buy homes at 120% of market value in a recession.

Banks lend to homeowners at negative interest rates without bothering about credit risk. In normal banking, they would have to charge a sufficiently high interest rate to compensate for default rates.

But the European Collectivism Bank provides everything - lavish pensions to whoever needs it by buying Greece 10-year at 2.1%, Italian 2-year at 0%.

At the current time, the Central Providers have bought corporate bonds, but it would be a stretch for the Central Providers to enrich stock market "speculators".

If you interview for a job at a European bank, make sure you say you don't know the meaning of the term "credit risk"

TwoCities, my opinion is that interest rates are more tightly coupled to real estate than equities.  It's standard practice to borrow to buy a house, quite rare in fact not to use debt.  With equities it's much less common to use debt and really it's a dangerous thing to do.   Maybe it's just that simple?  I agree that if markets are efficient there shouldn't be such a divergence but perhaps markets aren't that efficient.

I'm not so certain.

Sure most people don't use debt to buy equities, but the equities themselves have every opportunity to to lever up, refinance at lower rates, acquire competitors, fund capital projects, etc to grow revenues and earnings.

I agree the effects might become more apparent more quickly in mortgages, but to have the evidence in one area of the market and not another that should be similarly impacted calls into question the assumptions that it's interest rates driving that. Particularly where the only place globally upholding the "low interest rates = high equity multiples" mantra seems to be the U.S.

What's the end game to free money?

I think the end game is some hedge fund hotshots like Michael Burry or Paulson getting rich via CDS or other derivatives.

If we really have a "global recession" like the news media claims, will the Greece 10-year yield remain at 2%?

Maybe the Euro falls hard or the CDS goes up? How do I find such a hedge fund to invest in?
« Last Edit: July 03, 2019, 06:21:30 PM by RuleNumberOne »

mcliu

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Re: Negative interest rates take investors into surreal territory
« Reply #44 on: July 03, 2019, 06:31:46 PM »
What a crazy situation.. Doesn't the entire financial system just feel like a ponzi scheme?

Central banks seem to be trapped into a position where they need to
consistently lower interest rates (in-order to stimulate asset prices) so people feel wealthier (and will keep spending).

At this point, is fundamental analysis even relevant? It almost makes sense to keep buying homes/stocks/bonds/assets at ever higher prices because the system cannot tolerate a drop in prices (which will inevitably lead to a "politically unacceptable" recession/depression..)

Also, another perspective: Are the elevated home prices a reflection of growing value for homes (as derived from higher incomes, population, etc.)?
or are they a reflection of the declining value (debasement) of the currency?
Maybe in this modern financial system (and an age of abundance), rapid/hyper inflation is reflected not in the prices of consumer products, but in the prices of financial assets?

No idea. Just thinking out loud.

RuleNumberOne

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Re: Negative interest rates take investors into surreal territory
« Reply #45 on: July 03, 2019, 07:11:17 PM »
mcliu, This is a European bubble being exported to the US by European investors buying US bonds.
USD/EUR = 0.89.
US government debt is a far far far greater value than any European government debt.

Regarding asset inflation: that is why inflation calculators use "imputed rents", because they can "impute" whatever they please. Housing bubbles don't show up in the CPI.

But the ever-honest Bundesbank revealed that rent inflation in Berlin has been running at 7-10% and some politicians responded with a 5-year rent freeze in Berlin. That is why no Bundesbanker will ever be the head of the ECB. Instead the job of ECB chief is reserved for former or aspiring politicians.

Probably, rent freezes will be put in place in other German cities? Frankfurt rents have also gone up a lot.


What a crazy situation.. Doesn't the entire financial system just feel like a ponzi scheme?

Central banks seem to be trapped into a position where they need to
consistently lower interest rates (in-order to stimulate asset prices) so people feel wealthier (and will keep spending).

At this point, is fundamental analysis even relevant? It almost makes sense to keep buying homes/stocks/bonds/assets at ever higher prices because the system cannot tolerate a drop in prices (which will inevitably lead to a "politically unacceptable" recession/depression..)

Also, another perspective: Are the elevated home prices a reflection of growing value for homes (as derived from higher incomes, population, etc.)?
or are they a reflection of the declining value (debasement) of the currency?
Maybe in this modern financial system (and an age of abundance), rapid/hyper inflation is reflected not in the prices of consumer products, but in the prices of financial assets?

No idea. Just thinking out loud.

SharperDingaan

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Re: Negative interest rates take investors into surreal territory
« Reply #46 on: July 04, 2019, 06:52:47 AM »
Just to add some things here ...

It is assumed that lower NIM can be offset with higher fee income. Not really practical.
The advent of CBDC (eKrone), and social media platform currencies (Libra), means fee income has significant low-cost competion. Less fee income.
The mass displacement of large numbers of people in banking is also a social problem. More regulatory management.
....... unusual times, and for quite some time.

It is much harder to change fundamental business practices in Europe/Japan, than it is in the US/Canada. Ability to change.
And if future earnings rely on product innovation in changing times? Lower P/E multiples in Europe/Japan vs US/Canada.
....... 'controlled' bubbles in Europe/Japan as the norm, NOT the exception.

And then there's the UK ....

A Brexit will force widespread and broad change in business practices throughout the UK; unfortunately as a gale clearing out the cobwebs, versus anything 'controlled'. Change that Europe can't do, producing a competitive advantage as innovation is allowed to proceed. Great for the young, not so much for the old.

Average UK P/E multiples should improve over time, but not evenly. High for the new tech firms selling into the UK/Europe, low for the old tech firms stuck with legacy platforms. Betting on old tech firms having innovation failures (the norm) adds additional layers of opportunity. Great for employment, as 7 in 10 'future' jobs  don't exist today.

And the rest of Europe ? ....

Betting against 'moral hazard' is a pretty safe bet, just about everywhere.
There will be well-publicized regular temporary failures accross Europe, but the institution will not be allowed to fail - as too many people depend on its continuation. Over 10yrs+ of wide-spread continual CB interference, Europe has become an addict. Take away the drug, and there are withdrawal reactions. Trading opportunities.

SD
« Last Edit: July 05, 2019, 02:56:18 PM by SharperDingaan »

Spekulatius

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Re: Negative interest rates take investors into surreal territory
« Reply #47 on: July 04, 2019, 07:12:55 AM »
mcliu, This is a European bubble being exported to the US by European investors buying US bonds.
USD/EUR = 0.89.
US government debt is a far far far greater value than any European government debt.

Regarding asset inflation: that is why inflation calculators use "imputed rents", because they can "impute" whatever they please. Housing bubbles don't show up in the CPI.

But the ever-honest Bundesbank revealed that rent inflation in Berlin has been running at 7-10% and some politicians responded with a 5-year rent freeze in Berlin. That is why no Bundesbanker will ever be the head of the ECB. Instead the job of ECB chief is reserved for former or aspiring politicians.

Probably, rent freezes will be put in place in other German cities? Frankfurt rents have also gone up a lot.


What a crazy situation.. Doesn't the entire financial system just feel like a ponzi scheme?

Central banks seem to be trapped into a position where they need to
consistently lower interest rates (in-order to stimulate asset prices) so people feel wealthier (and will keep spending).

At this point, is fundamental analysis even relevant? It almost makes sense to keep buying homes/stocks/bonds/assets at ever higher prices because the system cannot tolerate a drop in prices (which will inevitably lead to a "politically unacceptable" recession/depression..)

Also, another perspective: Are the elevated home prices a reflection of growing value for homes (as derived from higher incomes, population, etc.)?
or are they a reflection of the declining value (debasement) of the currency?
Maybe in this modern financial system (and an age of abundance), rapid/hyper inflation is reflected not in the prices of consumer products, but in the prices of financial assets?

No idea. Just thinking out loud.

The rising rents in Germany were at least partly caused by immigration. All of a sudden, Germany has 1 Million more people they need housing adding in a short period of time. With full employment and starting with a shortage in larger cities to begin with, and little new construction, itís easy to see why demand outruns supply. The stop gap measure of rent control certainly will not solve the problem, but make it worse. Adding to the supply is what is needed.
To be a realist, one has to believe in miracles.

RuleNumberOne

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Re: Negative interest rates take investors into surreal territory
« Reply #48 on: July 04, 2019, 09:21:51 AM »
Frankfurt home prices grew 15%/year in both 2018 and 2017. So that would be a 32% rise in 2 years.

https://www.dbresearch.com/PROD/RPS_EN-PROD/PROD0000000000460528/The_German_housing_market_in_2018.PDF
https://www.dbresearch.com/PROD/RPS_EN-PROD/PROD0000000000488315/German_property_and_metropolis_market_outlook_2019.pdf

I thought Germany was scared of inflation, but maybe they enjoy housing booms just like anyone else. The author of those DB reports (Mobert) predicted rates rising in 2019 to 0.4% from -0.1%, but instead they have fallen so far in 2019 to -0.4%.


mcliu, This is a European bubble being exported to the US by European investors buying US bonds.
USD/EUR = 0.89.
US government debt is a far far far greater value than any European government debt.

Regarding asset inflation: that is why inflation calculators use "imputed rents", because they can "impute" whatever they please. Housing bubbles don't show up in the CPI.

But the ever-honest Bundesbank revealed that rent inflation in Berlin has been running at 7-10% and some politicians responded with a 5-year rent freeze in Berlin. That is why no Bundesbanker will ever be the head of the ECB. Instead the job of ECB chief is reserved for former or aspiring politicians.

Probably, rent freezes will be put in place in other German cities? Frankfurt rents have also gone up a lot.


What a crazy situation.. Doesn't the entire financial system just feel like a ponzi scheme?

Central banks seem to be trapped into a position where they need to
consistently lower interest rates (in-order to stimulate asset prices) so people feel wealthier (and will keep spending).

At this point, is fundamental analysis even relevant? It almost makes sense to keep buying homes/stocks/bonds/assets at ever higher prices because the system cannot tolerate a drop in prices (which will inevitably lead to a "politically unacceptable" recession/depression..)

Also, another perspective: Are the elevated home prices a reflection of growing value for homes (as derived from higher incomes, population, etc.)?
or are they a reflection of the declining value (debasement) of the currency?
Maybe in this modern financial system (and an age of abundance), rapid/hyper inflation is reflected not in the prices of consumer products, but in the prices of financial assets?

No idea. Just thinking out loud.

The rising rents in Germany were at least partly caused by immigration. All of a sudden, Germany has 1 Million more people they need housing adding in a short period of time. With full employment and starting with a shortage in larger cities to begin with, and little new construction, itís easy to see why demand outruns supply. The stop gap measure of rent control certainly will not solve the problem, but make it worse. Adding to the supply is what is needed.

mcliu

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Re: Negative interest rates take investors into surreal territory
« Reply #49 on: July 05, 2019, 08:55:23 AM »
This feels like a missed opportunity for massive infrastructure investment like what China did since 2008 by building a national high speed railway system.

Isn't it interesting that governments aren't using fiscal policy but instead focused on monetary stimulus? Clearly, at this point, monetary policy has had limited effect on driving inflation and wages higher, but may be creating risks in asset price inflation.

It just seems like a big investment in infrastructure (high speed rail, internet/fibre/5g, airports) is quite obvious ad it will tighten labour markets, drive wages, increase inflation and interest rates and drive long-term productivity. And the market is basically saying, it'll finance it for next to nothing..

0 high speed rail in the US vs 428km of high-speed rail in China in 2007 to 29,000km in 2017
5 of the 6 top airports in the world are in Asia..
Fastest internet: Taiwan, Singapore, Denmark, Sweden, Japan..