But the world’s central bankers have been ignoring that principle. They’ve been cutting rates deeper and deeper into negative territory. And now, not only is that strategy failing to HELP the economy or the markets, it’s actually HURTING them.
That’s the crux of this fantastic Wall Street Journal story. It zeroes in on the problem by saying:
“Those (negative interest rate) policies, which charge lenders for reserves they keep on deposit with central banks, are crimping lenders’ profits and amplifying fears of a wide economic slowdown. At the heart of the concerns is an alarming conundrum: While hobbled banks may not be able to tolerate rates this low, limping economies may not be able to tolerate them any higher.”
So how can negative interest-rate policy, or “NIRP,” hurt rather than help? Well, banks make money in a lot of ways – by selling financial advice, charging fees for safe deposit boxes, taking commissions on mutual-fund or insurance-policy sales, and so on.
But their core business is to borrow money from depositors and the bond market at low, short-term rates … and lend it out at higher, longer-term rates to borrowers of all shapes and sizes. The larger the difference between those rates, the more profitable banks become, and vice versa. The technical term for that spread is “net interest margin.”
|Global central bank action has left many investors feeling the pain.|
The problem is that the ongoing, massive waves of QE and NIRP from every corner of the central-banking world are crushing margins. They’re driving longer-term rates lower and lower, and causing key spreads to collapse to multi-year lows.
Take the 2-10 spread I’ve talked about before here in Money and Markets. It just collapsed to 98 basis points, or 0.98 percentage points. That’s the lowest going all the way back to December 2007. It’s not a perfect proxy for core banking profitability, but it gives you the general idea.
I’m not the only one warning about the toxic side effects of NIRP, either. The bond-fund giant Pimco just weighed in with its own. And David Kelly of JPMorgan Funds told CNBC this morning: “It’s an absolutely ridiculous policy … At some stage, the medicine becomes poison.”
|“The problem is that the ongoing, massive waves of QE and NIRP.”|
So what does this policy problem mean for markets and your wealth? I started saying months ago that central bankers were starting to lose control of the markets — in China, in Europe, in Japan, and here in the U.S. I said their policies weren’t doing squat for the real economy, even as they were puffing up asset prices.
But now, we’re in a whole new regime. Untested, radical monetary policies are no longer just failing to help economic and market “patients.” They’re making them even sicker.
That’s a confidence killer. It’s further undermining trust in central bankers on Wall Street. And it underscores how you really have to take matters into your own hands when it comes to protecting and building your wealth. So continue to stay dialed in to Money and Markets for guidance in these incredibly turbulent times.
The Dow jumped more than 300 some points today as the selling pressure temporarily eased. But the underlying problems we’re facing — including the perverse threat of NIRP — haven’t gone away. My advice: Stay cautious
That’s my take anyway. What’s yours? Is the failure of NIRP a problem for stocks and risky bonds? Will it continue to hollow out the banking sector, and thereby hurt markets and the economy? Is there a better alternative to NIRP for central bankers or fiscal policymakers? Make sure you take a minute to share your ideas in our comment section.
Yesterday was another wild and crazy day in the markets, with stocks cratering through the afternoon before rallying halfway back on yet another rumor about possible OPEC production cuts. Given the volatility, how are you handling your investments? I’m pleased to see several of you weighed in.
Reader Howard said: “In expecting a greater level of choppiness in currency markets, it is the one area that makes me nervous. Not knowing what central banks will do next with so many failed policies behind them is unsettling for a trader. It comes down to levels of risk in what you know and don’t know.”
Reader Peter said that Main Street investors aren’t fully appreciating the threats out there, but that he’s positioned conservatively: “I went to 40% cash last summer, and bought the S&P 500 inverse ETF SH and gold two weeks ago. But I don’t think we are at the point of a true megadecline yet like in 2008 and early 2009. The behavioral finance model that has guided me for years (yes such a model does exist) has not moved to a ‘sell’ signal yet, meaning that true despair on the part of millions of 401k and IRA holders has not hit the point of running for the hills.
“My best guess is these folks are not the least bit aware that we could be on the cusp of another Lehman-moment coming from Europe this time. It could be Deutsche Bank (DB) or Credit Suisse (CS) that get the ball rolling, but no one knows. My guess is that all those retirement-account holders don’t even know who those banks are and don’t even begin to understand the gravity of the current situation. Hence the psychology of the market still clings by a thread to hopium.”
Reader Gordon said there could be some “out of the blue” threats that investors aren’t prepared for, either. His take: “Something else to factor in is the fact that the SEC is investigating Boeing (BA) and its stock took a hit. I wonder how many more giants of industry are out there are quaking in their boots with the same problem. If Boeing is guilty of some sort of hanky-panky, that could be a real black swan event as investors, especially widows and orphans, will no longer trust anyone.”
Of course, there is one investment that could be entering bull-market mode here – gold. Reader Chuck B. shared his view on the metal:
“Gold broke the upper line of its nearly two-and-a-half-year down channel yesterday, but closed just a bit above the line, leading to the possibility of an overshoot after that big daily gain. Also, its RSI and MACD are well into overbought territory. Most gold-mining stocks are also overbought by those standards. I want to see a test of this gain before committing to the bull.”
Finally, Reader Lifestudent38 said currencies are a solid alternative to stocks here: “Cash holdings are safer than the market, but cash remaining still is useless. My objective is to ride the volatility waves in the foreign exchange market. There are bulls and bears all the time.
“By the way, credit-default swap (CDS) spreads on German bonds have been soaring in the recent past. That signals the symptoms of risk aversion in the eurozone markets.”
I appreciate all the different opinions about how to profit in these turbulent times. Currencies are a great alternative, and I’ve been helping my subscribers profit from the upside move in the Japanese yen in my Interest Rate Speculator service. I’m also closely watching the European banks because the action in their financial sector sure does smack of the action in our financial sector back in the Great Credit Crisis of 2007-2009.
Any other thoughts I didn’t cover yet? Then share them in the comment section below.
The civil war in Syria has displaced 4.4 million people, and killed countless others since it began in 2011. Now, U.S. Secretary of State John Kerry and Russian Foreign Minister Sergey Lavrov have attempted to broker at least a temporary cease fire. The deal is designed to allow for humanitarian and other aid to be delivered to besieged cities, even as it looks extremely tentative.
Bank stocks have gotten crushed in recent weeks amid fears of everything from energy-loan losses to shrinking lending margins to credit-market contagion. JPMorgan Chase (JPM) CEO Jamie Dimon tried to lean against the selling by purchasing 500,000 shares worth $26 million yesterday.
Do I believe this signals an end to the turmoil in that sector? In a word, no. JPMorgan has substantial exposure to derivatives and volatile capital markets, as well as other businesses that will get hit if credit-market turmoil worsens as I expect.
Finally, on the economic front, retail sales rose 0.2% in January. That was slightly better than the 0.1% gain that was expected. December’s reading was also revised up, and the core ex-autos, ex-gas number came in at a decent 0.4%.
Do the solid retail sales figures give you more optimism about the economy? How about the purchase of JPMorgan shares – is that a reason for optimism about banks? Or are interest rate trends too powerful of a negative force? Lastly, is there anything that can be done to end the fighting in Syria, Yemen, or other Middle Eastern hot spots?
Until next time,
P.S. Is your stock portfolio taking a hit? Most investors’ are. The S&P 500 is off about 13% since July of last year. The Nasdaq is down 18%.
But there is an alternative: The currency market!
You see, unlike stock markets, the currency investment markets never crash.
No matter what’s going on in the world, currencies will always rise and fall against each other, giving you the opportunity to make money.
What’s more, currencies move independently of stock markets. Even if every stock market on the planet fell to zero, you could still build a FORTUNE in currencies.
Take a recent example: An option on the falling Canadian dollar posted a 76.9% gain … Another option on the declining British pound generated an 85.4% gain … And a third option on the plunging Australian dollar posted a 100% gain.
That’s enough to turn every $10,000 you invested into $20,000 in less than 24 hours!