Deutsche: "Once The Carnage From Higher Rates Hits, Then We Move To Helicopter Money"

As Jim Reid writes, "it's been a very dull 24 hours" in the markets, so to pass the time the Deutsche strategist recapped his bigger picture thoughts "on government bond yields given the sell-off of the last two weeks." Hardly surprising, he goes along with the consesus, and expects yields to rise as more central banks turn hawkish (for reasons we have discussed on countless occasions, most recently yesterday) although what is interesting is Reid's take on what happens after the initial reaction, and it's here that the gloom descends because in a world with 327% debt/GDP...

... higher interest rates are simply unsustainable, the endgame is one: "at some point a government spends big and yields start to rise faster. This could still be many quarters ahead but if and when it does happen central banks might have to intervene and cap nominal yields to avoid carnage in a heavily indebted world. Then we move towards helicopter money..."

For now goldilocks remains, at least until one or more risk-parity fund gets whacked, and the momentum-chasing, vol-selling deleveraging begins.

His full note below:

After a very dull 24 hours I thought it might be an opportune moment to recap our bigger picture thoughts on government bond yields given the sell-off of the last two weeks. As we discussed in our Long-Term Study last September we think 2016 will likely be seen as the inflection point and the end of the 35 year bull market for bonds. It won't be a straight line reversal and perhaps the issue will eventually be more for future real returns over nominal returns. The reason for picking out 2016 was that this was the year that 1) voters in the bottom half of the income scale effectively won two landmark national votes and 2) endless extreme monetary policy for the first time started to impact the plumbing of the financial system. The impact of the first point is that it likely means politicians now have to steer policy specifically to this poorer income group to ensure that their electoral chances are enhanced. This likely means more fiscal policy and less austerity. The recent UK election reinforces this theme here and we think the theme will slowly spread.


With regards to the second point, 2016 was the year that negative rates cascaded like wildfire along the government bond curve in Europe. The problem being that the correlation between falling yields and poor EU bank equity performance is very strong and the correlation between bank equity and bank lending suggests that had the trends of 2016 continued much further then the real economy could have actually suffered by the negative yields actually aimed to support growth. However the fact that the BoJ and ECB pulled back from full-on QE in the last 4 months of last year suggested they appreciated that monetary policy had perhaps gone too far for now and was having some negative consequences. As such a slow reversal of the ultra low yield environment should have and should continue to follow. The risk being that at  some point a government spends big and yields start to rise faster. This could still be many quarters ahead but if and when it does happen central banks might have to intervene and cap nominal yields to avoid carnage in a heavily indebted world. Then we move towards helicopter money - a story for another day.


The problem with this view is that it's as much to do with gut feel, a change in the political wind, and second guessing policy makers as it is to do with spreadsheet based analysis of the current available facts. As such it makes it much more difficult to prove! Anyway this is likely to be a slow moving story for now  but generally since last year we've thought the general bias on yields is higher.


All Risk No Reward NoDebt Tue, 07/11/2017 - 15:47 Permalink

Don't believe their lies.The Mega-Banks and their OWNERS control the majority of net debt-money based monetary assets and debt paper.Why would a bank hyperinflate the money supply to make it so they didn't get paid in real terms for their trillions in outstanding loans...  when they can simply seize your house and other assets in forclosure?What, because you imagine they are stupid?======================================================How To Be a Crook - Debt Is Not a Choice 2.0 The Rise of [Debt-Money Monopolist] Financial Empire Money's probably the stupidest perspective of all...  like an ant running around your house thinking your stupid because you are leaving the room...  TO GET SOME RAID BUG KILLER!

In reply to by NoDebt

cherry picker Looney Tue, 07/11/2017 - 10:02 Permalink

Helicopter money also applies to crypto coin.There is no difference between cryto and fiat, it is a method of valuation based on confidence.However, the only difference between Cryptio transactions and traditional digit transactions is .gov and others are having a hard time tracking it, like cash.  .gov will find a way to regulate the anonymous cloak crypto offers and it will be no different than what is out there.The bitcoin proposed fork proves me right in the fiat aspect.The crypto fools allowed greed to overcome the original designer's intentions, renderring it worthless, but it takes some time before the geniuses figure out it is just smoke and mirrors.

In reply to by Looney

Ghordius cherry picker Tue, 07/11/2017 - 10:24 Permalink

the name "fiat" derives from "by fiat", i.e. "because I say so", or, better, by decreeit comes from how people in the old HRE got their quotations: a "town crier" would shout what the sovereign prince thought his IOUs aka currency would be worth, on that day, in his perhaps tiniest of principalities, against hard currency, for example the Venetian gold "ducats"so, strictly speaking, if there is no sovereign involved, there is no decree, and it's not fiatthe opposite of fiat currency would be private currencywhich is funny, because private currencies are allowed, in the EU, while... actually forbidden, in the US. and this leads me to constantly expect that someone in Washington notices this, and does something against cryptocurrencies...... which could of course lead to the exact opposite results, of course

In reply to by cherry picker

MEFOBILLS Ghordius Tue, 07/11/2017 - 14:18 Permalink

the opposite of fiat currency would be private currency Private banks, which are corporations, make the "credit" people use as money.  Less than 3% of the money supply is created by government.  In the U.S. the only seigniorage privledge government gets is when they mint coins, and then sell to Federal Reserve at face value.   Virtually all of money supply is created upon hypothecation, when YOU take out a loan.  Banks are in the asset purchasing business.  Banks make the financial asset (debt instrument) when you show up to take out a loan.  Then they make the credit to buy the asset just created.  You then take that new credit and put it in your savings account.  At that point, you have an asset and the bank has a liability.  So, we are currently in a PRIVATE CURRENCY world, where money we use is created by PRIVATE BANKING CORPORATIONS.  Federal Reserve act essentially usurped money power from the state, and gave it to a corporate money trust.  This money trust made their 'credit' good for paying taxes, and good for paying debts public and private.Crypto currencies are a financial asset class that floats relative to bank money (bank money was made coin of the realm by usurpation of law).  Commodities like gold also float relative to BM.  For crypto to grow in price it needs to be scarce relative to BM, or highly desireable relative to BM.  Mining makes Bitcoins scarce, hence bitcoin price increased, making bitcoins valuable, making price go up, in a feedback loop.

In reply to by Ghordius

Too-Big-to-Bail (not verified) Tue, 07/11/2017 - 09:42 Permalink

...and what a jubilee this will be. I guess it is still cheaper on the balance sheets of the Money Changers than outright chaos and planet-wide civil unrest, since they can always just print more and more provided the angry masses have not first rounded them all up and burned them at the stake

PitBullsRule Tue, 07/11/2017 - 09:40 Permalink

Hey numb-nuts, here's a news flash, we already had helicopter money.  Remember Chopper Ben?  He printed trillions for the bail outs, TARP, and gave it to his banker buddies.  Thats why our houses cost 3 or 4 times what we paid for them.  

Too-Big-to-Bail (not verified) PitBullsRule Tue, 07/11/2017 - 09:48 Permalink

The theory of helicopter money is it would be targeted more to be given to Main Street not Wall Street (like QE), but on the condition it would be used to pay down debt -- It is almost like a soft reset for the average joes in society that are at unsustainably ultra high debt levels-to-income ratios and in the long run this means less profit for the banksters since it is very deflationary as the average joes are not consuming like good little sheep.

In reply to by PitBullsRule

All Risk No Reward Too-Big-to-Bail (not verified) Tue, 07/11/2017 - 15:55 Permalink

You people have a vivid imagination.  Like a gazelle envisioning the lion letting it go just after it gets its mouth around the gazelle's neck.Not to mention that helicopter money makes no sense when money is created by the issuance of debt.You might as well say "helicopter debt."Do you think "helicopter debt" will solve the Art of War inextinguishable debt military operation the Debt-Money Monopolists have wages against your and yours for well over 100 years (in the US; truly, thousands of years including Europe).

In reply to by Too-Big-to-Bail (not verified)

Stormtrooper Too-Big-to-Bail (not verified) Tue, 07/11/2017 - 09:56 Permalink

Why not print the helicopter money and give it directly to the creditors so that they don't have to worry about the debt plagued plebes spending it on "experiences" rather than using it to pay down debt?  Oh, wait.  I think that is what they have already been doing for 8 years but they haven't canceled the plebes debt.  Double dipping much?

In reply to by Too-Big-to-Bail (not verified)

Too-Big-to-Bail (not verified) Stormtrooper Tue, 07/11/2017 - 10:41 Permalink

Hey man, I'm not the enemy -- I hate the banksters who have totally destroyed the world economy as much as anyone, but I am only relaying what I have read about the concept. The rationale was that QE created asset bubbles (real estate, the stock market, etc.) and had the effect of further concentrating wealth into the Top 1%, and this did not have a recovery effect, but now the grand experiment with helicopter money would be to give it to the 99% since they will spend it more on consumption (as opposed to speculate with it) and grease the wheels of economic recovery. Personally I don't think it will work either, but would likely have a more positive effect than the past decade of QE giving it to Wall Street.

In reply to by Stormtrooper

MEFOBILLS Too-Big-to-Bail (not verified) Tue, 07/11/2017 - 14:31 Permalink

You can do direct injections with a three party instrument, something like a check.  In the old days they called it a bill.Money is general demand.  You do not want to inject with general demand,  but instead with specific demand.  Since even the phd economists at Federal Reserve do not understand the difference between specific demand and general demand, they are likely to screw up again.  Their mis-education in banker funded neo-liberal economics is a real problem.A three party bill has a drawer, a drawee and a payee.  Basically if you write a check you are instructing the bank to draw from your account and pay somebody else, hence three parties and three different names.If a three party bill is used, then you can specifiy channeling.  This means it becomes specific demand, held within the channel specificed.  You get this check and it can only be spent on debt reduction, and we will verify that when it is countersigned by the three parties.It took Schacht two years to figure out MEFOBILLs, and he was already monetarily advanced.  So, I expect PHD ignorants at FED to not figure it out, as they never learned economic history and have limited understanding.They will probably screw up and borrow against the future, to then spend general demand today, and then stimulate Americans to buy on Chinese economy.  American private balance sheets (debt) will not be drawn down, and new general demand will bubble prices. 

In reply to by Too-Big-to-Bail (not verified)

101 years and … Tue, 07/11/2017 - 09:49 Permalink

it's coming.  no doubt.  once stocks drop 20-25%.  they already did "helicopter money" in 2008 with the $1200 rebate checks.  next round will be $5-10K for a family.  and then the bottom truly falls out of stocks/economy when this 1 time band aid barely slows the bleeding.

small axe Tue, 07/11/2017 - 09:52 Permalink

I'm sure Reid's master Deutsche Bank will position itself to maximize gains from others' misery, likely  leveraging itself in the process and thus contributing to the death spiral ... choose well, DB, you parasite.

chubbar Tue, 07/11/2017 - 09:55 Permalink

I've stopped believing the pundits on this topic. I remember only a year or so back when the thought of raising rates would elicit laughter from these same pundits as being absurd. Now we have the CB's raising rates into a rapidly slowing economy. I don't think anyone really knows what these fuckers are up too. I think it is entirely possible that they allow the world economy to crash without applying helicopter money. The deep state clearly has an agenda so without knowing what that is, it's not going to be possible to game this. I do believe that they want a one world currency and gov't but it's possible that it is something else entirely that happens in the short term.For instance, what if they want a massive die off prior to instituting order? One can make this case by looking at the widespread immigration of young radicals that has been forced on the western civilizations by the deep state. This situation has to resolve itself to have a functioning society and civil war could be entirely possible at this point.So with that scenario in mind, I'm not convinced that anyone really knows how long the CB's will be stringing along the economy with their efforts.

el buitre chubbar Tue, 07/11/2017 - 10:24 Permalink

The Deep State has two choices when chaos hits the markets.  Since they will not have adequate time to issue debt based money, they would have to flood the the market with helicopter digital market as Zim and Weimar did with paper.  This of course would accelerate hyperinflation.  The other thing that they could do is do nothing.  This would result in hyperdeflation which would allow the money interests to buy up everything for pennies on the dollar, which they did in in the 1930’s.  Either path would result in the destruction of credit which would lead to a paralysis of the supply chain for essential items.  A big die off of the American Sheeple.  Time to complete your preps.  Bill Holter is the best analyst regarding this scenario.

In reply to by chubbar

chubbar el buitre Tue, 07/11/2017 - 10:44 Permalink

They have more than these two choices, they can ameliorate these swings by doing half ass measures in order to delay. This is the point I was trying to make above, they could string this out if they want or they could crash it by either of the 2 methods you lay out. Unless you are in the deep state, you don't know what the plan is.

In reply to by el buitre

rex-lacrymarum chubbar Wed, 07/12/2017 - 14:43 Permalink

Not even the Deep State knows what the "plan" is, since it is probably not monolithic. As regards central bankers, per experience they are not exactly blessed with any great insights (one must assume that most of the time they haven't the foggiest idea of what they are doing). Apart from that, they are reactive. They are known as central planners, but that doesn't mean that they actually have a plan. They simply react with a varying time lag to whatever havoc their policies eventually unleash, and usually their reaction lays the foundation for even greater mayhem down the road. 

In reply to by chubbar