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The Sub-Zero Club: Getting Used to the Upside-Down World Economy


In the new reality of negative rates, borrowers get paid and savers get penalized

Simon Kennedy simonjkennedy

April 19, 2016 — 12:01 AM EDTUpdated on July 15, 2016 — 1:09 PM EDT

Japanese families seem to have a sudden affinity for home safes. According to the Tokyo-based manufacturer Eiko, shipments have doubled since last fall. And in Germany, insurer Munich Re has stashed some 10 million euros ($11.4 million) worth of its own cash into vaults.

Why the squirreling? One possible reason is the creeping imposition of negative interest rates across the world, which could make it more rewarding to bypass banks—and a safe or vault is, well, more secure than a mattress.

Welcome to the upside-down world of modern monetary policy. In this new reality, borrowers get paid and savers penalized. Almost 500 million people in a quarter of the global economy now live in countries where interest rates measure less than zero. That would’ve been an almost unthinkable phenomenon before the 2008 financial crisis, and one major economies didn’t seriously consider until two years ago, when the European Central Bank first partook in the experiment. Now the ECB and the Bank of Japan are diving deeper into the sub-zero world as they seek more ways to spark inflation.

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Trump raises prospect of replacing Yellen

mother goose

Sam Fleming in Washington

Donald Trump would probably replace Janet Yellen as Federal Reserve chair if he wins the presidential election, the presumptive Republican nominee said on Thursday.

The property developer turned politician told CNBC that Ms Yellen is “not a Republican” and that it would be “appropriate” to put someone new in the position when her four-year term expires in February 2018.

Nevertheless, Mr Trump also said that he agreed with Ms Yellen’s policy of keeping short-term interest rates low, saying that rate increases would push up the dollar and damage America’s competitive position with China, as well as making it harder to service US debt.

“I have nothing against Janet Yellen whatsoever; I think she has been doing her job,” said Mr Trump, describing her as “very capable”. However, he added: “She is not a Republican . . . when her time is up I would most likely replace her because of the fact that I think it would be appropriate.”

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Welcome to the “Keynesian black hole”, Negative central bank interest rates

Black Hole

Mapped: Negative central bank interest rates now herald new danger for the world

Negative rates are becoming the “new abnormal” in a shaky world economy. With fresh panic hitting markets, are we finally hitting the limits of what monetary policy can achieve? Click on the countries to find out

The world’s tentative experiment with negative interest rates got off to an unremarkable start.

Sweden’s Riksbank – the world’s oldest central bank – became the first major monetary authority to cross the rubicon and take its main policy rate into the red exactly a year ago to the month (see map above).

The Riksbank’s move followed the likes of Switzerland and Denmark, who had turned negative in a bid to stimulate flagging inflation and halt the punishing appreciation of their currencies.

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People Over 50 Carrying More Debt Than in the Past


The average 65-year-old borrower has 47% more mortgage debt than those in 2003

Updated Feb. 12, 2016 4:17 p.m. ET

Older Americans are burdened with unprecedented debt loads as more and more baby boomers enter what are meant to be their retirement years owing far more on their houses, cars and even college loans than previous generations.

The average 65-year-old borrower has 47% more mortgage debt and 29% more auto debt than 65-year-olds had in 2003, after adjusting for inflation, according to data from the Federal Reserve Bank of New York released Friday.

Just over a decade ago, student debt was unheard-of among 65-year-olds. Today it is a growing debt category, though it remains smaller for them than autos, credit cards and mortgages. On top of that, there are far more people in this age group than a decade ago.

The result: The composition of U.S. household debt is vastly different than it was before the financial crisis, when many younger households took on large debts they could no longer afford when the bottom fell out of the economy.

The shift represents a “reallocation of debt from young [people], with historically weak repayment, to retirement-aged consumers, with historically strong repayment,” according to New York Fed economist Meta Brown in a presentation of the findings.

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The world can’t afford another financial crash – it could destroy capitalism as we know it


A new economic crisis would trigger a political backlash in Britain, Europe and the United States which could drag us all down into poverty

By Allister Heath

10:24PM GMT 10 Feb 2016

They bounce back after terrorist attacks, pick themselves up after earthquakes and cope with pandemics such as Zika. They can even handle years of economic uncertainty, stagnant wages and sky-high unemployment. But no developed nation today could possibly tolerate another wholesale banking crisis and proper, blood and guts recession.

We are too fragile, fiscally as well as psychologically. Our economies, cultures and polities are still paying a heavy price for the Great Recession; another collapse, especially were it to be accompanied by a fresh banking bailout by the taxpayer, would trigger a cataclysmic, uncontrollable backlash.

The public, whose faith in elites and the private sector was rattled after 2007-09, would simply not wear it. Its anger would be so explosive, so-all encompassing that it would threaten the very survival of free trade, of globalisation and of the market-based economy. There would be calls for wage and price controls, punitive, ultra-progressive taxes, a war on the City and arbitrary jail sentences.

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Debt, defaults, and devaluations: why this market crash is like nothing we’ve seen before

Texas Oilfield Confessions

A pernicious cycle of collapsing commodities, corporate defaults, and currency wars loom over the global economy. Can anything stop it from unravelling?

By Mehreen Khan, graphic by Tom Shiel

10:00AM GMT 06 Feb 2016

A global recession is on the way. This truism of economics holds at any point in which the world is not in the grips of a contraction.

The real question is always when and how deep the upcoming downturn will be.

“The crash will come, but it would be nice if it came two years from now”, Thomas Thygesen, head of economics at SEB told over 200 commodity investors and analysts in London last month.

His audience was rapt with unusual attention. They could be forgiven for thinking the slump had not already arrived.

Commodity prices have crashed by two thirds since their peaks in 2014. Oil has borne the brunt of the sell-off, suffering the worst price collapse in modern history. Brent crude has fallen from $115 a barrel in the summer of 2014, to just $27.70 in mid-January.

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Citi: World economy seems trapped in ‘death spiral’


Katy Barnato | @KatyBarnato

The global economy seems trapped in a “death spiral” that could lead to further weakness in oil prices, recession and a serious equity bear market, Citi strategists have warned.

Some analysts — including those at Citi — have turned bearish on the world economy this year, following an equity rout in January and weaker economic data out of China and the U.S.

“The world appears to be trapped in a circular reference death spiral,” Citi strategists led by Jonathan Stubbs said in a report on Thursday.

“Stronger U.S. dollar, weaker oil/commodity prices, weaker world trade/petrodollar liquidity, weaker EM (and global growth)… and repeat. Ad infinitum, this would lead to Oilmageddon, a ‘significant and synchronized’ global recession and a proper modern-day equity bear market.”

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Keynesian black hole: The Fed Wants to Test How Banks Would Handle Negative Rates

Black Hole

Rich Miller

Three-month Treasury bill rate falls to negative 0.5 percent
Very adverse scenario posits harsh worldwide recession

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As interest rates turn negative around the world, the Federal Reserve is asking banks to consider the possibility of the same happening in the U.S.

In its annual stress test for 2016, the Fed said it will assess the resilience of big banks to a number of possible situations, including one where the rate on the three-month U.S. Treasury bill stays below zero for a prolonged period.

“The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities,” the central bank said in announcing the stress tests last week.

In that particular simulation, the unemployment rate doubles to 10 percent, the same level it reached in the aftermath of the last financial crisis.

Three-month bill rates have slipped slightly below zero several times in recent years, including in September after the Fed delayed rate liftoff amid global financial market turmoil, touching a low of minus 0.05 percent on Oct. 2.

But in the stress test, banks would have to handle three-month bill rates entering negative territory in the second quarter of 2016, and then falling to negative 0.5 percent and holding there through the first quarter of 2019.

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The Liquidity Trap That’s Spooking Bond Funds

mother goose

The specter of a destabilizing run on debt is haunting markets

Updated Dec. 13, 2015 3:22 p.m. ET

The debt world is haunted by a specter—of a destabilizing run on markets

Last week, this took on more form even if there weren’t concrete signs of panic. Only one mutual fund manager, Third Avenue Management, has said it would halt redemptions to forestall having to dispose of assets in a fire sale. The rest of the industry has been quick to say that while redemptions are elevated, particularly in high-yield bond funds, there doesn’t seem to be a rush to for the exits.

Still, growing angst comes as the oil-price rout continues and the U.S. Federal Reserve appears ready to raise rates. This has investors worried—and starting to ask the fearful question: “Who’s next?”

Goldman Sachs, for one, put out a note Friday warning Franklin Resources “is most at risk” given the large high-yield holdings of its funds, poor performance and large outflows. On Friday, its shares fell sharply. Meanwhile, there were unusually large declines Friday in the value of exchange-traded funds that track high-yield debt.

The idea of a “run” on mutual funds might sound strange. Typically, runs are associated with highly leveraged banks engaged in maturity transformation, funding long-term loans with short-term debt. Nearly all the programs designed to avoid destabilizing runs—from deposit insurance to the Fed’s discount window to liquidity requirements—are built for banks.

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US interest rate rise could trigger global debt crisis


Global debt levels are dangerously high and central banks cannot keep the game going indefinitely, warns the high priest of orthodoxy

By Ambrose Evans-Pritchard

8:30AM BST 14 Sep 2015

Debt ratios have reached extreme levels across all major regions of the global economy, leaving the financial system acutely vulnerable to monetary tightening by the US Federal Reserve, the world’s top financial watchdog has warned.

The Bank for International Settlements said the wild market ructions of recent weeks and capital outflows from China are warning signs that the massive build-up in credit is coming back to haunt, compounded by worries that policymakers may be struggling to control events.

“We are not seeing isolated tremors, but the release of pressure that has gradually accumulated over the years along major fault lines,” said Claudio Borio, the bank’s chief economist.

The Swiss-based BIS said total debt ratios are now significantly higher than they were at the peak of the last credit cycle in 2007, just before the onset of global financial crisis.

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Markets Brace for Major Sell off


Market Crash 1987?

The Death of Stupid ?

Debt the ultimate participation trophy ?

Keynesian black hole?

August 24,2015
the staff of the Ridgewood blog

Stocks aren’t quite as immune to financial disruption in the middle of 2015 as they had been previously. The last major, comprehensive selloff was also in tandem with “dollar” disorder back last October 15. This time, the motion was more erosion than “event”; at least until the past week. Just like crude oil, stocks lost their momentum back in early May (and broader index price indications dating back to last July and the first “dollar” rumble) and had more or less been stuck like the yuan doing nothing until the open break recently.

“Savage Speed” – A Look Inside Market Crash Statistics

Submitted by Salil Mehta via Statistical Ideas blog,

It was surely a frightening week in global financial markets.  The largest 500 American stocks (S&P) dropped 6%.  China’s Shanghai Stock Exchange (SSE) doubled this risk, as it dropped 12%.  Now there is an overall fear in the markets that we have not seen in years.  While these perilous risk statistics should not be something new, thesurprising jolt this week provides a renewed opportunity to review crash measures within a broader context, to boldly target your portfolio.

Let’s look at the worst weekly loss for the S&P, in each month from 2007 through August 14 (or right up until last week).  Geometrically approximated for symmetry.  We see in blue that the distribution of this monthly “worst weekly loss” has generally been similar to the same ranked values from the past couple of years (2103/2014).  Now towards the bottom of the chart we can better ascertain that the more severe “worst weekly losses”, were even worse in the years earlier than this (so 2007 through 2012).

We’ll prove out these numerical measurements here, but if you are dispassionate about the mathematics then don’t fear.  Please just skim what is immediately below -and head straight to the first illustration afterwards- to continue reading.  In October 2008, the worst weekly risk was -20% (this makes October the 24th worst month for “worst weekly loss” of 24 months in 2007/2008).  Hence it is plotted in red ~98 percentile at the bottom of the vertical axis below.  Not perfectly the 100th percentile (0% rank) due to probability math.  Also in the same 2007/2008 series, the next worst month for the “worst weekly loss” statistic was the following month of November.  That month saw a -9% change and being 2nd worst out of 24 means being ranked about 4% higher on the vertical axis, from where the -20% data is shown:

Global Trade In Freefall: Container Freight Rates From Asia To Europe Crash 60% In Three Weeks

Submitted by Tyler Durden on 08/23/2015 12:42 -0400

Three weeks ago, when we last looked at the collapse in trade along what may be the most trafficked route involving China, i.e., from Asia to Northern Europe, we noted that while that particular shipping freight rate Europe had crashed some 23% on just one week, there was some good news: at least the Baltic Dry index was still inexplicably rising, and at last check it was hovering just above 1,100.

That is no longer the case, and just as with everything else in recent months, the Baltic Dry dead cat bounce is now over, with the BDIY topping out just above 1200 on August 4, and now back in triple digit territory, rapidly sliding back to the reality of recent record lows which a few months ago we suggested hinted that much more is wrong with global trade, and the global economy, than artificially manipulated stock markets would admit.

Debt Is Good: For Funding The Greatest Participation Trophy Ever Created

Submitted by Mark St.Cyr,

As the capital markets from Shanghai to New York were melting down in ways hearkening back to the early days of the prior financial crisis – a period of time many would like to forget (or act) as if it never happened – the Nobel Laureate economist Paul Krugman decided it was time once again to weigh in with what will surely be viewed by the so-called “smart crowd” as a brilliant perspective on what ails the world: Not enough debt.

The title of his Op-Ed in the New York Times™ seemed to borrow directly from one of Wall Street’s most celebrated fictional characters Gordon Gekko when he delivered the now immortal line “Greed, for lack of a better word: Is good.” For Mr. Krugman however, there was no need of a “better word” qualifier. He came out blazing with what seems the only bullet in his arsenal as a cure-all for what ever the ailment might be (e.g., debt.) as he argues this view in his latest: Debt Is Good.

As I read, I found myself repeatedly either laughing, or with my head in my hands. What seemed lost on Mr. Krugman was the irony of not only his timing, but also the glaring front-of-mind examples real people, with real issues, currently have that are entirely interchangeable as to replace his call for action; and replace it with the actions they are currently living through. All of which are both suggested as well as endorsed by him and his ilk.

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S&P erases gains for year as stocks plunge 2% on Fed, growth concerns


Evelyn Cheng | @chengevelyn
12 Hours

U.S. stocks closed near session lows on Thursday, off more than 2 percent, as investors weighed continued uncertainty about the timing of a rate hike and concerns about global growth headed by slowing in China.

The S&P 500 and Dow Jones industrial average both had their worst day since Feb. 3, 2014. ( Tweet This )

“I think the markets are overly pessimistic,” said Anthony Valeri, investment strategist at LPL Financial. “I think this sentiment is panicking over news from China, the Fed (and) oil at six-year lows.”

Weakening in emerging market currencies on the heels of China’s yuan devaluation last week added to worries of broad economic slowdown.

“I think the oil and the geopolitical problems are the real problems for the market because we’re looking at lower global economic growth, and lower global growth is going to weigh on the U.S. as well,” said Peter Cardillo, chief market economist at Rockwell Global Capital.

The S&P 500 fell into the red for 2015 and closed down 1.1 percent for the year. Consumer discretionary led all 10 sectors lower with a decline of 2.8 percent for its worst daily performance since June 1, 2012. Energy is the greatest laggard for the year so far, down more than 18 percent.

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Stocks are a ‘disaster waiting to happen’: Stockman

david stockman

Amanda Diaz | @CNBCDiaz

David Stockman has long warned that the stock market is on the verge of a massive collapse, and the recent price action has him even more convinced than ever that the bottom is about to fall out.

“I think it’s pretty obvious that the top is in,” the Reagan administration’s OMB director said Thursday on CNBC’s “Futures Now.” The S&P 500 has traded in a historically narrow range for the better part of 2015, having moved just 1 percent higher year to date. “It’s just waiting for the knee-jerk bulls, robo traders and dip buyers to finally capitulate.”

Stockman, whose past claims have yet to come to fruition, still believes that the excessive monetary policy from central banks around the world has created a “debt supernova,” and all the signs point to “the end of the central bank enabled bubble,” which could cause a worldwide recession.

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Garrett Blasts Federal Reserve on Lack of Transparency

1027a a6garrett60p

Jul 18, 2015

WASHINGTON, D.C. – Rep. Scott Garrett (NJ-05), Chairman of the House Financial Services Capital Markets and Government Sponsored Enterprises Subcommittee, issued the following statement in response to Federal Reserve Chair Janet Yellen’s testimony before the House Financial Services Committee today.

“The Federal Reserve has proven itself to be one of the most unaccountable and least transparent agencies in the federal government, and today’s hearing did little to change that reality. From being unresponsive to subpoena requests from our Committee to dismissing concerns over serious problems in the fixed income markets, the Fed is the poster child of a shadow regulatory system that threatens taxpayers and our broader economy. It is an agency in dire need of change, and I look forward to continuing our Committee’s efforts to bring real reforms to the Federal Reserve.”

Rep. Garrett has been a longtime critic of the Federal Reserve’s lack of transparency and its failed monetary policy. He is the author of two pieces of legislation that would shed light on the Federal Reserve’s notoriously opaque operations:

H.R. 113, The Federal Reserve Accountability and Transparency Act of 2015
H.R. 2625, The Bailout Prevention Act of 2015

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Economists have discovered how bad the economy really is


Economists have discovered how bad the economy really is

By Matt O’Brien April 21 at 8:00 AM

Unemployment is almost back to normal, but the economy isn’t.

That isn’t because the unemployment rate is a conspiracy to make things look better than they really are. It’s because even though the unemployment rate tells us the most about the labor market, it doesn’t tell us the full story. All it does is show us how many people who are actively looking for work can’t find it. But that leaves out the “shadow unemployed” who want full-time jobs but have either given up looking for them or can only find part-time ones. That usually doesn’t make that big a difference, but it does now, because, even six years after the crisis has ended, there still isn’t much that’s usual about this economy.

Now if you add it all up, this shadow unemployment means our jobs hole is more than three times as big as it looks. That, at least, is what economistsDanny Blanchflower and Andrew Levin found when they looked at how low the unemployment rate is versus how low we think it could go, how high the participation rate is versus how high we think it could go, and how many people can only find part-time jobs. That first part tells us how much further unemployment itself could fall, the second how many discouraged workers could come back, and the last how many people would work more if they could. In other words, it shows us the gap between how many full-time jobs we have and how many full-time jobs we need. The result, as you can see above, is that instead of being a million full-time jobs short, like the unemployment rate says we are, we’re about 3.5 million short.