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From Negative Yields on Bonds to Mortgages That Pay You, Where Does it End?
How far into Bizarro World can we venture? How deep does the interest rabbit hole go? We’re rapidly finding out the answers, thanks to all the crazy stuff going on in Europe.
Consider this: Almost 1.2 trillion euros worth of European government bonds now sport negative yields. That’s about 25 percent of the entire universe of sovereign securities across the Pond. Want to actually earn a return in German debt? Now you have to buy securities with a maturity of more than seven years!
The ECB currently says it won’t buy anything yielding less than -0.20 percent. But that means it may not be able to snap up the 1.1 trillion euros worth of debt it has pledged to buy over the next year or two. What happens then? Who the heck knows! Maybe they’ll buy the Colosseum and the Acropolis.
|The ECB said it won’t buy anything yielding less than minus 0.20 percent.|
Meanwhile, if you go to take out a mortgage in Denmark, guess what? The bank might end up paying you! The situation is so messed up, banks are trying to figure out how to reprogram their systems so that interest can be paid out, rather than taken in.
A separate Danish small business “borrower” recently told the New York Times that she was quoted an interest rate of -0.0172 percent. In other words, the bank would pay her interest of around $1 a month to take out a loan.
Want to deposit money? Then you’ll have to pay the bank interest, rather than the other way around! As one understated Danish banker told the Wall Street Journal: “Paying our customers zero or positive interest is very bad for profitability.”
When it was just big-money investors, a handful of hedge funds, and mega-corporations who were getting nicked modestly by negative rates, that was one thing. They often have to keep money in zero- or negative-yielding accounts and bonds because of their investment mandates. And it’s not like they can just take millions or billions of dollars out of their banks or investment accounts and bury them in a can in the backyard.
But now we’re talking about retail customers in a growing portion of Europe getting hit. These people, just like you and I, aren’t as constrained as Megacorp. We pay 0 percent interest on our cash and most of us don’t have tens of millions of dollars on deposit.
|“Paying our customers zero or positive interest is very bad for profitability.” — Danish banker|
So we can easily withdraw money or close our bank accounts, and pay for many obligations with good old fashioned greenbacks, if it becomes necessary. That’s why many economists believe this Bizarro World-policy will ultimately lead to bank runs, a collapse in lending activity, and a hollowing out of the economy overall.
Bottom line: The rabbit hole in Europe is getting deeper by the day. That’s going to have all kinds of unintended consequences policymakers won’t be able to anticipate, and are quite likely underestimating.
So now let me hear from you. What do you think of a mortgage that pays you? Or a CD that requires you to pay the bank? Would that be the ultimate insult, and cause you to switch to more cash-based transactions? If we see negative yields here (rather than just in Europe), do you think that will be a real problem for the banking sector and the economy? Why or why not?
Here’s the link to the Money and Markets website … have at it!
|Our Readers Speak|
Is the dollar done rocking and rolling? Are emerging markets cheap? Are some of the health care “solutions” being proposed worse than the current problems? These are just some of the topics you discussed in the last day.
Reader Mike said he doesn’t see the dollar taking a breather, given the state of global fundamentals. His take: “With the ECB just starting their QE program, which will drive interest rates on European sovereign debt even lower … the Russian ruble in crisis for various reasons … the Mexican peso troubled by the drop in oil prices … and the political turmoil in Brazil, I just don’t see an end to the strengthening in the dollar anytime soon. If the Fed starts increasing interest rates, it will just get worse.”
But Reader Fred1 said technical analysis suggests the run is just about over. His view: “I have to disagree with the fundamentals. Just looking at the technicals, this rally in the dollar should be about over. We had an explosion out of a 4th wave triangle. That triangle in a 4th wave usually marks the end of an upward pattern. I would look for the dollar to start trending downward soon.”
Reader Dani K. weighed in with an international perspective on some of the causes and consequences. The comments from South America:
“You are absolutely right about emerging markets: They are getting crushed by the strong dollar. Unfortunately here in Brazil, we have also a socialist government which is spending by far too much — and let’s not forget the Petrobras scandal, which is getting worse every day. This country is now on the brink of a serious recession.
“Ironically, the situation for me gets better every day as I have my money in Swiss francs. Hence I could not resist the temptation and just bought another apartment here in Rio with a currency discount of about 33 percent compared to a few months ago. That’s what I call a bargain.”
Thanks for the comments! International real estate, vacations, luxury goods — they are all getting cheaper, in dollar (or franc) terms thanks to the collapse in the euro. But the negative impacts on EM markets, commodities, and U.S. multinationals are piling up — and that’s a key reason why I think we’re reaching a breaking point/pause in this move. We shall see!
As for health care, Reader Jo offered this take on single-payer systems:
“Single-payer promoters have not taken into consideration that American doctors will not be satisfied with lower paychecks, and American consumers will not be satisfied with delayed service and options, nor with any type of rationing. American insurance companies will not be satisfied with less-than-mandated insurance, and Americans don’t want to be told what to eat and to exercise more.
“If changes aren’t made in the way health care is delivered, the system will remain too expensive.”
And Reader Deerflyguy shared his view on why the Apple (AAPL, Weiss Ratings: A+) Watch is likely going to be a rare bust for the consumer electronics firm:
“With a stated runtime of only 18 hours between charges, coupled with its high cost, the Apple Watch will never be a success! Clunky and unattractive to boot, the decision to sell this white elephant might well mark the turning point in the Apple success story.”
Love the great comments and great feedback. I know I won’t be banging down the door at my local Apple store when the Watch goes on sale. If there’s any ground we haven’t covered yet, or you want to add your voice to the mix, make sure you use the website to do so.
|Other Developments of the Day|
Tragedy struck the U.S. military overnight, when an Army Black Hawk helicopter went down in the Gulf of Mexico. Seven Marines and four crewmen on board the helicopter were feared dead after the training flight crashed off the Florida Panhandle near Eglin Air Force Base in foggy weather conditions.
1.07. 1.06. 1.05 and change. The incredible sinking euro keeps plumbing new depths against the dollar, with the pace of selling accelerating to a rate rarely seen outside of financial crises. The last time the euro fell at anything like this rate was during the credit implosion of 2008.
China’s economy continues to lose steam, with industrial production, retail sales, and fixed asset investment expanding at weaker-than-expected rates in early 2015. Growth last year was already the weakest in a quarter century, and the slower data suggests more aggressive monetary stimulus may be coming down the pike there.
Any of these stories (or others I missed) get your blood boiling? Then don’t hold it in — head over to the website and speak up!
Until next time,