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2010 Contrarian Prediction of the Disastrous Consequences of ZIRP & Free Money Policy In the Banking System, Year 5
Listen to this video to hear my opinion of ZIRP starving the banks in 2010 when nearly every single economist analyst and pundit swore that ZIRP would be free money and unlimited profits for said industry. If you don't want to hear my opinion on derivative daisy chain risk afterward, fast forward to the 6:18 marker to see how the contrarian opinion panned out the following year.
Fast forward again, by three years, and we're not only still flirting with ZIRP (despite proclamations to the contrary) but European NIRP. Those that read my analysis know how I feel that will turn out for European banks. After all, if zero is bad, less than zero is probably...
See this article from American Banker, the banking industry's pre-eminent trade rag (subscription may be required, so I'll excerpt a pertinent portion): U.S. Bancorp, PNC Lack Options to Counter Low Rates
The latest quarterly results from U.S. Bancorp and PNC Financial Services Group illustrate the same hard truths: earnings are going to be lackluster until rates go up, and regional banks and their investors will have to keep toughing it out.
Why? Margins are continuing to erode, offsetting low yields with volume is proving tougher than expected, fee businesses are not enough of a supplement, and most cost-cutting efforts have been exhausted.
... PNC in Pittsburgh is no different from other institutions in how it is being affected by low interest rates— they are killing its spread income.
Now, go to the 0:55 marker in this video and listen for a minute or two, then continue reading.
Chairman and Chief Executive Bill Demchak forecasted that rates will not rise as soon, or at a fast enough clip, as he would prefer.
"It's also clear given the most recent jobs data and some data out this morning on manufacturing that we are likely to see interest rates rise later and slower than previously anticipated," Demchak said Wednesday. "If correct, it will have an impact on our net interest income for the remainder of the year and out years. We can't ignore the realities of the current environment."
If the Federal Reserve postpones raising rates until the fall, it will keep a lid on revenue growth, Rob Reilly, PNC's chief financial officer, said during the conference call.
Richard Davis, chairman and CEO of U.S. Bancorp, also acknowledged the burning question as to when and how rates will rise: will there be four hikes starting in June, or two hikes starting in September? However, Davis returned to his often-cited theory that a rate increase is going to cause a "tsunami" of activity as borrowers scurry to lock in rates before they tick up higher.
"What's most important is it starts at all," Davis said. "I've got to tell you, that is way more important than the number of times that it occurs."
Keep hope alive, my friend. Keep hope alive. Oh yeah! This just in from the Wall Street Journal - It looks increasingly likely that the Federal Reserve won't be raising interest rates in June, amid a rash of negative economic news. Surprise. Surprise! You know things are getting worse when you see more bailouts coming before we finish ending the last bailout program (ZIRP) - The Federal Reserve has decided to let U.S. banks make limited use of municipal bonds to meet liquidity requirements
The solution? Financial services companies (ie. banks) as software in the fortified cloud (the blockchain).
No balance sheet exposure, ex. no Lehman Brothers.
No rehypthoceation, ex. no MF Global.
No excess leverage, ex. no Bear Stearns
No incentive for fraud, ex. no, well... That list takes longer than time I have to type, but you get the message.
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I'd tell you Reggie's tech calls have been downright visionary but Admiral Michael S. Rogers (no marinero, solo Capitan) might be listening and I don't want him to get an unfair advantage...
reggie, i have been reading your articles for more than 7 years and i think you are brilliant.
at your leasure could you point me to, or explain nirp and its ramifications? i cannot wrap my head around it and i'm sure you could explain it logically.
thank you in advance for your help, and thank you for all of the knowledge i have gained from your articles and comments.
kindest regards,
redfearn
First off, thanks for the supportive words and the patronage. Both are greatly appreciated.
NIRP = negative interest rate policy. Its basically a tax that central banks put on those who wish to hold cash or (percieved) low risk cash equivalents. The problems is that tax is carried out by charging a negative interest rate which absolutely screws fundamental analysis - hence common sense. See "Fu$k the Fundamentals!": Negative Rates In EU Will Absolutely Wreck the Very System the ECB Sought to Save
Think of you going to your bank and borrowing $500k to buy a house, and then legally and meritoriously demanding that your bank pay you for the privilege of borrowing that $550k from them. The bank, loathe to pay you cash to lend you money (I know, WTF?) offers to reduce the principal on the loan that you took out instead of sending you cash. This transaction is the only debt service exchanged - from the bank to you, but you have their $500k (plus the amounts they send you as debt service for the negative interest rate on the loan you took out). Now, what does this do to bank earnings? Devastation! It's being done now in Denmark "How the Danish Central Bank is Destroying the Danish Citizens' Wealth Form Both Sides While Stressing It's Bank!",
What does this do to real estate prices? To the moon, Alice. After all, who wouldn't borrow half a million to buy a rental property, and then get paid to borrow the money monthly, plus get paid on the rental income. If you had a property, you'd know to ask absolutely top price because you're literally selling the right to print money.
Is this sustainable? Hells no! What happens when rates rise above zero. Hell likely to break loose as all of those prices come crashing down to reality.
Read "It's All Out War, Pt 3: Is the Danish Krone Peg to Euro More Fragile Than Glass Beads? The Danish National Bank Infers So!" and my warnings in 2010 on the PAN-EUROPEAN SOVEREIGN DEBT CRISIS which will do a lot to fill in the background as well.
Day before yesterday, the Wall Street Journal ran a story on the Spanish bank, Bankinter S.A., which was actuallypaying customers interest on their mortgages, in a rather backwards twist that is the result of the perverse incentives (basically, the opposite of typical tenets that underly fundamental analysis) that come about when you turn the world of borrowing, literally, upside down.
Anybody who wants indepth analysis, research or even handholding on this topic or any other that my team covers can purchase Veritas.
Middletons analysis is correct. ZIRP and NIRP eliminate the need for having a sound payout for an investment and induce misallocations of capital on a massive scale. Shortly after the interest rates went negative in Denmark, the price of real estate skyrocketed .... people are getting money back when loaning money - total monetary insanity. Same for stocks : the big cies lend money at zero interest rate, buy back their stocks while no investments or developmental work is done, the number of shares drops and hence the earnings per share increase ( but not the revenues, in some cases those keep dropping ). When ever the rates start to increase again the bond markets will collapse, equities same thing, real estate same thing, governments can no longer service their massive debt levels, 2008 will look like a walk in the park. I am out of everything and the banking system to start with.
Zirp and Nirp are indications that the previous stable business model PIRP (positive interest rates) has become structurally challenged and may not be a valid business model in some ways now.
And as an engineer, I see it as being strongly tied to a lack of growth in the real economy and real employment.
So the banks and corporations are morphing the old PIRP business model on the fly, where there are fees for many things that there didn't use to be fees for. Nirp is a fee on just having money on deposit! If they don't morph the business model to match actual real production and employment, then the trouble in the old model would probably be more easily exposed and recognized.
Wait what ? This is like Jim Cramer saying Lehman is fine on TV. And still denying it after everyone had seen the video !
That Reggie, he's no fool... He tells it like he see's it, and he see's right through the Bullshit constantly spewing forth from the FED and their apologists on the "Financial Media"... ZIRP, NIRP... Burp...
Banks have not been "banks" in the traditional sense for quite a while. They are useless fucking middlemen. Fuck em.
But they ARE great for money laundering.....
Markets are up about 100% since 2010 and he is trying to say he was right all along????
Yer damn skippy buddy. Bank NIM margin and interest generated earnings have been down across the board. The article above quotes two prominent bank CEOs admitting it. Are you tring to say I was somehow wrong with this spot on view?
Or are you saying that bank interest earnings and manipulated stock market prices are somehow synonomous and one and the same? Exactly what is it that you are saying?
whats your view on Japanese bonds..
You reco'd shorting stocks that more than doubled and tripled, and refuse to even admit that you were wrong.
Morgan Stanley has tripled since you went all in short on it, congrats.
You have absolutely no idea what I've recommended and what I didn't because you weren't a client. What you have been doing for years was cherry picking one or two things you percieved didn't go my way and then attempting to harp on it. If you truly don't see value, why in the world do you read and respond to my posts?
I've been right much, much more than I've been wrong (knock on wood, hate to jinx myself :-))
I suppose we can then agree your 'free' contributions only tell a small part of the story and this is merely an advertisement for subscriptions.
Middleton's problem is he's not snorting hopium and sucking up to the Wall St. crack whores. Anybody with a little common sense knew it was all bullshit but if you work for CNBC etal you've had your common sense surgically removed.
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