Wednesday, February 17, 2016

Negative Rate Not Having Intended Effect--Wait, What? There's A Hitler Parody Too?!

A threefer.
First up, from Nikkei's Asian Review, what reads like a bad translation forward and then back,* but an interesting chart:

Negative rate not having intended effect

TOKYO -- A negative interest rate policy on Tuesday introduced itself to the Japanese money market. Stock market players, however, breathed a sigh of relief as the Nikkei Stock Average continued its recent rise. 
     Still, concerns remain over the China-led global economic slowdown and Europe's financial system. 
     A representative of an online brokerage questioned whether the Nikkei average hit bottom on Friday, when it closed at 14,952. "It is still unknown," the representative said. 
     Market attention is shifting to a meeting of finance ministers and central bank chiefs from leading rich and developing nations. The Group of 20 meeting is to be held in Shanghai on Feb. 26-27.

     Markets are likely to keep fluctuating. And there are concerns that the Bank of Japan's negative interest rate policy could play out poorly. Consider Japan's annual spring wage negotiations. "More companies may become more cautious about raising wages," said Hisashi Yamada, chief economist and general manager of the economics department at the Japan Research Institute. 
     The central bank on Jan. 29 adopted "the most powerful monetary policy framework in the history of modern central banking," as Gov. Haruhiko Kuroda put it. Kuroda's hope is that the move weakens the yen, thereby giving Japanese exporters a lift, and moves stock prices higher, giving companies reasons to raise wages and boost capital spending....

Next up, from FT Alphaville:

Yup, negative rates were a really bad idea
It seemed so plausible. Break through the zero lower bound and ta dah! A new scale of economic stimulus can be engineered. 
And yet, as the likes of usFrances Coppola and even Downfall Hitler have been warning for a number of years, this was always a silly presumption because negative carry creates an entirely different incentive structure to that of a positive carry world. 
Notably, it encourages predation, monopolisation, hoarding and in some cases, even contraction as opposed to growth. 
As Coppola noted in 2013:
So, if – say – the ECB imposed negative interest rates on excess reserves in a world which is both risky and risk-averse, how would banks behave? I can’t see any reason at all why they would increase lending. They would be more likely to look for other “safe” investments as an alternative to parking deposits at the central bank. And they wouldn’t have far to look. The debt of countries like Germany, the US and the UK is explicitly backed by government guarantee just as central bank reserve accounts are. If the yield on these bonds were higher than the negative interest rate charged by the ECB, banks would purchase these with their surplus deposits. There might also be round-tripping from banks seeking to arbitrage the difference between sovereign debt yields and central bank negative interest rates. The inevitable effect would be downwards pressure on the yields on “safe” government debt in much the same manner as QE. 
Negative rates, especially when legitimised through central bank policy, encourage a zero-sum game and thus become entirely counter-productive. And that remains true, by the way, even if you scrap banknotes. Then the hoarding incentive just migrates into corporate inventory or parallel value markets, with equally drastic implications on depreciation rates. 
BoAML’s Liquid Insight team headed by Chris Xiao and Vadim Iaralov, in any case, are on to the problem.
As they observe on Wednesday about the effectiveness of negative rates: 
Empirically, negative rates have thus far been ineffective at achieving the central banks’ objectives of curbing currencystrength and boosting inflation expectations (Chart of the day). Historically, quantitative easing (QE) has been effective at raising inflation expectations. In our view, the divergence in results may be due to the market interpreting NIRP as over-reliance on monetary stimulus.
Here’s the chart:...

Finally, from an obviously off-center mind:

Hitler finds out about negative interest rates from Negative Rates on Vimeo.

*As we saw in 2010's "Thoughts on Markets, Investing and Life":
..."The original title of this book was 'Jimmy James, Capitalist Lion Tamer' but I see now that it's... 'Jimmy James, Macho Business Donkey Wrestler'... you know what it is... I had the book translated into Japanese then back in again into English. Macho Business Donkey Wrestler... well there you go...
 ...Anyway, I wanted to read from chapter three... which is the story of my first rise to financial prominence... 
I had a small house of brokerage on Wall Street... many days no business come to my hut... my hut... but Jimmy has fear? A thousand times no....