Author Topic: Negative interest rates take investors into surreal territory  (Read 35121 times)

Spekulatius

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Re: Negative interest rates take investors into surreal territory
« Reply #170 on: May 05, 2020, 05:54:25 AM »
Germany :

Bundesverfassungsgericht - Judgment of May 5th 2020 : ECB decisions on the Public Sector Purchase Programme exceed EU competences :

https://www.bundesverfassungsgericht.de/SharedDocs/Pressemitteilungen/EN/2020/bvg20-032.html.

What? [ 0_0 ] - This has potential for absolute havoc written all over it.


Bloody hell! How much power does this court have?

It‘s the equivalent of the US Supreme Court in Germany. There is nothing above it.
Life is too short for cheap beer and wine.


John Hjorth

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Re: Negative interest rates take investors into surreal territory
« Reply #171 on: May 05, 2020, 12:49:35 PM »
It‘s the equivalent of the US Supreme Court in Germany. There is nothing above it.

Thank you for elaborating, Spekulatius,

What does that imply in this particular context?

”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 #172 on: May 05, 2020, 03:27:49 PM »
It‘s the equivalent of the US Supreme Court in Germany. There is nothing above it.

Thank you for elaborating, Spekulatius,

What does that imply in this particular context?

Some helpful commentary here:

https://www.wsj.com/articles/ecb-faces-renewed-legal-pressure-over-bond-purchases-11588685562

I’m not too familiar with European politics but the story is consistent with my general sense that we may be reaching the political limits of these massive central bank interventions.

Spekulatius

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Re: Negative interest rates take investors into surreal territory
« Reply #173 on: May 05, 2020, 04:25:36 PM »
It‘s the equivalent of the US Supreme Court in Germany. There is nothing above it.

Thank you for elaborating, Spekulatius,

What does that imply in this particular context?

It means they depending on the goal of the QE, the ECB actions are Not consistent with the German constitution. It’s seems that the ECB can do QE (buying sovereign bonds) to stabilize the monetary system, but they wouldn’t be allowed to buy bonds with the stated goal to bail out a foreign ECB member government. What happens with this verdict depends on what the German politicians do with it. I see it more likely thwt after this verdict, the “whatever it takes “ policy of the EVB could run into resistance from German politicians.

This verdict is a result of a lawsuit from the CSU (the conservative sister party from Bavaria ) which have been critical of Draghi in the past.

This all dates back to the time the Bundesbank was governing the Deutsche Mark and per German constitution, their only goal was monetary stability, not low unemployment or increasing growth, at least not when monetary stability would be impaired.
Life is too short for cheap beer and wine.

Cigarbutt

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Re: Negative interest rates take investors into surreal territory
« Reply #174 on: May 05, 2020, 04:52:42 PM »
^Unsolicited noob's take becoz this is so fascinating.
The German High Court is basically sending a message of conditional love in the asymmetric relationship.

The ECB is looking for creative ways to engage in monetary financing of national budget deficits, which is verboten at this point.
The idea is to present the solidarity project as a continuation of Good Ole QE.

The Supreme Court supports the cooperation but is also asking the Brussels' people for a more detailed risk-benefit analysis.
Typically, the ivory-tower money authorities suggest that a without-QE would-have-been world would have been absolutely catastrophic, an assumption impossible to verify.

Just like when giving insulin to a diabetic or heroin to a drug addict may be life saving, in a way, is it not reasonable to wonder about fundamentals once in a while?

FWIW, i just finished Changing Fortunes (1992) by Mr. Paul Volcker (and Mr. Toyoo Gyohten) and it's incredibly relevant to the German high judicial opinion. To make a long story short, international cooperation is critical and central banks need to fill the vacuum as a lender of last resort but the outcome is always related to the underlying fundamental solvency of the situation. As Mr. Volcker explains, national solvency is an elusive concept but in the end why risk having to deal with an even larger problem? Of course, there is never a good time to ask such a question.

The following link is relevant and recent. It also has the advantage of having been published before the German judgement.
https://www.project-syndicate.org/commentary/ecb-needs-to-embrace-covid19-monetary-financing-by-paul-de-grauwe-2020-03


John Hjorth

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Re: Negative interest rates take investors into surreal territory
« Reply #175 on: May 06, 2020, 05:46:56 AM »
Thank you for the explanations & elaborations, Spekulatius & Cigarbutt.
”In the race of excellence … there is no finish line.”
-HH Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the United Arab Emirates and Ruler of Dubai

Cigarbutt

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Re: Negative interest rates take investors into surreal territory
« Reply #176 on: May 26, 2020, 04:36:19 AM »
i came across the following while finishing a review of the rental and servicing of uniforms market.
https://www.bloomberg.com/news/articles/2020-05-25/a-0-0000148-yield-on-bond-sale-in-japan-is-exciting-investors?srnd=markets-vp
TL;DR version: It's a Japanese agency (student financing) that just issued bonds at a minuscule yield (0.0000148%) and the positive yield (!) got investors "excited" resulting in excess demand because the agency had issued negative (barely) yield debt last year.
Using a USD analogy and a pension funding point of view, putting aside 1M in such debt would procure 15 cents (rounded) per year. To fund one Starbucks latte per year would require setting aside 30M.

The rental and servicing of uniforms industry is interesting and has a future. Cintas (CTAS) for example has pulled all the right levers to improve all lines from top to bottom and even borrowed cheap debt to buy 1B of stock in 2019. A conclusion is that the return from holding such security is very likely to be positive over the long run. However a satisfactory return (IMO) is possible only if the Japanese debt example above makes sense.