Sometimes we can combine one of our themes with the news flow and today is an example of that. We can start with the role of central banks where what was considered extraordinary policy is now ordinary and frankly sometimes mundane. We have seen interest-rate cuts, then QE bond buying, then credit easing and of course negative interest-rates. Overnight even the home of the All Blacks has joined the latter party.
Some New Zealand wholesale rates fell below zero for the first time on Wednesday as investors increased bets on a negative policy rate. Two and three-year swap rates sank to minus 0.005%, as did the yield on the benchmark three-year bond. ( Bloomberg)
So we have negative bond yields somewhere else as the contagion spreads. Whilst it is only marginal the track record so far is that it will sing along with Madonna.
Deeper and deeper, and deeper, and deeper
Bloomberg thinks it is driven by this.
Most economists expect the RBNZ to cut its cash rate from 0.25% to minus 0.25% or minus 0.5% in April next year, and some see the chance of an earlier move.
However they seem to have missed the elephant in the room.
The Monetary Policy Committee agreed to expand the Large Scale Asset Purchase (LSAP) programme up to $100 billion so as to further lower retail interest rates in order to achieve its remit. The eligible assets remain the same and the Official Cash Rate (OCR) is being held at 0.25 percent in accordance with the guidance issued on 16 March. ( Reserve Bank of New Zealand 12 August)
So we are on the road to nowhere except according to Bloomberg it was a triumph in Sweden.
Negative rates were successful in Sweden because they achieved the aim of returning inflation to target without causing any significant distortions in the economy, said Lars Svensson, an economics professor in Stockholm and a former deputy governor at the Riksbank.
Only a few paragraphs later they contradict themselves.
Swedish mortgage rates dropped below 2%, causing house prices to surge to double-digit annual gains, but unemployment fell and the economy grew. Crucially, headline inflation rose steadily from minus 0.4% in mid-2015 to meet the central bank’s 2% target two years later. Inflation expectations also rose.
The Riksbank sent its policy rate into negative territory in early 2015, reaching a low of minus 0.5% before raising it back to zero late last year.
It worked so well they raised interest-rates in last year’s trade war and they have not deployed them in this pandemic in spite of GDP falling by 8%!
Oh and there is the issue of pensions.
In Sweden, the subzero-regime was advantageous for borrowers but brutal for the country’s pension industry, which struggled to generate the returns needed when bond yields turned negative.
So in summary we arrive at a situation where in fact even the Riksbank of Sweden has gone rogue on the subject of negative interest-rates. Going rogue as a central bank is very serious because they are by nature pack animals and the very idea of independent thought is simply terrifying to them.
Also the Riksbank of Sweden is well within the orbit of the supermassive black hole for negativity which is the European Central Bank or ECB. We learn much I think by the fact that in spite of economic activity being in a depression no-one is expecting an interest-rate cut from the present -0.5%. When we did have some expectations for that it was only to -0.6% so even the believers have lost the faith. This is an important point as whilst the Covid-19 pandemic has hit economies many were slowing anyway.
We are seeing central banks start to hint at ch-ch-changes.
Purchases of foreign assets also remain an option.
The Governor of the Bank of England Andrew Bailey has also been on the case and the emphasis is mine.
But one conclusion is that it could be preferable, and consistent with setting monetary conditions
consistent with the inflation target, to seek to ensure there is sufficient headroom for more potent expansion
in central bank balance sheets when needed in the future – to “go big” and “go fast” decisively.
He then went further.
That begs questions about when does the need for headroom become an issue? What are the limits? One
way of looking at these questions is in terms of the stock of assets available for purchase.
He refers to UK Gilts ( bonds) but he is plainly hinting at wider purchases.
Swiss National Bank
This has become something of a hedge fund via its overseas equity purchases. For newer readers this all started with a surge in the Swiss Franc mostly driven by the impact of the unwinding of the “Carry Trade” where investors had borrowed Swiss Francs. The SNB promised “unlimited intervention” before retreating and now as of the end of June had 863.3 billion Swiss Francs of foreign currency assets. It did not want to hold foreign currency on its own so it bought bonds. But it ended up distorting bond markets especially some Euro area ones so it looked for something else to buy. It settled on putting some 20% of its assets in equities.
Much of that went to the US so we see this being reported.
Swiss National Bank is one of the leading tech investors in the world. 28% of SNB’s Equity portfolio is allocated to tech stocks. Swiss CenBank has 17.4mln Apple shares worth $6.3bn or 538k Tesla shares worth $630mln. ( @Schuldenshelder )
So this is a complex journey on which we now note an issue with so-called passive investing. The SNB buys relative to market position but that means if shares have surges you have more of them each time you rebalance. So far with Apple that has been a large success as it has surged above US $2 trillion in market capitalisation as the recent tech falls are minor in comparison.But the 20% fall in Tesla yesterday maybe a sign of problems with this sort of plan. It of course has surged previously but it seems to lack any real business model.
The Tokyo Whale
The Bank of Japan bought another 80.1 billion Yen of Japanese equities earlier today as it made its second such purchase so far this month. As of the end of last month the total was 33,993,587,890,000 Yen. Hence its nickname of The Tokyo Whale.
Quite what good this does ( apart from providing a profit for equity investors) is a moot point? After all the Japanese economy was shrinking again pre pandemic and there was no sign of an end to the lost decades.
We find ourselves in familiar territory as central bankers proclaim the success of their polices but are always expanding them. If they worked it would not be necessary would it? For example the US Federal Reserve moving to average inflation targeting would not be necessary if all the things they previously told us would work, had. I expect the power grab and central planning to continue as they move further into fiscal policy via the sort of subsidies for banks provided by having a separate interest-rate for banks ( The Precious! The Precious!) like the -1% provided by the ECB. Another version of this sort of thing is to buy equities as they can create money and use it to support the market.
The catch of this is that they support a particular group be it banks or holders of assets. So not only does the promised economic growth always seem to be just around the corner they favour one group ( the rich) over another ( the poor). They have got away with it partly by excluding asset prices from inflation measures, but also partly because people do not fully understand what is taking place. But the direction of travel is easy because as I explained earlier central bankers are pack animals and herd like sheep. They will be along…..