Cory's Insights – Tue 9 Feb, 2016
Low interest rates are here for a while
Hi everyone, I am currently on vacation with my wife (we are currently in Thailand and making our move to Cambodia in a week) but still listening to all the segments (through our podcast) and continuing to read as many articles as possible. Also I am half way through Marin Katusa’s book The Colder War which is a fascinating history on Putin’s rise to power and his motives for the future of Russia’s energy play – Click here to get the book on Amazon.
I have to say the moves in the US markets, gold and the US dollar have me getting up in the middle of the night to see what is happening when the US markets are open. The move in gold is very nice so far but I think the breakdown in the US dollar is the standout. Although I expected a move by the US dollar to come this week (it actually started last week, a week earlier than I expected) we now need to assess how low this correction will go. In the short term I believe this drop is almost done and we will see a recovery in the dollar. This drop has some technical similarities to the drop we saw in August. We could have a sideways move for a little bit and then a recovery. That’s my take – I am still learning these technicals but let’s all watch and see.
As for the article below I think the author brings up some points that need to be considered between now and 2007/2008. I agree that the global system and debt levels are concerning but I stand on the side that says we will not see a fast collapse similar to what we saw in 2007/2008. It will take time and be a slow unwinding of paper assets that slowly squeezes investors and bankers alike. Have a read of the article and let me know what you think. I will have a read over all the comments when I get on WiFi at our next destination.
Finally I hope everyone is having a great week and enjoyed the Super Bowl! My wife and I woke up at 6am on our first day of getting settled here to watch the game. We prefer more offensive games but it is nice to see Payton get another ring before retiring (which he better). Plus Cam Newton needs to do a little growing up before he can be the face of the league – I prefer to see leaders celebrate with their team after scoring a touchdown rather than doing their Super Man poses and handing the ball to kids in the crowd. Just my opinion… Coming from a 49ers fan.
As the world economy again flirts with recession, prepare for years to come of zero interest rates
In the face of a slowing economy, central banks have again abandoned the quest for higher interest rates
Well, this is depressing. Almost everywhere, central banks have once again turned dovish. Any attempt to return monetary conditions to a semblance of normality, always more a statement of intent than anything more substantive, has been all but abandoned.
Even the US Federal Reserve, which had been planning to push through at least four rate rises this year, seems close to capitulation. Bill Dudley, president of the New York Fed, said last week that the strong dollar could have “significant consequences”, an apparent admission that tighter money had cast a pall over the US economy.
Cue a sharp sell-off in the greenback, the strength of which was threatening a full blown emerging markets crisis. Meanwhile in Europe, Mario Draghi, president of the European Central Bank, has been reiterating his promise of further monetary easing to come. In Japan, the central bank has joined the negative interest rate club. And in the UK, the Bank of England last week cut its growth forecasts, backing away from any rate rise for the foreseeable future. There can never be a winner from such a begger thy neighbour race to the bottom, but competitive currency devaluation is once more the order of the day.
Every time the central bank attempts to push up rates, it seems that markets go up in flames, prompting what is known in the jargon as a “negative feedback loop” in the real economy, which in turn forces rate setters to back off anew.
Worries about China and the plummeting oil price have been with us for a while; the new concern over the past week is that the US economy too may be about to enter another downturn. I’ve been warning for some time now that markets have been underestimating recession risk. The US expansion is already a long one by historic standards, and with the shale boom now over, some sort of a slowdown is already evident.
Even so, I suspect we may now be entering overshoot territory. Increasingly hysterical calls for negative interest rates, helicopter money and the like look premature, at least for the main Anglo-Saxon economies. Both America and Britain may be slowing, but they are still growing.
Low oil prices are similar in their effect to a tax cut, and historically have therefore been a relatively reliable pointer to a sustained period of economic growth to come. Yet today they are seen as the reverse – as a sign of a further collapse in demand just around the corner. Take your pick. One thing is certain. The era of zero interest rates has a lot longer to run yet.
Another banking crisis?
It’s been another torrid week for bank shares, particularly European ones, some of which are edging back towards post crisis lows. Credit Suisse – which last week announced a whopping great loss – is now trading at half book value. Either there is another banking crisis coming, or the shares are a screaming buy.
As to the former possibility, this seems quite hard to believe, even if it shouldn’t altogether be discounted. Continued low interest rates are weighing heavily on net interest margins, which in the US are at their lowest level in more than thirty years. What’s more, record high corporate debt, together with distress conditions in many emerging markets, has prompted a sharp rise in non-performing loans, adding to worries about the state of bank balance sheets.
Even so, you have to believe that regulators got some things right in the aftermath of the 2008/9 crisis. Capital and liquidity buffers are much larger than they were, and should be capable of surviving a further, even quite serious downturn.
There is, however, no accounting for the politics of renewed deterioration in the real economy. Much of Europe has yet to recover from the last meltdown. Voters are still incensed about the damage the banking crisis did to them. If there is a further recession on top, the populist insurgency will get much worse, and there is no telling where that will end. Small wonder that risk aversion is back in the driving seat. The trouble with doom laden sentiment is that it has a nasty habit of becoming self fulfilling.
Lord Hill’s challenge
As if to make the case for Brexit, there have apparently been more than forty separate pieces of legislation affecting the financial sector to have come out of the European Commission since the onset of the crisis. Some of this is admittedly mere enactment of the international reform agenda, and therefore cannot directly be blamed on the Eurocrats. Even so, a more mountainous accumulation of nonsense is hard to imagine.
It is of course understandable after such a scandalous crisis that regulators should vow “never again” and attempt to slam as many stable doors as they can identify. Yet the crack down has gone way too far. The biggest threat to European stability today is not financial mischief making, but lack of growth. Belatedly Europe has woken up to the destructive power of this regulatory bedlam and is trying to do something about it. The task of dismantling the financial stuff, or at least attempting to make it more growth friendly, falls to the British appointed commissioner, Lord Hill. In his call for evidence, he’s received more than 300 responses, detailing hundreds of examples of where regulation isn’t working. Perhaps surprisingly, he seems to be pushing at an open door. Among virtually all 28 member states, there seems to be a real appetite for pushing back the regulatory tide. We should perhaps be careful not to expect too much. Europe’s integrationist, anti market instincts are not so easily buried. All the same, if Britain remains in, it is imperative that inroads are made.
In the US, some 70pc of finance comes from the capital markets and only 30pc from banks. In Europe it is the other way around, which with the banking sector on its knees is a large part of the explanation for why the Continent is still struggling to recover. If Hill can bring about an effective capital markets union, the prize for the City will be an enormous one. But it is even less likely to happen if Britain withdraws.