Negative Interest Rates Are a Calamitous Misadventure
Here is the opening of this interesting column by Ambrose Evans-Pritchard for The Telegraph:
The world's central banks should take a deep breath and step back from the calamitous misadventure of negative interest rates.
Whatever theoretical profit can be mined from this thin seam, it is entirely overwhelmed by the slow ruin of the banking system.
Huw Van Steenis, from Morgan Stanley, calls negative rates (NIRP) a "dangerous experiment" that undermines the mechanism of quantitative easing rather than reinforcing it, and ultimately induces banks to shrink their loan books - the exact opposite of what is intended.
• Negative rates a 'dangerous experiment' as monetary policy hits buffers
The market verdict on the Bank of Japan and the European Central Bank speaks for itself. Bank equities have crashed by 32pc in Japan and by 26pc in the eurozone since early December.
"Financial markets increasingly view these experimental moves as desperate," said Scott Mather, from the giant bond fund Pimco.
The policy blunder is creating a false fear that central banks have run out ammunition. It is distracting attention from the real failings of the global policy regime: lack of willingness to launch a New Deal and inject money directly into the veins of the real economy through fiscal stimulus when needed, and arguably to do so with turbo-charged effect through central bank transfers rather than debt issuance.
Narayana Kocherlakota, ex-head of the Minneapolis Federal Reserve, reluctantly backs NIRP as deep as -3pc but calls it a "gigantic fiscal policy failure" that central banks must resort to such absurdities.
Roughly $7 trillion of debt is trading at negative rates. Western states can borrow for next to nothing until the 2030s, yet they refuse to repair their crumbling infrastructure and invest in their future dynamism from fear of fiscal deficits.
Mr Kocherlakota wants it done by old-fashioned borrowing. If you are worried about high debt ratios it can equally be done by "helicopter money", a plan proposed by Adair (Lord) Turner at a forum of the International Monetary Fund in November.
Let me be clear, I think the market ructions of recent weeks are a false alarm. We are not on the cusp of a global recession, and it is a first-order fallacy to suppose that a glut of cheap oil is bad for growth. The Atlanta Fed's instant tracker of US growth for the first quarter has jumped to 2.7pc. China's broad credit to the real economy reached a 33-month high of 14.6pc in January.
Global recessions typically begin when the world economy is running at 2pc above its natural speed limit, as you can see from the Pimco chart below. This forces the authorities to jam on the brakes to prevent overheating. We are nowhere near this level today. IMF data suggest that the global "output gap" is -1.2pc, leaving masses of headroom.
David Fuller's view
An analytical problem is that there is so little precedent for what we are experiencing, leading to widely differing views about risks and opportunities for investors. Needless to say this is hardly reassuring.
However, Ambrose Evans-Pritchard’s views above make sense to me. I would also like to see less reliance on central banks and more sensible fiscal spending by Western governments, not least the USA.
This item continues in the Subscriber’s Area, where a PDF of AE-P's article is also posted.
Cameron Faces Off With 27 EU Leaders in Battle for Britain
Here is the opening of this topical article from Yahoo News:
BRUSSELS (AP) — Prime Minister David Cameron faced off Thursday against the 27 other European Union leaders, telling them to grant his country a new deal to settle the festering issue of their relationship or face a possible divorce as soon as this summer.
Cameron said he was "battling for Britain" at a Brussels summit — and for a less intrusive EU that would benefit other countries, too. But French President Francois Hollande struck a cautionary note, warning that no individual leader should be allowed to stop closer European cooperation.
"It's the EU in question, not just one country in the EU," Hollande said as he arrived. "I want Britain to stay in the EU. But I hope most of all that Europe can advance, can be stronger."
Cameron is seeking changes to the U.K.-EU relationship that will let him urge Britons to vote "yes" to continued membership in a referendum that could come as early as June. He told his fellow leaders that he needed a substantial deal that would be "credible for the British people." The British referendum on EU membership is bound to be hard-fought, since few issues in Britain have as much resonance as its relationship with the EU.
David Fuller's view
I think most of us in the UK, not to mention across Europe, have been reading and wondering about this for long enough. Therefore I will close with the comments of Lithuania’s impressive Prime Minister, Dalia Grybauskaite, who said as she arrived at the summit:
“Everybody will have (their) own drama, and then we will agree.”
Inside High Frequency Trading: Algorithms, Not Markets, Lead to Wall Street Riches
Here is the opening of this article on HFT from Inverse, which is mostly and interview:
A trade that makes a penny is a win. And with the number of trades the algorithms and processors driving high frequency trading shops are making per minute, days are full of wins and coffers are overflowing with pennies. High frequency trading may not be a new phenomenon, but these coder collectives are steadily making markets either smarter than the people who purport to understand them or way, way dumber. It depends on who you ask.
If you ask Brad Katsuyama, the founder of IEX and a major character in Michael Lewis’s best-selling book Flash Boys, HFT is rendering markets ridiculous. This is why Katsuyama has promised to coil 38 miles of non-metaphorical cable between traders and the servers of his potential exchange, which is still waiting for the SEC go-ahead before listing companies. This would result in a 350-microsecond ”speed bump” designed to diminish the high-frequency advantage.
Katsuyama has a fair number of cheerleaders because a lot of people within the financial sector would like to see high frequency traders subjected to a speed limit.
Still, within the confines of HFT firms, coders, statisticians, and so-called “quants” toil in well-compensated obscurity. Things are pretty much as they have been.Inverse spoke with a trader, who wished to remain anonymous due to potential personal ramifications, about the potential end of high frequency trading and the moral questions it poses.
David Fuller's view
Katsuyama is right and if you read the interview which follows this introduction above, I doubt that you will find it reassuring.