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south past support
Feb. 12th, 2016 12:37 amThursday, the S&P 500 and DIJA both closed below the support levels I've discussed as of late; the DIJA is worse, having violated Dow Theory support rules discussed here. The Baltic Dry Index daily numbers have a 2-handle, which I've never seen before - but then, so is oil, in a lot of ways. Phillips 66 just dumped a bunch of crude at a substantial loss per barrel.
But where we're headed into very strange territory is the introduction of negative interest rates on a larger scale. Recent thinking on interest rates is that negative interest - I will pay you to borrow money from me - isn't truly "negative" until the cost of storage exceeds the rate of payment for borrowing. Depending upon how you work those numbers, studies referenced at the last Fed statement suggested that rates would have to sink as far down as -4.5% to get to actual zero. (Seeking Alpha has a partial transcript.)
(Relatedly: Robert Michele of J.P. Morgan thinks there's a serious contraction in credit. I'm not confident this reflects functional credit, though I think he has a good point if you're talking financial instrument credit - which isn't actually very productive. Still, these negative rates are not good for banks.)
The primary instigators in this at the moment are Sweden (which just cut rates further negative) and Japan (I kind of hate to link to Zero Hedge, but they're the only ones carrying the Morgan Stanley commentary on the yen's strengthening in the face of NIRP (Negative Interest Rate Policy)). But they're not alone.
There are a lot of states working to keep their currencies lower-valued, in no small part - goes the theory - to try to stimulate inflation. It didn't work for the yen; the central bank had to intervene directly again. There's also real concern building about a currency-devaluation war, enough that mainstream sites are raising the question of a co-ordinated response to the Chinese Yuan.
Let's be pretty clear about this though: nobody has any fucking idea how this works, because this is a new trick. And that includes me. (My favourite line on it is from Alphaville, a succinct "We dunno." Yes, that's a quote.)
Pragmatic Capitalist talks about why anyone would buy a negative-interest bond, and how a bond-buyer in that position could still make money. But he, too, notes this is getting into very strange territory. Seeking Alpha doesn't understand the Swede central bank motivation here, running the numbers. Their economy is in good shape, their balance of trade is overwhelmingly in their favour, they have inflation, what are we all missing?
And given that the US's numbers look pretty decent too, but people are starting to talk about the possibility of a US Fed NIRP in the 6-10 month timeframe, I have to ask what they're seeing, because I am not seeing this. But then, I don't know why the Yen is being treated as such a safe haven, given that the Japanese government is pushing it down as hard as they can manage.
Eastern Asia down overnight, particularly Japan. (See above: this is a safe haven?) India up as I'm writing this; Europe opened broadly higher and is holding it at the moment. LIBOR is stable and well in normal ranges. Money multiplier is still bad, but actually the best it's been in two and a half years (smoothed out - there was a spike up, then back down, then regression to an upward curve). Railcar loadings have been really shitty - January was bad - but all the latest numbers (February 6) are up across all carriers.
If there's a liquidity issue, I'm not seeing it.
But where we're headed into very strange territory is the introduction of negative interest rates on a larger scale. Recent thinking on interest rates is that negative interest - I will pay you to borrow money from me - isn't truly "negative" until the cost of storage exceeds the rate of payment for borrowing. Depending upon how you work those numbers, studies referenced at the last Fed statement suggested that rates would have to sink as far down as -4.5% to get to actual zero. (Seeking Alpha has a partial transcript.)
(Relatedly: Robert Michele of J.P. Morgan thinks there's a serious contraction in credit. I'm not confident this reflects functional credit, though I think he has a good point if you're talking financial instrument credit - which isn't actually very productive. Still, these negative rates are not good for banks.)
The primary instigators in this at the moment are Sweden (which just cut rates further negative) and Japan (I kind of hate to link to Zero Hedge, but they're the only ones carrying the Morgan Stanley commentary on the yen's strengthening in the face of NIRP (Negative Interest Rate Policy)). But they're not alone.
There are a lot of states working to keep their currencies lower-valued, in no small part - goes the theory - to try to stimulate inflation. It didn't work for the yen; the central bank had to intervene directly again. There's also real concern building about a currency-devaluation war, enough that mainstream sites are raising the question of a co-ordinated response to the Chinese Yuan.
Let's be pretty clear about this though: nobody has any fucking idea how this works, because this is a new trick. And that includes me. (My favourite line on it is from Alphaville, a succinct "We dunno." Yes, that's a quote.)
Pragmatic Capitalist talks about why anyone would buy a negative-interest bond, and how a bond-buyer in that position could still make money. But he, too, notes this is getting into very strange territory. Seeking Alpha doesn't understand the Swede central bank motivation here, running the numbers. Their economy is in good shape, their balance of trade is overwhelmingly in their favour, they have inflation, what are we all missing?
And given that the US's numbers look pretty decent too, but people are starting to talk about the possibility of a US Fed NIRP in the 6-10 month timeframe, I have to ask what they're seeing, because I am not seeing this. But then, I don't know why the Yen is being treated as such a safe haven, given that the Japanese government is pushing it down as hard as they can manage.
Eastern Asia down overnight, particularly Japan. (See above: this is a safe haven?) India up as I'm writing this; Europe opened broadly higher and is holding it at the moment. LIBOR is stable and well in normal ranges. Money multiplier is still bad, but actually the best it's been in two and a half years (smoothed out - there was a spike up, then back down, then regression to an upward curve). Railcar loadings have been really shitty - January was bad - but all the latest numbers (February 6) are up across all carriers.
If there's a liquidity issue, I'm not seeing it.
