Coppola Comment

The world is saving like crazy. Corporations are building up cash mountains that they can’t or won’t invest in expanding their businesses. Individuals are building up pensions and precautionary savings. Governments, especially in developing countries, are building up FX reserves. The “ savings glut ,” as former Fed chairman Ben Bernanke dubbed it, shows no signs of dissipating. It is sloshing around the world looking for a productive home. But there isn’t one - or at least, not one that offers the safety that fearful investors desperately crave. That, fundamentally, is what is driving down the returns on assets. It is also the primary cause of the wide US trade deficit. The President likes to think that the reason for the US’s persistent trade deficits is unfair trade practices and currency manipulation. And for some countries, these are undoubtedly contributing factors. But the biggest reason by far is the global dominance of the dollar, and above all, the pre-eminence of dollar

Yield curves have gone mad. Negative yields are everywhere, from AAA-rated government bonds to corporate junk . Most developed countries have inverted yield curves, and a fair few developing countries do too: (chart from worldgovernmentbonds.com) Negative yields and widespread yield curve inversion, particularly though not exclusively on safe assets. To (mis)quote a famous pink blog , this is nuts, but everyone is pretending there will be no crash. Here, for your enjoyment, is an à la carte selection of the most lunatic government yield curves. You can find lots more here . Exhibit 1: Switzerland. Negative yield already extends beyond 30 years, and markets are pricing in further interest rate cuts and/or QE, or indeed anything to stop the Swiss franc appreciating as scared investors pile into CHF-denominated assets. Hence the curve inversion. Exhibit 2: Denmark. Every Danish government bond currently circulating in the market is trading at a negative yield. And the in

The ever-optimistic OBR has some encouraging forecasts for interest rates and global government bond yields: Well, ok, they were rather more encouraging in November than they are now. The uplift was supposed to start ANY DAY NOW, but there has been an interruption to normal service. Leaves on the line, perhaps. Or the wrong sort of snow. The trouble is, the OBR has a long record of hockey-stick forecasting. Not that it is unique in having a noticeable bias to the upside: If ever there were evidence that economic forecasting owes more to magic than science, it is this pair of charts. Markets expected that interest rates would start rising in 2010, 2011, 2012, 2013, 2014......it is now 2016 and markets are beginning to wonder if they will ever rise. There is a feeble uplift pencilled in for 2018, and the ghost of a suggestion that there could even be a rate cut this year. The runes have failed, not once but repeatedly. Sack the shamans. Why the runes have failed is not at all

Banks are complaining. "Negative interest rates hurt our margins," they moan. Here's Commerzbank, for example, in its recent results announcement (my emphasis) : Mittelstandsbank attained a solid result in a challenging market environment. The operating profit declined in the 2015 financial year to EUR 1,062 million (2014: EUR 1,224 million), yet remains at a high level. The fourth quarter accounted for EUR 212 million (Q4 2014: EUR 251 million). The full year revenues before loan loss provisions declined to EUR 2.7 billion (2014: EUR 2.9 billion). This development is due in particular to the downturn in deposit transactions, which was driven by the negative level of interest rates on the market as well as the depreciation of a shareholding.  And here is Danske Bank's CFO Heinrik Ramlau-Hansen, quoted in Bloomberg : “There are considerable costs associated with negative rates. In 2015 alone, narrowing deposit margins resulted in a cost of more than 2 billi

Yesterday, HSBC prepared the ground for imposing negative rates on business depositors. This is an excerpt from HSBC's letter announcing the necessary change to the Terms & Conditions of HSBC business accounts: Now, this requires some explanation. Firstly, the change applies only to BUSINESS accounts. Retail depositors are unaffected. Secondly, it applies only to currency accounts, not sterling accounts. And thirdly, despite HSBC's mention of "negative rates set by central banks including the European Central Bank", the relevant "policy or reference rate" at present is still positive everywhere except Sweden, where the policy rate is currently -0.35%. Central banks set several interest rates, of which only one is the so-called "policy rate". The policy rate is usually the rate at which the central bank will lend to banks against good collateral: it is the benchmark not only for the interbank lending rates (Libor, Euribor and their re

Japan has just introduced negative rates on reserves, following the example of the Riksbank, the Danish National Bank, the ECB and the Swiss National Bank. The Bank of Japan has of course been doing QE in very large amounts for quite some time now, and interest rates have been close to zero for a long time. But this is its first experiment with negative rates. The new negative rate framework is complicated, to say the least. The Bank of Japan has helpfully produced a pretty picture to explain it: The bottom tier is a "basic balance" which is the existing reserve level in the banking system: The average outstanding balance of current account, which each financial institution held during benchmark reserve maintenance periods from January 2015 to December 2015, corresponds to the existing balance and will be regarded as the basic balance to which a positive interest rate of 0.1 percent will be applied. So existing reserves will (overall) continue to bear posi

Or anywhere else, for that matter - but that's another story. At Forbes, I look into the real reason why the ECB is considering negative interest rates on bank reserves. Despite what the papers say, it's not about bank lending..... Read the article here .

I found a couple of fascinating articles by Willem Buiter discussing the future of cash. They date from 2009, but are still current today. In fact, as they address the problem that cash creates in a negative rate environment, they are even more relevant now. The "zero lower bound" (ZLB) constraint on interest rates exists because of the presence of non-interest bearing forms of money in the economy, of which the most important is physical cash. Were all money entirely electronic and interest-bearing, negative nominal rates would have become reality years ago. But where there are non-interest bearing forms of money that are near-perfect substitutes for interest-bearing forms, the view is that at the ZLB investors will switch funds to non-interest bearing forms of money rather than accept loss of principal. In short, they will hoard cash. The effect of the ZLB constraint is to force central banks to adopt all manner of peculiar ways of forcing real interest rates below ze