Author Topic: Negative interest rates take investors into surreal territory  (Read 23433 times)

RuleNumberOne

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Re: Negative interest rates take investors into surreal territory
« Reply #60 on: July 05, 2019, 10:22:45 PM »
@JimBowerman

I propose an even simpler exercise for some aspiring economist/intern.

1. Call up 2 real estate agents in the Bay Area, we can get their numbers from mlslistings.com. Ask them:

    -   How much was the construction cost per sqft in 2011? How much is it today? Gone up 2x?

2. Call up 2 apartment complexes in the Bay Area. Ask them:

    -   How much was your rent in 2011? How much is it today? Gone up 2x?

3. Then ask Jim Bullard why the CPI for the San Francisco - San Jose metro area for the last 8 years is so low when rents and home prices went up so much? Housing is > 40% of the US CPI basket.

If housing is 42% of the CPI basket, and rents went up even 7% per year, housing alone would contribute 2.94% to CPI. What tricks did the BLS use to whack it down to 1.5%?

W.r.t your point about S&P revenues, I think S&P domestic revenue fluctuations (both upwards and downwards) have a larger inflation component than government figures (think about it from the viewpoint of bubbles and busts, a chart of S&P sales over time shows this.)

W.r.t your point about rgdp, the gdp figures get revised for many years afterwards because the government has no idea. The gdp figures at any given time are nothing but a guess. The inflation component in nominal gdp is likely larger than what is currently claimed.

BTW, off-topic, but I don't pay any attention to what Sumner/Schiff/shadowstats say. I look at first-hand data myself and come up with first-principle explanations.


RuleNumberOne,

Not to deflect and I’d be happy to continue this further but the whole shadow stats conspiracy has largely been debunked imo.  Someone a while back even went back and looked at the subscription prices for shadow stats.com and found the dude hadn’t even increased subscription prices at the same rate as his implied super high inflation rate. He increased prices at the much lower rate implying inflation was lower than he guessed.

Scott sumner (who has forgotten more about economics than I’ll ever know) debunked a similar argument as yours from peter Schiff all the way back in 2013 (see video below)

Summers basic point is that if inflation is really as high as you and schiff claim then rgdp would have to be negative or very low.  Something that is very unlikely given the unemployment numbers.  You basically have to believe the government is outright lying across multiples surveys (ngdp, unemployment, etc). Even sp500 revenues do to show anywhere near the inflation your claiming

https://youtu.be/_b4_KuC1-sQ
« Last Edit: July 05, 2019, 10:30:58 PM by RuleNumberOne »


John Hjorth

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Re: Negative interest rates take investors into surreal territory
« Reply #61 on: July 09, 2019, 01:12:57 AM »
Carried to here from the "1999 again?" topic:


If Danish mortgage rates are at -0.43%, are deposit rates even more negative?

If they are not, on a 30 year mortgage, the bank would lose -13% (since the negative rate is implemented by forgiving -0.43% of the loan every year.)

I really liked that Bloomberg article headline about the stimulus - "won't say when or how." Not sure if the bears will continue to believe there are bullets in Draghi's gun.

The bond bears can make a killing, duration has increased so much that a one percent interest rate increase results in $2.4 trillion in sovereign debt losses alone. Not to mention home price implosion.

You need to understand the Danish mortgage system. It's not financed by deposits, but by mortgage bonds, ref. also what kab60 has mentioned before in this topic.

Here is link to the 2018 financials for Realkredit Danmark A/S. Realkredit Danmark A/S is a wholly owned subsidiary of Danske Bank A/S. As a mortgage institution, Realkredit Danmark A/S is separately regulated, while the bank is separately regulated as bank.

Please take a look at page 2 - I'll translate for you :


Realkredit Danmark A/S generated a profit for 2018 of DKK 4.649 B [included in the group profit for Danske Bank A/S for 2018]

"Realkreditudlån" : Mortgage loans [for YE2018 : DKK 796.045 B]
"Udstedte realkreditobligationer" : Issued mortgage bonds [for YE2018 : DKK 809.091 B]


- - - o 0 o - - -


Wikipedia : Mortgage industry of Denmark.

Edit:

Finance Denmark : The Danish Mortgage Model.
« Last Edit: July 09, 2019, 01:40:31 AM by John Hjorth »
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RuleNumberOne

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Re: Negative interest rates take investors into surreal territory
« Reply #62 on: July 09, 2019, 09:14:06 AM »
Danske Bank also publishes English statements. They do have deposits, though they also have an equal amount of mortgage bonds.

Either way, this is a forced transfer from bondholders or depositors to homebuyers.

It is like a bondholder buying a house for $2million, selling it to the homebuyer for $1.7 million, and paying the bank $100,000 in commissions.

The cost of this negative rate stuff in creating these distortions is greater than the benefits (I believe a housing bubble is the benefit?). ECB is out of ammo.

Cigarbutt

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Re: Negative interest rates take investors into surreal territory
« Reply #63 on: July 11, 2019, 06:25:27 AM »
Surreal may become an insufficient qualitative word at some point:
https://www.ft.com/content/6cee154a-a307-11e9-974c-ad1c6ab5efd1

John Hjorth

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Re: Negative interest rates take investors into surreal territory
« Reply #64 on: July 11, 2019, 09:12:02 AM »
Finanswatch [July 11th 2019] : Nationalbanken [<- The Danish FED, John] about low interest rates : Not the fault of the central banks.

Danmarks Nationalbank [June 27th 2019] : Analysis - The natural real interest rate in Denmark has declined.

Personally, I consider this at least a decent stab at getting to an explanation of this phenomen. It also reminds me of a post recently by Cigarbutt about the long term development in interest rates.

It's not all negatives. The analysis implies, that it - among other things - has to do with high savings rates in the Danish households after the GFC [please note here : at a total level]. Consumption folly [perhaps even for borrowed money] hasn't really arrived here - at least yet.
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John Hjorth

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Re: Negative interest rates take investors into surreal territory
« Reply #65 on: July 11, 2019, 01:50:22 PM »
I'm carrying your post in the WFC topic over here, for commentary, RuleNumberOne,


Negative rates have not been proven to work yet. Bernanke and Greenspan have said they don't think it is useful. Bernanke says at some point people will simply hoard cash.

I am not sure how Denmark is forcing people to accept negative rate mortgage bonds. Or how the European Project is forcing people to buy negative rate sovereign debt. As soon as the rate goes negative, one might as well leave their money as cash? Cash is better than any negative rate bond? Unless you force pension funds, university endowments to buy bonds with their cash?

https://www.marketwatch.com/story/alan-greenspan-comes-out-against-using-negative-rates-2016-03-01
https://www.marketwatch.com/story/bernanke-says-fed-likely-to-add-negative-rates-to-recession-fighting-toolkit-2015-12-15

In Europe, it is probably part of the "whatever it takes" to keep Italy and Greece in the European Project. I haven't seen any explanation of how it benefits the economy.

Europe bond bubble will blow up eventually.

You're certainly up to something right here, RuleNumberOne,

This post is only about Danish conditions.

The answer to your question here is : They don't [buy these bonds with negative yields]. The outcome has been that the Danish banks are literally swimming in cash - some of them are almost drowning in it. The more conservative the bank is run, more worse it gets.

I have read somewhere, that the Danish banks holds retail [household] deposits of ~DKK 900 B. What does a Danish bank do with all its cash, when it gets "punished" by Danmarks Nationalbank [The Danish FED] with an interest rate of minus 0.65 percent if it deposits its liquidity there, when it can't expand its loan underwriting/loan book because of very strict lending policies surveyed by the relentless and pretty brutal Danish FSA with inspections of the loan book, giving orders and fines and such when things aren't done OK? -Furthermore the actual demand for credit from Danish households has been languishing for many years - in general, the Danes have been paying down their debt, and accumulating funds for a rainy day.

The banks only alternative is to buy bonds. So there are large bond positions on the balance sheets of Danish banks - to varying degrees. To at least get some yield from these bonds, the banks have to buy bonds with at least some duration. That again requires capital buffers to withstand [sudden?] rate spikes in the bond market, or else the bank may be forced to reduce its balance sheet [by selling bonds] at the exact wrong time [the price bottom].

- - -  o 0 o - - -

Some data:

So far, I haven't been able to find some data from what I consider a reliable primary source for Danish retail [household] deposits in banks, that I'm sure of, and understand with precision. So here comes a rough, quick & dirty estimate of that figure:

Source: Danske Bank A/S Factbook Q1 2019.

Deposits [Section 1.7.2 at page 11] :

Retail : DKK 208.0 B
Wealth Management : DKK 70.9 B
Total : DKK 278.9 B

Market share [section 4.1 at page 41] :

Retail : 28.5 percent,

Thus : Total retail [household] deposits in Danish banks ~ DKK 278.9 B / 28.5 percent ~ DKK 978 B

- - - o 0 o - - -

An extreme example of a Danish bank in this situation :

Fynske Bank A/S [ticker : FYNBK.CPH] : [source : 2019Q1 10-K].

Equity : DKK 1,053 M
Loan book : DKK 3,255 M
Deposits : DKK 5,406 M
Bonds : DKK 2,495 M.

Some days I really can't decide if this bank is a bond portfolio with a bank glued to the bond portfolio, or "just" a bank with a big bond portfolio.


- - - o 0 o - - -

The above cash deposits estimate has to be judged relative to total mortgage loans in the Danish mortgage institutions of DKK 1,609 B in Danish homes and recreational homes, plus second layer house financing provided by the banks to households. What matters for the financial stability of the whole system is naturally how these assets and liabilities are distributed among the citizens of the nation.
« Last Edit: July 11, 2019, 03:01:59 PM by John Hjorth »
”In the race of excellence … there is no finish line.”
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SHDL

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Re: Negative interest rates take investors into surreal territory
« Reply #66 on: July 11, 2019, 02:31:51 PM »
So today (a) the CPI report showed signs of an uptick in inflation, and (b) long term Treasury yields went up following an auction of 30-year bonds that didn’t go so well.  Yes, this could be just noise but they are still interesting data points because they suggest that things might actually be moving in the opposite direction of what a lot of people seem to be expecting.
« Last Edit: July 11, 2019, 03:24:52 PM by SHDL »

Cigarbutt

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Re: Negative interest rates take investors into surreal territory
« Reply #67 on: July 11, 2019, 05:32:57 PM »
Finanswatch [July 11th 2019] : Nationalbanken [<- The Danish FED, John] about low interest rates : Not the fault of the central banks.

Danmarks Nationalbank [June 27th 2019] : Analysis - The natural real interest rate in Denmark has declined.

Personally, I consider this at least a decent stab at getting to an explanation of this phenomen. It also reminds me of a post recently by Cigarbutt about the long term development in interest rates.

It's not all negatives. The analysis implies, that it - among other things - has to do with high savings rates in the Danish households after the GFC [please note here : at a total level]. Consumption folly [perhaps even for borrowed money] hasn't really arrived here - at least yet.
That was an interesting read and it seems to fit with consensus thinking among central bankers with, for example, Mr. Bernanke suggesting over the years that real yields are getting lower in developed countries because of maturing age cohorts and search for yield coming from the savings glut.
Just like deflation I guess, there could be 'good' and 'bad' reasons behind low interest rates.

When people try to get to the top of Mount Everest, gradually declining oxygen levels tend to send a signal to the hiker that the safe limit has been reached, necessitating to abandon the cherished goal. Interestingly, at some point, there is a phase when low levels of oxygen causes cerebral edema and confusion and the safety signal is lost and, without proper sherpa people restraint, people become filled with overconfidence and think they can reach the top at a time when they should retreat. Maybe the sky is the limit.

If interested, Hoisington Investment Management, which used to be a significant source of inputs for Fairfax, released yesterday their Q2 report. They continue to think that yields are heading, eventually, lower.
www.hoisingtonmgt.com/pdf/HIM2019Q2NP.pdf

JimBowerman

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Re: Negative interest rates take investors into surreal territory
« Reply #68 on: July 11, 2019, 07:41:09 PM »

That was an interesting read and it seems to fit with consensus thinking among central bankers with, for example, Mr. Bernanke suggesting over the years that real yields are getting lower in developed countries because of maturing age cohorts and search for yield coming from the savings glut.
Just like deflation I guess, there could be 'good' and 'bad' reasons behind low interest rates.

Money is neutral in the long run...That is, over the long run, nominal interest rates don't affect real variables.

That said, as Scott Sumner says, in the short and medium term, nominal shocks have real effects (because of sticky wages) so imo the main argument should be to keep nominal growth rates as stable as possible (which central banks have failed miserably at over the last 20 years)

When looking at nominal growth rate stability (and its correlation to real growth rates) I have to believe we can do better

That said, yes, real growth rates (because of slower population growth) should be lower going forward...but that's no excuse for lower nominal growth rates nor more volatile nominal growth rates going forward (both of which a central bank almost completely controls)

https://twitter.com/SplitRockMgmt/status/1147275457324376064

RuleNumberOne

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Re: Negative interest rates take investors into surreal territory
« Reply #69 on: July 11, 2019, 08:00:07 PM »
If I were to run a bank in a negative-rate economy, I would not make any mortgages.

I would just keep the deposits in a -10bp fee account, where the 10bp pays for expenses and profits. On 900billion, that is 900 million per year.

All that the bank would do is accept direct deposits of paychecks, wire transfers, checks. It would also provide ATMs for a fee.

The above setup is very profitable. No loan risk, just a nice fee like Visa/Mastercard. If you want, don't even call it a bank. Call it a cash management company.

I presume the government in a negative-rate economy has to force banks and insurance companies, pension funds to buy bonds and make loans. Kind of like a dictatorship, otherwise the economy would look worse than the Great Depression.


I'm carrying your post in the WFC topic over here, for commentary, RuleNumberOne,


Negative rates have not been proven to work yet. Bernanke and Greenspan have said they don't think it is useful. Bernanke says at some point people will simply hoard cash.

I am not sure how Denmark is forcing people to accept negative rate mortgage bonds. Or how the European Project is forcing people to buy negative rate sovereign debt. As soon as the rate goes negative, one might as well leave their money as cash? Cash is better than any negative rate bond? Unless you force pension funds, university endowments to buy bonds with their cash?

https://www.marketwatch.com/story/alan-greenspan-comes-out-against-using-negative-rates-2016-03-01
https://www.marketwatch.com/story/bernanke-says-fed-likely-to-add-negative-rates-to-recession-fighting-toolkit-2015-12-15

In Europe, it is probably part of the "whatever it takes" to keep Italy and Greece in the European Project. I haven't seen any explanation of how it benefits the economy.

Europe bond bubble will blow up eventually.

You're certainly up to something right here, RuleNumberOne,

This post is only about Danish conditions.

The answer to your question here is : They don't [buy these bonds with negative yields]. The outcome has been that the Danish banks are literally swimming in cash - some of them are almost drowning in it. The more conservative the bank is run, more worse it gets.

I have read somewhere, that the Danish banks holds retail [household] deposits of ~DKK 900 B. What does a Danish bank do with all its cash, when it gets "punished" by Danmarks Nationalbank [The Danish FED] with an interest rate of minus 0.65 percent if it deposits its liquidity there, when it can't expand its loan underwriting/loan book because of very strict lending policies surveyed by the relentless and pretty brutal Danish FSA with inspections of the loan book, giving orders and fines and such when things aren't done OK? -Furthermore the actual demand for credit from Danish households has been languishing for many years - in general, the Danes have been paying down their debt, and accumulating funds for a rainy day.

The banks only alternative is to buy bonds. So there are large bond positions on the balance sheets of Danish banks - to varying degrees. To at least get some yield from these bonds, the banks have to buy bonds with at least some duration. That again requires capital buffers to withstand [sudden?] rate spikes in the bond market, or else the bank may be forced to reduce its balance sheet [by selling bonds] at the exact wrong time [the price bottom].

- - -  o 0 o - - -

Some data:

So far, I haven't been able to find some data from what I consider a reliable primary source for Danish retail [household] deposits in banks, that I'm sure of, and understand with precision. So here comes a rough, quick & dirty estimate of that figure:

Source: Danske Bank A/S Factbook Q1 2019.

Deposits [Section 1.7.2 at page 11] :

Retail : DKK 208.0 B
Wealth Management : DKK 70.9 B
Total : DKK 278.9 B

Market share [section 4.1 at page 41] :

Retail : 28.5 percent,

Thus : Total retail [household] deposits in Danish banks ~ DKK 278.9 B / 28.5 percent ~ DKK 978 B

- - - o 0 o - - -

An extreme example of a Danish bank in this situation :

Fynske Bank A/S [ticker : FYNBK.CPH] : [source : 2019Q1 10-K].

Equity : DKK 1,053 M
Loan book : DKK 3,255 M
Deposits : DKK 5,406 M
Bonds : DKK 2,495 M.

Some days I really can't decide if this bank is a bond portfolio with a bank glued to the bond portfolio, or "just" a bank with a big bond portfolio.


- - - o 0 o - - -

The above cash deposits estimate has to be judged relative to total mortgage loans in the Danish mortgage institutions of DKK 1,609 B in Danish homes and recreational homes, plus second layer house financing provided by the banks to households. What matters for the financial stability of the whole system is naturally how these assets and liabilities are distributed among the citizens of the nation.