Citi On Why Negative Rates Are Like Potato Chips: "No One Can Have Just One"
Now that Japan has let the negative rates genie out of the bottle, or as DB put it, 'opened the Pandora's Box' and in the process unleashed the latest global "silent bank run" and capital flight, prepare to hear a whole lot more about NIRP in the coming weeks because as Citi's Steven Englander put it, "Why are Negative Rates like Potato Chips? No one can have just one."
This is what else Englander said:
You can admire the policy boldness of the BoJ move into negative rates, and recognise its powerful asset market effects – positive for equities and negative for JPY. Experience in other countries that have entered into this territory should sober you up on the likely economic and inflation impact. No country that has gone into negative rates has experienced major shifts in its growth and inflation profile – minor, yes; major, no. As a consequence every dip into negative rates has been followed by additional moves.
Negative rates are a powerful inducement for cash to leave the banking system, but there is little evidence that investors take the cash and build steel plants with it. They buy foreign and financial assets, which is probably more than enough for the BoJ.
Some further thoughts from Citi's FX desk, and why the BOJ ultimately shot itself, and other central banks, in the foot:
As the dust settles on the BoJ reaction, USDJPY is somewhat higher and risk currencies have begun to rebound following an initial dip. However, the price action has not been one-sided. Partly this seems to reflect the tendency of many investors to dismiss the rate move as diluted given its tiered implementation. Of the investors I have spoken to since the decision, a significant majority were inclined to poke holes in the decision. The response also carries some echoes of the response to the Fed, where dovishness did little to support investor sentiment and markets sold off. If anything, the pattern seems to be that bad news is bad news, good news is bad news and no news is good news. To me, this latter concern presents a more sustained threat to risk sentiment and it has been harder to dismiss the deeper vein of market concern on underlying slowing, policy effectiveness and the ability of policymakers to respond to future shocks.
Finally, who could have possibly foreseen the entire world collapsing into NIRP singularity? Well, this blog for one (more on that later). Others included Albert Edwards and Bob Janjuah who sat down in September and predicted that sooner or later the Fed itself would cut rates to -5%. Some laughed at the duo 4 months ago; hardly as much laughter this time around.
When two legendary "bears" (actually what they really are is realists who refuse to drink the Fed's, the establishment's, and the media's Kool-Aid) such as Albert Edwards and Bob Janjuah sit down, while the outcome is hardly as dramatic as the Stay Puft marshmallow man emerging, one certainly expects very provocative and contrarian observations to emerge. This is precisely what happened one week ahead of the Fed’s last meeting.
Here is the story as told by Edwards himself in his latest note to SocGen clients:
I enjoyed afternoon tea with my fellow strategist Bob Janjuah of Nomura (aka Bob the Bear). When we occasionally meet up, we lie back and look up for a bit of clear blue sky thinking – okay, I know it’s London and the sky is usually overcast, but that sort of fits in with our bear view of the world! Among other things we wondered why no-one else entertains the possibility that rates might bottom at minus 5% Fed Funds in the coming downturn.
The next US recession will probably arrive a lot sooner than most investors expect and will likely see more desperate monetary experimentation from the Fed. Bob and I thought that this time we would see deeply negative interest rates in the US (and Europe). Sweden has led the way, dipping their toe below the water line with their current -0.35% policy rates but there will be more, much more along these lines. For if -0.35% is possible, why not - 3.5% or less? It goes without saying that deeply negative interest rates would be accompanied by a massively expanded QE4 in the US. The last seven years of exploding central bank balance sheets will seem like Bundesbank monetary austerity compared to what is to come.
And so it came to pass last week – just one negative dot in the Fed policymakers’ projections for interest rates set the markets abuzz that central banks were no longer to be constrained by the zero interest rate bound. The very next day the Bank of England’s chief economist and policy wonk, Andrew Haldane, also raised the possibility of not just negative interest rates, but banning cash if people hoard it in an attempt to attain a heady 0% return – link. Wow, even Bob and I hadn’t thought of that!
Yes, it is odd that when push comes to shove, not even the biggest skeptics could conceive of the world that is about to be unleashed by tenured economists who have never held a real job in their lives, and yet - somehow - are micromanaging the entire world.
Actually, why not all three - after all, what does the Fed have left to lose? It appears gold is finally getting the memo that the final debasement of the reserve currency is about to be unleashed.
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