James Bianco Interview At Finanz und Wirtschaft,
From FuW:
James Bianco, president
of Bianco Research, warns of unintended Consequences of negative
interest rates and is concerned about a credit event triggered by
defaults in the energy sector.
It’s getting suspiciously
silent at the global financial markets. After a strong rebound the US
stock market is losing steam and has been moving sideways for two weeks.
Jim Bianco remains alert. The influential market strategist from
Chicago who is highly regarded among institutional investors is
especially concerned about the eagerness to experiment among central
bankers. «The larger issue here is that nobody understands negative
rates», says the outspoken president of Bianco Research. He is also
skeptical with respect to the recent rally in the oil market. He draws
worrisome parallels to the subprime crisis in the US housing market and
spots the risk of a credit event if the price of oil tanks again.
Mr. Bianco, negative
interest are causing a lot of stir at the financial markets. It looks
like even the Bank of Japan is having some doubts now, since it didn’t
launch more monetary stimulus this week. What’s your take on negative
interest rates?
Even if you go back to the Egyptian pharaohs and the Fertile
Crescent in Mesopotamia we have never consistently seen negative
interest rates in the reported human history until two years ago. That’s
why investors are worried that negative rates are going to create
distortions and what you see out of Japan are some of those distortions.
The Bank of Japan is not getting the market reaction that it expected.
So if negative yields are not a mistake then central bankers have to do a
better job in explaining to the world why this is going to work out
just fine.
Why are many investors so skeptical about negative interest rates?
People are still staring at negative interest rates and still not
comprehending them. When the ECB introduced negative interest rates two
years ago the world viewed it just as a temporary gimmick. But then, on
January 29th, the Bank of Japan comes in and they go negative as well.
After the Bank of Japan decided to go negative, the number of
outstanding bonds with a negative yield suddenly doubled in about two
days. If you exclude the US market, around 45% of sovereign bonds in the
world are now yielding negative.
Why is it so hard to understand negative interest rates?
The problem with negative rates is two-fold. Firstly, it’s a
procedure problem. Even though we at the financial markets look at our
screens and see negative numbers, negative interest rates don’t exist at
the consumer level. The banks in Europe are not offering negative
mortgages, they’re not offering negative deposits and they’re not
issuing bonds with negative coupons yet. If a country like Switzerland
was to issue a negative coupon sovereign bond that means that every
owner of that bond has to pay the issuer. But how do you collect that
money? Nobody’s got a system in place that can reach out to bondholders
and get all those checks. Or how does a negative mortgage work? With a
negative mortgage, instead of you paying the bank, the bank pays you.
But how does the bank pay you? They don’t have a system in place to mail
out all those checks.
And secondly?
Negative interest rates turn the whole credit process upside down.
Let’s say we have a system in place and a company has thousand and
thousands of bondholders that own its bond with a negative coupon.
What’s the credit rating of that security? It’s not the credit rating of
the company. It has to be some kind of total of the people that own
this bond and that’s probably a junk rating. So how does the company get
the money from everybody? What happens if some bond holders don’t pay?
And what are the collection procedures for people that are in arrears?
That’s the problem with such kind of securities and that’s why people
thought it was just a gimmick.
So what are the consequences of negative interest rates?
In a negative interest rate world currencies yield zero and that’s
actually a high yield. As a matter of fact, according to former
Fed-chief Ben Bernanke the Federal Reserve did a very interesting study
that looked at the volume of all of the vault space at the major banks
in the US and they calculated a break-even. They calculated that if the
Fed Funds Rate ever got below -35 basis points, the banks would be
better off by stacking in the volume of their vault space with $100
bills yielding zero as opposed to taking a Funds Rate at -35. There is
no such study for European banks. But Bernanke believes that their
break-even would be even closer to zero, something like -20 or -15 basis
points because they have a 500 Euro note which is six times the
monetary value of a $100 bill and roughly the same size. Yet, we’re
seeing no movement out of the European banks to stack 500 Euro notes in
their vaults. That means they’re acting irrationally. They’re not acting
that way because they don’t believe it or they don’t understand it. So
we’re still all trying to feel around in the dark as to what this means.
And that means that the chance of an accident is very high.
Also,
when you look at the poor performance of European bank stocks, negative
interest rates seem to cause severe concerns among investors in the
financial sector.
Deutsche Bank’s share price is under its 2009 low. That was the
level at which we thought the world was ending. So what does it mean
that Deutsche Bank’s share price is lower than that? Does it mean the
world is ending for the largest European bank by assets? And by the way,
Credit Suisse (CSGN 14.57 -4.08%)
is not far behind. Of course, Deutsche Bank’s on the hook for a lot of
other things, too. They’ve missed on regulation, they’ve missed on
capital, they’re in the wrong line of business and they have significant
risk. Deutsche Bank (DBK 16.47 -5.13%)
is the largest holder of Euro denominated derivatives. So what happens
if it comes to a Brexit or if it comes to a Grexit? The problems in
Greece never went away. We’ve just decided that we got bored to talk
about it.
And what about the big banks in the United States. The performance of US bank stocks is pretty disappointing as well.
Coming out of the financial crisis, the five largest financial
institutions in the United States now have a higher concentration of
financial assets. Not only do they have a higher concentration of assets
than they did before the financial crisis but it’s the largest
concentration ever. So we’ve made the too-big-to-fail-problem worse
because we have bigger, more systemically important financial
institutions now than we did in 2007 – and nobody seems to know what to
do about it....MORE
HT:
ZeroHedge