#interestrates

Central banks are climate change experts now. If only they possessed such skill in their core competency

Are these people for real? Does the Bank for International Settlements (BIS) truly believe that world’s central banks will become “climate rescuers of last resort”? Do we really want our central banks to be more proactive in pushing governments toward a greener economy by suggesting a carbon tax as “first-best solution“? The problem with central bankers is that every problem looks like a nail when they only have a hammer in the toolkit.

First, on what level do central banks have a clue about climate change? If they had even the foggiest notion about the science they would never have embarked on a set of reckless monetary policy measures that created the very conditions for excessive debt, mal-investment and over-consumption which they now seek to punish us for via the adoption of a carbon tax.

We should not forget the almost $300 trillion of global debt now racked up thanks to abnormally low interest rates. It is politically expedient to run budget deficits too because central banks are only too happy to keep (near) ZIRP or NIRP which makes servicing ballooning deficits appear almost perpetually affordable with short term focused politicians. It is but a figment of their imagination.

How easy it is to sound the alarm on climate change to mask the policy blunders of the last two decades. It would be nice if we could believe they possessed expertise in their mandated role before embarking into a field they have no sound base to work from. It is a dangerous distraction.

It is worth citing a few examples of the record of central banks around the world since GFC.

In 2018, the US Fed stopped reporting changes in the balance sheet. It did this to prevent spooking the markets over tapering. It reminds FNF Media of the day Bernanke’s Fed announced it would no longer report M3 money supply a year before the financial markets headed into the GFC. Why is there a need for a lack of transparency if it wishes to instill market confidence via its policy settings?

Has the Fed reflected on the fact that over half of listed corporates have a credit rating of BBB or below? Ford Motor Co’s credit rating was downgraded by Moody’s to junk. $84bn worth of debt now no longer investment grade. It will be the first of many Fortune 500s to fall foul to this reality. In 2008, there was around $800bn of BBB status credit. That number exceeds $3.186 trillion today. Brought to you courtesy of low interest rates.

The Bank of Japan (BoJ) is now responsible for 60% of all ETF market ownership. Latest reports confirm the Bank of Japan (BoJ) has now become a top 10 shareholder in almost 50% of listed stocks. In a sense, we have a trend which threatens to turn Japan’s largest businesses into quasi-state-owned enterprises (SoE) by the back door. The BoJ now owns $250bn of listed Japanese equities. It is the top shareholder in household Japanese brands such as Omron, Nidec and Fanuc. At current investment rates, the BoJ is set to own $400bn worth of the market by 2020-end.

The BoJ’s manipulation of the JGB market caused several of the major Japanese banks to hand back their trading licenses because they served no purpose anymore given the central bank’s manipulation.

The ECB has dropped the ball in Europe. Jonathan Rochford of Narrowroad Capital wrote,

Many European banks have failed to use the last decade to materially de-risk. The most obvious outworking of this is that European banks continue to receive taxpayer funded bailouts, with Germany’s NordLB and Italy’s Banca Popolare di Bari both receiving lifelines this monthOne final issue that lurks particularly amongst European banks is their gaming of capital ratios. European banks have become masters of finding assets that require little risk capital but can generate a decent margin. Government debt from Italy is one example, with pressure now being put on the ECB to allow for unlimited purchases of Greek government debt. This would substantially increase the already significant “doom loop” risk. This risk arises from the potential for a default on government debt to bankrupt the banks, and the converse situation where failing banks look for a taxpayer bailout and bankrupt the country.

The list goes on and on. Central banks are in no position to lecture the rest of us on anything given their command of their core competence remains so flawed.

Global money velocity has been declining for two decades. Every dollar printed creates an ever shrinking fraction of GDP impact. Yet all we did was double down on all the failed measures that led us into the GFC

What we do know is that the BIS has sought the advice of literature professors to come up with the phrase that climate change presented a “colossal and potentially irreversible risk of staggering complexity.”

Really?

It is easy for the BIS to shout that a “green swan” event could send us into the financial abyss. However the reality is that dreadful stewardship of monetary conditions has set us up for a huge fall. Not a bushfire, storm or flood. Perhaps we might view a green swan event as wishful thinking by central banks because it would allow them to absolve themselves of all responsibility in getting us into this mess in the first place. They want to see themselves as saviors, not culprits.

Rochford sums up central banks brilliantly with this comment,

When it comes to central banks, I would prefer to believe it is a combination of groupthink, an unwillingness to take career risk by speaking the truth and a willingness to either ignore or disregard counter evidence that has resulted in the detrimental decisions since the financial crisis. However, the increasing amount of evidence, often produced by central banks themselves, points to central banks being more culpable than gullible.

So given this condition why on earth are we paying any attention to their prescriptions on saving the planet? When they quit the excuses and fess up that the last two decades of monetary policy has failed to fix the excesses built in the system then we might lend an ear. Until then they join the list of government agencies who don’t want to be caught out not being in line with the settled politics. Truly sick.

Jan 2008 again?

3mthTB

Back to Jan 2008 10yr Treasury – 3mth Treasury Bill spread levels of 0.84% overnight. Shaded areas are previous recessions. I’m sure it is nothing. The friend who sent me the link also sent a Barron’s article last week which interviewed Kiss legend Gene Simmons who believes the Dow is poised for 30,000. He may well be proved right, although I wonder just whether algo trading is linked to Twitter followers. Maybe if Katy Perry starts jawboning about Dow 40,000 we should shut up and buy the trend. More useful than some Goldman Sachs nerd with a PhD in nuclear fission to read the runes…

10-3mthTB

Plunging credit quality more troubling than market rout

D42A75BB-58A4-49A5-B084-32343877CFFF.png

The Dow plunged 1175 points (-4.6%) overnight. 4.6% is a lot and yes 4-digit drops optically look worse but off the higher base we get higher (record) point drops. One thing to contemplate in a rising bond yield market is corporate credit quality. Since 2006 the average credit ratings for US corporates issued by the big agencies have seen the number of top rated (to the left) fall while those with deteriorating grades (to the right) soar. That’s right, the 4 categories before “junk” have risen sharply. After many years of virtually free money many corporations have let the waistline grow. When refinancing comes around just how will credit ratings influence the new spreads of corporates who’ve shifted to the right?

The IMF highlighted in 2017  that US companies have added $7.8t in debt & other liabilities since 2010. The ability to cover interest payments is now at the weakest level since 2008 crisis.

This despite near full employment, record level equity markets and every other word of encouragement from our politicians.

However if this is the state of the corporate sector at arguably the sweet spot of the economic cycle CM shudders to think the state of potential bankruptcies that will come when the cycle truly takes a turn for the worse. This is a very bad sign.