I’m Positive Rates Will Be Negative

The old joke was…

How do you tell when a politician is lying? The punchline…their lips are moving.

These days you can interchange ‘politician’ with ‘central banker’.

Long gone are the days when those holding the position of the ‘bankers’ banker’ are held in high regard.

Their incompetence makes Daniel Andrews look (almost) competent. And that’s saying something.

In Andrews’ defence (and I cannot believe I just wrote that) he was dealing with a sudden and unexpected crisis. Decisions were being made on the run.

Central bankers have no such defence.

  • Debt crises have been around for centuries.
  • The symptoms never vary.
  • System takes on too much debt.
  • System blows up.
  • System starts again.

Never in the long and storied history of debt crises has one ever been resolved by adding MORE debt.

But the current crop of present (and recently retired) central bankers ignored all historical precedent. They knew better.

The conceit of these academic pontificators is galling.

They continue making bad situations worse.

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We have another bubble in US housing

When the dotcom bubble blew up, Greenspan took rates lower for longer. Guess what? Yep, you know the story. We have another bubble in US housing. That bubble met its subprime pin.

When faced yet again with damning evidence of how fundamentally flawed this debt-funded economic growth model is, what are their options…

  1. Admit you are an economic fraud and do the honourable thing and resign.
  2. Show humility, apologise and change the model to one that strikes a fair balance between rewarding savers and moderating the growth rate of debt.
    OR
  3. Arrogantly and wilfully abandon all common sense and remain blindingly committed to your academic hocus-pocus. Take those rates even lower for even longer in the belief there will not be a repeat of what’s happened every other time.

Personally, I think they should have gone for a) but would have settled for b).

However, to go for c), well that — as defined by no less than Albert Einstein — was pure insanity.

Central bankers — and I know this might sound harsh — are mean, heartless and full of their own self-importance.

How else can you explain actively encouraging households to take on more and more and more debt, knowing that history repeatedly show you this will end very badly?

In Australia, with the lowest interest rates in history, we have 73.4% of ‘young growing families’ experiencing mortgage stress.


Port Phillip Publishing

Source: DFA

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I hope the RBA is well pleased with its handiwork…putting 1.52 million Australian households in mortgage stress.

Why would you dangle the low interest rate debt carrot knowing you are only offering false hope to people?

Why would you want to punish savers so badly they are forced to risk their life savings chasing high-yielding, high-risk alternatives?

Central banker delusion creates the illusion

Investments that — as also shown by history — will inevitably leave them with cents in the dollar?

This is the work of the callous and merciless. They have no big picture vision. Their only focus is on next quarter’s CPI, GDP and unemployment data.

It matters for nought that these are flawed and doctored statistics. Just do ‘whatever it takes’ to move those broken needles in the right direction. When it comes to central banks, it’s all smoke and mirrors.

Central banker delusion creates the illusion. The vast majority of people actually believe central bankers know what they are doing.

Do they not see where central bankers have taken us and are going to take us to?


Port Phillip Publishing

Source: Real Investment Advice

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Whether you like or not we are going to a greater height from which to fall.

When faced with the recent economic slowdown, central bankers have taken another leaf out of the book on how to run a Zimbabwean economy.

Yesterday, Bloomberg reported (emphasis added):

Christine Lagarde said the European Central Bank [ECB] has room to add stimulus and can adapt its already expansive toolkit if the economy needs more help.

“We clearly showed that when the economic situation demanded, we were capable of finding the necessary responses,” she told a joint session of the French and German parliaments on Monday. “And we will continue to use the monetary policy instruments; either those that exist now by calibrating them to the right level, either by imagining other mechanisms that will allow us to respond.

“Has the ECB fired its last cartridges? No, not at all, not at all,” she said. “We can find answers to help economies.”

In case you missed it…either by imagining other mechanisms.

If that doesn’t send a shiver down your spine, I don’t know what will. What could these crackpots create in their imaginations? And remember, what one of these central banker nutters does, the rest surely follow.

Europe went into negative rates in 2014 and then Japan followed in 2016.

The aim of negative rates is to discourage savings and encourage spending. In theory, this will get that CPI needle moving into the targeted range.

Really?

When negative rates were introduced into Europe, CPI actually fell. Then it started to nudge up to the magical 2% line, but, about 18 months ago (before COVID-19), price inflation could not be maintained.


Port Phillip Publishing

Source: Investing.com

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I won’t even bother showing you Japan’s CPI, it’s more or less the same as Europe.

Negative rates DO NOT work.

And this chart from no less than the ECB itself shows why.

After rates went negative in 2014, cash holdings (yellow line) actually rose…


Port Phillip Publishing

Source: ECB

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What the central bankers fail to appreciate is that their lower for longer interest rate policy actually sends a signal to bunker down…things are not good out there.

So what do people do? Stockpile cash…like Europeans are doing in even greater amounts now.


Port Phillip Publishing

Source: Eurostat

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But tried and failed policy settings have never stopped central banks in the past, so why should we expect any different in the future?

The UK Telegraph recently reported:

When Andrew Bailey stepped up to become Governor of the Bank of England [in March 2020] he was emphatic about the prospect of negative interest rates in Britain. “On the whole, negative interest rates, no,” he said. “It is not an area I would want to go to.”

What a difference six months makes.

Concrete evidence negative rates are coming…

As reported by Reuters on 17 September 2020 (emphasis added):

The Bank of England said it was looking more closely at how it might cut interest rates below zero as Britain’s economy faces a triple whammy of rising COVID-19 cases, higher unemployment and a possible new Brexit shock.

In Australia, the Australian Financial Review on 1 June 2020:

Governor Philip Lowe has confidently ruled out the need to lower rates from 0.25 per cent into negative territory, saying the move would be “extraordinarily unlikely.”

But then we had this in Reuters on 22 September 2020 (emphasis added):

Australia’s central bank is assessing various monetary policy options including currency market intervention and negative rates to meet its inflation and employment goals, Deputy Governor Guy Debelle said on Tuesday.

The final option was negative rates, though Debelle said the empirical evidence on its success was mixed.

The RBA has previously said on multiple occasions that negative rates were “extraordinarily unlikely” in Australia and Debelle reaffirmed that stance.

For now, it’s ‘extraordinarily unlikely’. But I’ll bet you London to a brick it’s going to become ‘extraordinarily likely’ in the coming months, even though…‘empirical evidence on its success was mixed’.

The evidence is not mixed. It is unequivocal. Negative rates DO NOT work. Europe started at MINUS 0.1% and six years later is at MINUS 0.5% and still cannot sustain CPI above 2%.

What do these people not get?

And the last word goes to the central bank big daddy…the Fed.

To quote from the 18 May 2020 issue of Forbes:

“I continue to think, and my colleagues on the Federal Open Market Committee continue to think that negative interest rates is probably not an appropriate or useful policy for us here in the United States,” said Chairman Powell in a recent 60 Minutes interview. “The evidence on whether it helps is quite mixed.”

Those central banks that have not yet ventured into negative rates are all singing from the same hymn sheet.

Let’s not go there. Extraordinarily unlikely. Not an appropriate policy. Mixed evidence.

If ever you wanted concrete evidence negative rates are coming, there you have it.

What we should be really, really worried about is Lagarde’s thought bubble…imagining other mechanisms.

This comes from a person who, in 2016, was tried and convicted in a French court of the criminal charge…‘negligence by a person in position of public authority’.

In my imaginings, one day central bankers will be hauled before a court and found guilty of the same charge.

Regards,

Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion


Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Port Phillip Publishing as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.


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