The Pointlessness of Negative Yields

If there are any virtues of debt instruments with negative yields we have yet to realize them. Certainly, we understand that as bond yields fall, bond prices rise, and bond investors are rewarded with capital appreciation. But when capital is appreciating as a consequence of negative yields, we suspect there is something fundamentally wrong with the capital itself.

 

Not only is the stock of negative-yielding debt at a new record high of almost $17 trillion, lately there has been a big surge in corporate debt sporting negative yields-to-maturity. [PT]

 

Capital markets, as we have always understood them, are centered around lenders buying debt – such as a bond – at a yield that compensates for the risk of default over a contracted duration. The acceptance of negative yield is an abstraction that violates the form and function that capital markets are built on.  In fact, negative interest rates undermine the foundational business model of banking in general.

How can banks lend money if they’re not compensated for the risk that some loans will go bad?  And if banks can only lend money at a loss, why lend money at all?  If there is no profit motive, what is the point?

There is currently about $17 trillion in combined government and corporate negative yielding debt in existence.  The European Central Bank and the Bank of Japan, with policies of mass money debasement that far exceed those of the Federal Reserve, are the primary culprits.  Their fake money and fake interest rates have produced fake capital markets.

In effect, Negative Interest Rate Policy (NIRP) destroys a commercial banks ability to build capital and offset losses. In other words, NIRP destroys commercial banks.  By extension, NIRP via central banks leads to the implied nationalization of commercial banks.

 

They certainly do look destroyed – the EuroStoxx Bank Index is down 84% from its 2007 high. Maybe NIRP wasn’t such a great idea after all… [PT]

 

Japan and Europe are already past the point of no return.  President Trump beats on Fed Chair Jay Powell practically every day to go negative.  Will he acquiesce?  In truth, he doesn’t have a choice…

 

Roadkill

In western Wyoming, between the Teton Mountain Range and the Gros Ventre Range, sits a high altitude mountain valley.  The near vertical slopes used by Davy Jackson and other 19th century fur trappers to enter the valley from the north and east gave the sensation of entering a hole. The name stuck.

The conditions are harsh along the Jackson Hole valley floor.  Radiational cooling, where low lying cold air from the snow covered ground plunges the temperature as the air migrates down the valley.  This cooling effect, an effect similar to negative yielding debt, has produced temperatures of negative 66 degrees Fahrenheit.

However, for a brief period each year, the conditions in Jackson Hole are near perfect.  In late summer, the valley’s paradise.  Still, perfect conditions do not mean all is perfect in Jackson Hole.

 

Jackson Hole – where Moose go to die. According to the Jackson Hole Conservation Alliance, we are now at “22,390 dead moose” – and counting. If you happen to be a moose, we would strongly urge you to avoid the area. [PT]

 

On Sunday night, for example, resident Gale Wilson took a photo of a moose and her calf near Highway 390 and the Snake River.  When she stepped outside on Monday morning she was greeted by the dead calf’s body.  “It just ruined my day,” said Roosevelt.

Unfortunately, moose roadkill has become such a common occurrence along this stretch of Highway 390 that Mark Gocke, with the local Game & Fish, has lost track of how many moose have died.  To better square up the runaway roadkill, Mr. Gocke is hard at work – or, perhaps, hardly working – on an official tally.  He may need to add several new entries to his log before the weekend is over…

 

Dead Meat in Jackson Hole

This Thursday through Saturday, for the 37th consecutive year, the Kansas City Federal Reserve is hosting its economic symposium in Jackson Hole. Central bankers from the Federal Reserve have descended upon the valley like 19th  century fur trappers.  Who they bill their expense reports to is a question better not asked.

At the time of this writing, Fed Chair Powell has yet to give his speech.  There are many things he could say.  There is little that he will say. There are things he definitely won’t say.

 

The plethora of pressures Jerome Powell is laboring under: serenades asking for more cowbell, hopeful bovines in ACME trucks, subtle suggestions from Wall Street and a certain politician, heartfelt prayers… [PT]

 

For example, Powell won’t say that the world’s central banks are tripping and stumbling as they race to out-stupid one another.  Nor will he say that locking in a guaranteed loss on bonds that are held to maturity is a terrible way for investors and pension funds to meet their long-term liabilities. Or that sometime over the next decade retirees will be eviscerated. He won’t say any of that…

Powell also won’t say that the Federal Reserve’s days are numbered.  That the central bank is obsolete and one crisis away from its own destruction. That it has cannibalized the nation’s time and treasure, transferring individual wealth to Washington for Washington’s ends.

Powell certainly won’t say that he may very well be the last Chair of the Federal Reserve.  That the economic model of the 20th century is over.  That increased issuance of debt no longer translates into increased economic growth.

That the Fed merely provokes wild asset price swings, negative yielding bonds, casino style speculation, and epic bubbles and busts. And that with full knowledge of this, he will still take the nation into the hole of negative yields.

 

Meet the next yield target… [PT]

 

Indeed, the rash of moose kills in Jackson Hole is acutely instructive. The central bankers are dead meat. And they know it.

 

Charts by Invesco, Bloomberg, investing.com

 

Chart annotations and image captions by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

One Response to “Dead Meat in Jackson Hole”

  • utopiacowboy:

    Do they know it? In the mainstream media, they say that the Fed has everything under control and Trump tells us this is the greatest economy ever. To infinity and beyond!

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • The Impulses of Lunar Fed Policy Under Repo Madness
      Trepidation Nation This week, while you were busy working, Jamie Dimon, CEO of JP Morgan Chase, took time out from rubbing elbows with fellow movers and shakers at the World Economic Forum in Davos, Switzerland, to share his trepidations:   “The only thing I have trepidation about is negative interest rates, QE, and the diversion between stock prices and bond prices and yield and stuff like that...  I think it’s very hard for central banks to forever make up for bad...
  • Opportunities in the Gold Exploration Sector
      An Unloved Sector We rarely discuss individual stocks in these pages, but we make an exception now and then when we spot exceptional opportunities. This time the reason is actually more mundane: the vast majority of gold exploration stocks failed to benefit from the rally in precious metals prices last year. As a result many of them came under even greater pressure in the tax loss selling season at the end of the year. We made a list of such stocks late last year – a download link to the...
  • The Triumph of Madness
      Historic Misjudgments in Hindsight Viewing the past through the lens of history is unfair to the participants.  Missteps are too obvious.  Failures are too abundant.  Vanities are too absurd.  The benefit of hindsight often renders the participants mere imbeciles on parade.   The moment Custer realized things were not going exactly as planned. [PT]   Was George Armstrong Custer really just an arrogant Lieutenant Colonel who led his men to massacre at Little...
  • The Strongest Seasonal Advance in Precious Metals Stocks Begins Now
      Bonanza Season In the 18 December 2019 issue of Seasonal Insights I discussed the strong seasonal advance in precious metals around the turn of the year. In silver it begins in mid December and continues until the end of February. A roughly similar pattern can be observed in platinum and palladium, while seasonal buoyancy is at least to some degree evident in gold as well.   Long-term silver and platinum seasonal charts from the late 2019 issue of Seasonal Insights : the...
  • US Stock Market  - Sentiment and Positioning
      Market Drivers The recent outbreak of a dangerous respiratory illness caused by a new Corona virus in China was widely blamed for the stock market sell-off on Monday last week. It is undoubtedly true that the epidemic has the potential to severely disrupt economic activity, although it is too early to come to a definitive conclusion about that. Be that as it may, the event actually serves as an excellent example illustrating that the news of the day are incidental to market action...
  • The Constitution IS the Crisis
      A Review of Murray N. Rothbard’s Conceived in Liberty, Vol. 5 Holy Writ The posthumous release of Murray Rothbard’s fifth volume of his early American history series, Conceived in Liberty, is a cause of celebration not only for those interested in the country’s constitutional period, but also for the present day as the nation is faced with acute social, economic, and political crises.   Murray Rothbard, the foremost representative of the “American branch” of the...
  • A Pharmaceutical Stock That Is Often Particularly Strong At This Time Of The Year
      An Example of Strong Single Stock Seasonality Many individual stocks exhibits phases of seasonal strength. Being invested in these phases is therefore an especially promising strategy.   Danish drug company Novo Nordisk   Today I want to introduce you to a stock that tends to advance particularly strongly at this time of the year: Novo Nordisk. The Danish pharmaceutical group supplies a broad range of products and is a global market leader in diabetes...
  • The Secret to Fun and Easy Stock Market Riches
      Post Hoc Fallacy On Tuesday, at the precise moment Federal Reserve Chairman Jay Powell commenced delivering his semiannual monetary policy report to the House Financial Services Committee, something unpleasant happened. The Dow Jones Industrial Average (DJIA) didn't go up. Rather, it went down.   The Fed chair and His Magnificence, God Emperor, Field Marshall & Stable Genius, POTUS Donald J. Trump: a complicated relationship. [PT]   Were the DJIA...

Support Acting Man

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

     
    Buy Silver Now!
     
    Buy Gold Now!