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RIP Central Banks - Feb 2016

Central bank policy is proving increasingly ineffective, and now Europe and Japan have turned to negative rates. What's the impact on the US if the Fed must resort to similar measures?

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RIP Central Banks - Feb 2016

  1. 1. RIP Central Banks 25 February 2016 War Room
  2. 2. HiddenLevers War Room Open Q + A Macro Coaching Archived webinars CE Credit Idea Generation Presentation deck Product UpdatesScenario Updates
  3. 3. Market Update RIP Central Banks Scenario: Negative Rates? RIP Central Banks NEW
  4. 4. HiddenLevers MARKET UPDATE
  5. 5. Market Update sources: HiddenLevers,, WSJ, Bloomberg 1 Oil Production Freeze 2 3 Boomers Now Dying Call to Break Up TBTF Banks
  6. 6. Market Update: China Slowdown 4 sources: HiddenLevers, China Banking Regulatory Commission, People’s Bank of China, NY Times, China bad loans now $645b Jan 2016 Record Bank Lending Reducing required coverage First World markets over China? China markets plummeting. USA not reacting. US subprime crisis began at $600b Domestics moving money out
  7. 7. Fed Stress Tests: 2015/2016 Comparison Fed Stress Test 2015: • Adverse = Stagflation • Severely Adverse = Crash with flat inflation Fed Stress Test 2016: • Adverse = Deflation • Severely Adverse = NIRP sources: Federal Reserve 1, Federal Reserve 2 Lever 2015 Adverse 2015 Severely Adverse 3M Treasury 0.0 -> 2.6 0.0 -> 0.1 CPI 1.1 -> 4.0 1.1 -> 1.1 Dow Total Stock Market -20% -58% Lever 2016 Adverse 2016 Severely Adverse 3M Treasury 0.1 -> 0.1 0.1 -> -0.5 CPI 0.2 -> -0.1 0.2 -> 1.3 Dow Total Stock Market -26% -51%
  8. 8. HiddenLevers RIP CENTRAL BANKS
  9. 9. RIP: Interest Rates Worldwide sources: WisdomTree, MW Yield curve shows long duration on low interest debt
  10. 10. RIP: Battle Against Deflation sources: JP Morgan, Markit Negative interest rates not lowering currency value as hoped in Japan, Euro area. 25% of Developed Gov’t debt has negative interest rates. ($23tn universe) Inflation still ~0
  11. 11. RIP: Why Negative Rates? sources: HiddenLevers,, Financial Times devalue currency get people spending robot takeover commodities perfect storm first world demographic shift Using negative rates to fight deflation is like using plastic forks to fight an atom bomb jumpstart growth
  12. 12. RIP: Impact on Borrowers + Savers Effect on Savers • Fees on deposits • Switch to other stores of value (gold, bitcoin, etc.) • Insurance companies + pension funds at risk • Take on higher risks in search for yield. Effect on Borrowers • Low borrowing costs for companies/households • Banks unwilling to lend • Who would buy a -1% corporate bond? sources: Economist, NYTimes
  13. 13. Negative Rates: Impact on Banks sources: Credit Suisse, HiddenLevers Negative rates have led to drop in bank stocks in EU / Japan BUT – the underlying factor is interest rate margin, not rate level
  14. 14. RIP: Global Bank Comparison sources: HiddenLevers, Economist 2008-09 US banks recapitalized, Europe not so much Japan banks in 5y ditch 2015-16 US banks lending Europe not recovering Japan banks in 10y ditch -38% Japan -28% Europe -16% USA
  15. 15. RIP: Fed Report Card (post-2008) sources: HiddenLevers US GDP - Meh US Inflation - Fail
  16. 16. RIP: Central Banks Irrelevant in 2016 source: HiddenLevers, Fiscal Times, Telegraph, Economist Japan -0.10 ECB -0.30 Switzerland -0.75 Fed: +0.50 Negative rates not working abroad. Central banks out of ammo? Denmark -0.65 Sweden -0.50
  17. 17. RIP: Central Banks Irrelevant in 2016 source: HiddenLevers, Fiscal Times, Telegraph, 2, Economist Japan -0.10 ECB -0.30 Switzerland -0.75 Fed: +0.50 Negative rates abroad Rate hike in USA Surprise results Denmark -0.65 Sweden -0.50 yen euro 10y Treasuries unemployment euro peg franc
  18. 18. HiddenLevers NEW SCENARIO: NEGATIVE RATES?
  19. 19. GOOD: Reflation Continues source: HiddenLevers, CPI trending up in USA, despite Oil Crash Rising Rents + Home Prices CPI rising since Jan 2015 Healthcare Inflation UP
  20. 20. BAD: Financials Struggle No rate hikes = no margin for big banks source: HiddenLevers, Foreign Policy, low commodities mitigate pressure on equities persists recession avoided -14% -7%
  21. 21. UGLY: USA Joins Club new all time lows on 10y treasuries source: HiddenLevers first world demographics to blame Fed follows Japan + Europe into negative rates mild recession a la EU/Japan savers likely go to cash + gold gold
  22. 22. Scenario: Negative Rates? 12M T-bills -0.3% S&P -20% 12M T-bills 0.1% S&P -8% 12M T-bills 0.8% Fed is able to raise rates as inflation trends toward 2% in the USA. This enables financial sector margins to recover. Inflation below target forces the Fed to cut rates. Financial sector hit hard, while market as a whole nears a bear market (measured from 2015 high) USA joins EU + Japan in negative rate territory, as deflation pulls US into mild recession. Good: Reflation Continues Bad: Financials Struggle Ugly: USA Joins Club S&P +8%
  23. 23. RIP Central Banks – Take Aways NIRP hits financial sector hardest NIRP causes flight to safety First World Deflation overwhelms Monetary Policy NIRP does NOT weaken currency