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Admission of Failure

05-22-2019

Before turning to the market action, I would like to discuss an article from the front page of yesterday's Wall Street Journal headlined, "Negative Rates, Designed to Jolt Europe, Become a Crutch." Even more important was the subhead: "Central banks can't quit the policy, creating economic distortions."

Second Thoughts I was pretty excited to read this because it is the first admission I've seen in the mainstream media that NIRP and ZIRP policies don't work. I understand that the WSJ is picking on the ECB and not the Fed, as people think these methods have worked for our central bank because it has gotten more bang for its buck, but they are still failures and for the same reasons: because you can't undo them and they lead to distortions, as noted in the article.

It will be interesting to see how long it takes for this idea to get real legs and for people to finally begin to understand that all the central banks have done in response to the real estate bubble bursting is kick the can down the road. Now we've got an even bigger pile of debt, although it has been rearranged to some degree.

The article notes that, "Negative rates haven't had the desired effect on consumers," then cites a fellow in Berlin who says, "I'm not spending much more money and I'm not saving more. I'm just moving it around."

Going to the Mattresses The story continues, "The low rates produce counterproductive responses: some banks report major depositors have asked to park their physical cash in vaults…where it avoids incurring negative rates, as it might in the form of electronic deposits, but also does no good for the economy. Some Europeans, their pensions tied to bonds, are saving more to secure retirement income as bond yields drop."

Of course, that is also happening in the U.S. and there is a tremendous amount of speculation to try to create income. As folks have done what they've done over the last decade, and it has "worked," people now think that financial markets are essentially riskless. So the bigger problem is going to be the mountains of misallocated capital and all of its consequences, but that won't be discovered until the bear market in stocks intensifies.

Printed Into a Corner Another point the article makes is that this strategy has trapped central banks, noting, "Central bankers can't give up negative rates in large part because it could damp their economies further." Thus, we are all stuck with policies that don't work, but which they are afraid to change. As more people start to figure this out, it will have negative consequences for stocks and bonds, but what the exact catalyst will be for a wider recognition of this problem, I can't say, although lower stock prices often cause people to examine everything.

Turning to the market action, the algos said "Sell" overnight, but "Buy" in the early going, the net of which saw the indices just modestly lower through midday. In the afternoon (post the useless Fed minutes), the indices just sort of drifted sideways, closing with the small losses you see in the box scores.

Away from stocks, green paper was pretty much flat, fixed income was higher, and the metals were basically unchanged, while the miners were weaker for no reason once again.