Charts of the Week: Negative Bond Yield Spreads as Global yields fall to record, China’s Shibor rates plunge to 2009 lows as Hong Kong’s HIBOR rates spike!

Charts of the Week: Negative Bond Yield Spreads as Global yields fall to record, China’s Shibor rates plunge to 2009 lows as Hong Kong’s HIBOR rates spike!

As negative-yielding sovereigns spread with the entire Swiss curve in the negative, Germany’s 30-year yield remains the only positive.

Global bond yields hit record low prior to the payroll reports.

German bunds fell below the ECB’s deposit rates for the first time ever!

Hong Kong’s 1-week interbank lending rate (HIBOR) raced to 2008 levels to highlight symptoms of liquidity squeeze!

In the meantime, China’s overnight interbank lending rate (SHIBOR) falls to 2009 lows last Thursday, to signify panic hoarding by banks.

Finally, when the public refuses to borrow, just forced them to. Nigeria’s central bank orders banks to lend money.  

You can lead the horse to the water, but you can’t make it drink.

Unfortunately, that’s the only thing central banks know of.

$10 Trillion of Negative Yielding Bonds, George Soros Bets Big on a Market Crash!

Negative yielding global bonds have reached $10 trillion says Fitch. This means that instead of borrowers paying lenders for the privileged to access someone else’s or the lender’s savings, negative yields means lenders are paying borrowers to borrow! Of course under the fractional reserve banking, lending is not a function of someone else's savings but from the central bank's digital press traditionally channeled through banks. 

Even more, any entity that owns a negative yielding instrument is guaranteed of losses. So the broadening of negative yields simply means that losses in the financial and economic system has been mounting! And all these for the sake of holding onto liquid instruments that ensures of the financing of spendthrift governments around the world. 

In short, negative yield is like a premium for the convenience yield. 

Think of what this will do to financial institutions, which are required to hold government debt as part of their Tier 1 Capital. 

And think of what this will do to pension funds. In order to match assets with liabilities these institutions are being forced out into the financial markets to gamble. And the yoke of the attendant risks from such speculative activities will be shouldered by depositors and pension beneficiaries…and eventually taxpayers and currency holders 

In Japan, because primary dealers are required to buy government bonds, Bank of Tokyo-Mitsubishi UFJ (BTMU) mulls to quit from such a role given the prospective losses. 

It has really been an upside down world that has been spawned by desperate central bankers. 

Negative Interest Rates (NIRP) have been designed to the shield the mountain of accumulated debt, particularly government debt, from imploding and setting off a crisis. 

And don’t forget given the globalization of financialization these negative yields brought about by NIRP have been transmitted to as partly carry trade or cross asset arbitrages. For instance, bond traders have sold negative instruments and have been piling into any bonds such as US treasuries with  positive yields. Some of these has been spilling over into emerging markets (which should include the Philippines) 

Well not everyone agrees that central bank magic have its desired effect. 

Investing savants like Stanley Druckenmiller and Carl Icahn have bet recently big on the prospects of a market crash. 

Today, international media also reported George Soros have taken a sizeable position on a market crash. 

From the Business Insider (bold mine) 

Legendary investor George Soros is back to making big bets. 

Soros has returned to trading after a long hiatus, according to Gregory Zuckerman over at The Wall Street Journal. 

He has recently directed a series of large bearish bets, selling stocks and betting on gold, the report said. 

Soros, who ranks second on the list of the most successful hedge fund managers of all time, has spoken publicly about his concerns for the global economy. 

He recently said that China's financial system right now "eerily resembles what happened during the financial crisis in the US in 2007-08." 

And in Davos earlier in the year, he said that the world is running into something it doesn't know how to handle, and that he was betting against Asian currencies and commodity-linked economies. 

China later warned Soros against going to 'war' on its currency 

Soros stepped back from day-to-day trading some time ago, and his return to investing marks a turnaround. 

Scott Bessent had been the top investor at Soros Fund Management, but he left last year tolaunch his own fund, Key Square Group In January, Soros Fund Management named Ted Burdick as its news chief investment officer

Well you may interpret as my appeal to authority. Regardless, such unprecedented monetary-NIRP policies will come with big unintended very nasty consequences.

And because the world is interconnected and interdependent, rallying Philippine assets have been a consequence of the Developed Nation's negative interest rate and ZIRP policies for the rest. Yes the BSP has a negative real rates policy. Soros or no Soros.

ECB Panics! Announces Deeper Negative Rates and Expands QE!

ECB's Super Mario lived up to the stock market's expectations. 

In the aftermath of the recent meltdown, Super Mario promised to bailout the stock markets with even more stimulus. Tonight Super Mario delivered

Here's the Bloomberg for the details:

Mario Draghi unleashed his most audacious stimulus package yet, unexpectedly testing the lower bounds of all the European Central Bank’s interest rates and expanding its monthly bond purchases by a third...

The 25-member Governing Council, meeting in Frankfurt on Thursday, cut the rate on cash parked overnight by banks by 10 basis points to minus 0.4 percent and lowered its benchmark rate to zero. Bond purchases were increased to 80 billion euros ($87 billion) a month from 60 billion euros, and corporate bonds will now be eligible. A new series of long-term loans to banks will begin in June.

The package exceeded market expectations for more stimulus and may signal increasing concern about persistent weakness in consumer prices and a Chinese slowdown. Draghi -- who will present new economic forecasts -- has repeatedly said policy makers are willing to do what’s necessary to revive inflation and underpin the region’s upturn.

Remember, the ECB continues to throw 'everything but the kitchen sink'...yet the sustained failure to accomplish the desired goals.  And this is why the next phase of the bailout.

So central banks virtually does the same thing over and over again and yet expect different results. For some such acts are called insanity. But for policymakers it is called as standard.

Now the question is, how long will the honeymoon period last?

Bank of Japan's War on Cash: Demand for Safes and Big Denomination Yen Notes Soar! Gold Priced in Yen Surges!

At the outset of the imposition of NIRP,  the average Japanese seem to be vehemently pushing back on the Bank of Japan’s (BoJ) attempts to shanghai their resources.

First, the imposition of NIRP has only caused fissures in the establishment. This can be seen in mainstream media, as well as in the reactions of several politicians to the BoJ

According to Fidelity/DJ Business News (February 18)

A clash Thursday between Japan's central-bank chief and lawmakers highlighted the downside of negative interest rates: They are making the Japanese public feel negative.

Bank of Japan Gov. Haruhiko Kuroda, who announced the nation's first move into minus rates three weeks ago, found himself dodging a concerted attack in Parliament from lawmakers who charged the policy was victimizing consumers and sending a message of despair.

Next, in anticipation of non bank savings, sales of safes (and safety boxes) have suddenly boomed!

From Fortune.com (February 23, 2016)

Negative interest rates mean customers effectively pay a fee for parking cash in banks, so Japanese citizens are beginning to hoard yen, according to the Wall Street Journal, and they need somewhere to put it.

Sales of safes have doubled from the same period a year earlier at chain hardware store, Shimachu, according to theJournal. The chain has already sold out of one model worth $700. Others savers are considering more unconventional storage spaces.

“In response to negative interest rates, there are elderly people who’re thinking of keeping their money under a mattress,” Mariko Shimokawa, a Shimachu saleswoman told the Journal.

Third, real cash demand has spiked as exhibited by zooming demand for the yen's big notes!

From Bloomberg (February 24, 2016)

Demand for 10,000-yen bills is steadily rising in Japan, even as the nation’s population falls and the use of credit cards and other forms of electronic payment increases.

While more cash might sound like a good thing, some economists are concerned that it shows Japanese households are squirreling away money at home instead of investing it or putting it into bank accounts -- where it can make its way back into the financial system and be put to productive use.

That’s a big problem for Prime Minister Shinzo Abe and his central bank chief, Haruhiko Kuroda, as they try to spur consumption and reflate the stuttering economy.

The mountain of cash in Japan amounts to almost 100 trillion yen ($890 billion), equivalent to about a fifth of the size of the economy. And last year the number of 10,000-yen notes, the biggest bill, increased by 6.2 percent, the largest jump since 2002.

Increased demand for big note cash has likewise surfaced in Europe.

Lastly, gold prices in yen has likewise surged.

Despite the recent correction in the prices of gold based on USD, the yen price of gold continues upward as shown in the chart from the World Gold Council.

Perhaps my observation is being incrementally affirmed

Coupled with growing ban on cash by governments mostly under NIRP, the likelihood of imposition of myriad capital controls, prospective bail-ins or deposit haircuts on troubled banks, and or even perhaps outright protectionism, probably gold senses a massive disruption in the banking system, and the large scale drying up of global liquidity as the public gravitate towards cash with gold functioning as an alternative medium of exchange.

Confiscations of private sector resources to finance desperate bankrupt governments will likely deepen. From zero bound, to zero to negative and to the war on cash, as well as, to various capital, transactional and people controls, these shows of the slippery slope of the government's thrust.  So it won't take long, when governments will likely expand their prohibitions or increased regulations to include safes and safety boxes and gold ownership. Add guns to it. Yes people will need guns to protect their home based savings.

Breaking News: Bank of Japan Embraces Negative Interest Rates!

What the casino stock markets have been drooling for has finally arrived. 

Since stock markets are not allowed to sink, so desperate times calls for desperate measures. The global war on interest rates has only deepened

From the Financial Times:

The Bank of Japan has adopted negative interest rates in their first benchmark rate move in five years, but has also chosen not to expand its quantitative and qualitative easing programme beyond its current level of buying Y80tn assets a year.

The BoJ has adopted a benchmark rate of -0.1 per cent, from a previous level of 0.1 per cent. It is the first time they have moved interest rates since October 2010.

Most economists had expected the BoJ to stay on the same course, although investors are looking to central banks for additional support given falling stock prices. Deflationary pressures – largely energy-related, as oil prices remain low – and the risks they pose to the BoJ’s inflation expectations are consistently cited as a likely motive for further easing.

Quote of the Day: Monetary Policy Cannot Solve All Economic Problems That May Ail Our Economies; What happens When The Fed Stops Distorting Prices?

The authority of monetary policymakers to intervene in financial markets has come to be accepted and expected. Whether the purpose is to change the relative price of various assets, such as long vs. short dated Treasuries, or to alter the allocation of credit, such as Treasuries vs. mortgage-backed securities, the result has been a much more interventionist central bank. The belief is, of course, that central bankers know enough to control relative asset prices with sufficient precision and that the transmission mechanisms and consequences are sufficiently predictable that policymakers can better control real economic growth and employment, and now, financial stability.

I find this a dubious proposition at best. For central banks to act as if these conditions exist suggests to the public that monetary policy has great ability to fine tune economic outcomes. That means monetary policy makers may well be accepting more responsibility for managing economic outcomes than they, in fact, can deliver. This is a recipe for failure and can undermine the public’s trust and confidence in the central bank. So maybe a little more humility on the part of central bankers and the public regarding what they monetary policy can accomplish is in order and a little less intervening just because it can, or has the power or authority, may be prudent. Monetary policy simply cannot solve all economic problems that may ail our economies.

(bold added)

This quote is from Charles Plosser former President, Federal Reserve Bank of Philadelphia and former Dean, Graduate School of Business Administration, University of Rochester as interviewed by the Money and Banking blog

More juicy quotes (bold mine)

As I mentioned, no regulatory authority anywhere in the world, no central bank no financial supervisory agency, saw the crisis coming. What makes us think we will spot the next one? Whenever it arises it will surely come from somewhere the authorities were not looking.

We face a number of challenges. First we have the problem of defining financial stability. I know of no good definition. Without a definition how do we know if we have succeeded? How do we know if we have over compensated and reduced risks too much without some metric that tells us of the trade-offs? Implicit in the Dodd-Frank legislation is the view that if only we could write enough rules and prohibitions on the financial sector we could solve the problem. I believe this is a bit like the dog chasing its tail, and equally futile.

Second we should acknowledge that stability risks can move around. Where regulators look, those risks are unlikely to be found. The challenge is figuring out where they will show up next. Financial markets are adept at packaging and repackaging risks in forms that the market will buy. There is nothing inherently wrong with this except regulators will always be behind the market developments.

Finally, the central bank should be particularly vigilant in not artificially encouraging financial imbalances or stability risks through its monetary policy actions. Unfortunately, this may bring financial stability and the goals of monetary policy into stark conflict. There is an ongoing and important debate on this issue. That is, should monetary policy be used to address financial stability risks or not; what if it’s a source of the risks?

Today the stated goal of the interventions undertaken by the Fed such as the asset purchases or the maturity extension program have been intended to encourage risking-taking and alter the portfolio balances of economic agents. If successful, these actions distort market prices. One stability risk worth considering is: What happens when the Fed stops distorting prices?

Wow! Ambiguity in the definition of financial stability, stability risk in a state of perpetual flux (or also policy or political response as 'fighting the last war' or dealing with past rather then present evolving problems) and most importantly, treating symptoms while encouraging the disease (financial imbalances) seem as an implied rebuke on central banking's "macroprudential policies" and the Basel Standard!

Quote of the Day: The Apex of Market Stupidity

In the last week, we have reached what is surely the apex of this stupidity. A bunch of algo traders programmed their computers expecting “Derivative Draghi” to be extremely dovish, as any proper Italian central banker should be. I am not sure I understand why, but some traders obviously decided that he had not been dovish enough. European stock markets plunged by -4%, while the euro went up by roughly the same amount in the space of a few minutes. What that means is simple: value in the financial markets is no longer a function of the discounted cash flow of future income, but instead is determined by the amount of money the central bank is printing, and especially by how much it intends to print in the coming months. So we are in a world where I can postulate the following economic and financial law: variations in the value of assets are a function of the expected changes in the quantity of money printed by the central bank. To put it in a format that today’s economists understand:

Delta (VA) = Delta * (M),

where VA is the value of assets and M is the monetary increase.

What we are seeing is in fact in one of the stupidest possible applications of the Cantillon effect, whereby those who are closest to the money-printing, i.e. the financial markets, are the biggest beneficiaries of that printing. This is exactly what happened in 1720 in France during the Mississippi Bubble inflated by John Law. The end results were not pretty.

What I find most hilarious is that some serious commentators have been pontificating at considerable length about what the market’s participants think. These days, some 70% of market orders are generated by computers, and many of the rest by indexers. And computers do not think. They simply calculate at light speed, which allows them to react to short term movements in market prices as they were programmed to do. And since they are all programmed the same way, the result is some big short term market moves. In essence, these computers act as machines that allow market participants to stop thinking. As a result, I cannot remember a time when less thinking has ever been done in the financial markets, which is why I find today’s financial markets infinitely boring.

We are swimming in an ocean of ignorance, just like France in 1720. It seems all the painful economics lessons learned over the last 300 years have been forgotten. I suppose that means we will just have to wait for another Adam Smith to appear. La vie est un éternel recommencement...

This excerpt is from an article written by Gavekal's Charles Gave published at ZeroHedge

Headlines of the Day: Response to ECB’s (Toy Bazooka) Stimulus: Spasmodic Withdrawal Syndrome!

Zealots of the ECB’s (or central banking) tooth fairy elixirs got a dose of harsh reality as stock markets melted down from failed grand expectations.

The following headlines says it all...

Europe… (via Google search)

US… (via Google Search)

Asia… (via Wall Street Journal)

There is no such thing as a free lunch FOREVER.

Sweden’s Central Bank Launches QE4, Norway’s Wealth Fund Suffers Biggest Loss and China’s Steel Demand Slumps at Unprecedented Speed

Why are central bankers around the world in a panic?

From Bloomberg: (bold mine)

The Riksbank expanded its bond-purchase plan for a fourth time since February as policy makers in Sweden struggle to keep pace with stimulus measures in the euro zone.

The quantitative easing program was raised by 65 billion kronor ($7.6 billion). The bank opted to keep the benchmark repo rate at minus 0.35 percent, as estimated by 13 of the 15 analysts surveyed by Bloomberg. Two had foreseen a cut.

“There is still considerable uncertainty regarding the strength of the global economy and central banks abroad are expected to pursue an expansionary monetary policy for a longer time,” the Riksbank said in a statement on Wednesday. “An initial raise in the rate will be deferred by approximately six months compared with the previous assessment.”

How low can the Riksbank go?

Since the European Central Bank signaled last week it may expand an already historic stimulus program as early as December, policy makers outside the euro zone have girded for the next stage of a currency war that few have adequate tools to fight. The Riksbank’s expanded QE program means it will have purchased 200 billion kronor in bonds by the end of June 2016, it said.

“The Riksbank is haunted by the krona and a soft ECB,” Torbjoern Isaksson, an economist at Nordea, said by phone. Nordea will probably stick to its forecast that the Riksbank will lower its repo rate further in December, Isaksson says.

When central banks panic, this represents a Pavlovian classical conditioning signal for the greater fools to indulge in a buying mania of risk assets

chart from Zero Hedge

Aside from stocks, the previous easing by the Riksbank has only been inflating Sweden’s incredible housing bubble.

Yet all the easing by the central bankers seem to have failed to do its wonders even in stocks. One of the unfortunate casualty is a government fund.

Norway’s sovereign wealth fund reportedly suffered its biggest loss in four years. From another Bloomberg report (bold mine)

The world’s largest sovereign wealth fund posted its biggest loss in four years, dragged down by Chinese stocks and Volkswagen AG, just as the Norwegian government prepares to make its first ever withdrawals to plug budget deficits.

The $860 billion fund lost 273 billion kroner ($32 billion) in the third quarter, or 4.9 percent, the Oslo-based investor said on Wednesday. Its stock holdings declined 8.6 percent, while it posted a 0.9 percent gain on bonds and a 3 percent return on real estate. It was the first back-to-back quarterly loss in six years.

“We have to expect fluctuations in the value of the fund when there are large movements in the market,” said Yngve Slyngstad, its chief executive officer. “With the fund as big as it is today, this can have a considerable impact in the short term. The fund has a long-term horizon, however, and is in a good position to ride out short-term volatility.”

The period was marked by turbulence as worries of a China slowdown and prospects of a U.S. rate increase wiped trillions of dollars off the value of global markets. The MSCI World Index lost 9 percent while the MSCI Emerging Markets Index plunged 19 percent in the quarter. The selloff was exacerbated by a rout in commodities.

The fund had a loss of 21.3 percent on Chinese stocks in the period and 16.6 percent on its emerging market equities.

To compound on the woes of the Norwegian government, the growing budget gap as consequence of low oil prices and high social spending would probably lead to a drawdown by the government on her wealth fund. So the fund's 'long term horizon' may never occur.

From CNBC:

The signs are worrying: For the first time ever, Norway announced plans to tap its fund to make up for lost oil revenues earlier this month.

The country plans on withdrawing around $450 million from the fund which had $820 billion under management as of the end of June of this year.

While this is not a massive slice of the pie, analysts are worried that the behemoth fund's days of stellar growth may be numbered especially with oil prices predicted to stay low for longer and the $100 per barrel price tag something of a distant memory.

The fund, officially called the Government Pension Fund Global, has accumulated over 25 years of investing oil revenues, making headlines at the start of last year when it rose to 5.11 trillion Norwegian crowns, which at the time was worth $828.66 billion. This meant every person in Norway became a theoretical crown millionaire for the first time thanks to strong oil and gas prices.

Sovereign wealth funds control around $7 trillion of assets, largely created through investing natural resource revenues. After Norway, oil rich Abu Dhabi and Saudi Arabia manage in the region of $770 billion and $670 billion respectively, according to data from Sovereign Wealth Fund Institute.

Norway's economy is currently not under any strain due to soundly managed finances according to economists. But with 40 percent of Norway's exports coming from oil and gas and oil prices down 60 percent since last summer, the fund has come under pressure.

Everything is interconnected. 

The losses of Norway’s sovereign wealth fund has been partly due to her exposure on Chinese risk assets. The Riksbank’s QE has been in response to the global economy also due to the rapid slowing of Chinese economy.

Yet deepening economic troubles continue haunt China.

According to a honcho of a big Chinese steel firms, demand for steel has slumped at an ‘unprecedented’ rate.

From another Bloomberg report (bold mine)

If anyone doubted the magnitude of the crisis facing the world’s largest steel industry, listening to Zhu Jimin would put them right, fast.

Demand is collapsing along with prices, banks are tightening lending and losses are stacking up, the deputy head of the China Iron & Steel Association said on Wednesday.

“Production cuts are slower than the contraction in demand, therefore oversupply is worsening,” said Zhu at a quarterly briefing in Beijing by the main producers’ group. “Although China has cut interest rates many times recently, steel mills said their funding costs have actually gone up.”

Behold the central bank magic! Instead of easing, funding costs goes up!

More…

China’s mills -- which produce about half of worldwide output -- are battling against oversupply and sinking prices as local consumption shrinks for the first time in a generation amid a property-led slowdown. The fallout from the steelmakers’ struggles is hurting iron ore prices and boosting trade tensions as mills seek to sell their surplus overseas. Shanghai Baosteel Group Corp. forecast last week that China’s steel production may eventually shrink 20 percent, matching the experience seen in the U.S. and elsewhere.

“China’s steel demand evaporated at unprecedented speed as the nation’s economic growth slowed,” Zhu said. “As demand quickly contracted, steel mills are lowering prices in competition to get contracts.”

Making Losses

Medium- and large-sized mills incurred losses of 28.1 billion yuan ($4.4 billion) in the first nine months of this year, according to a statement from CISA. Steel demand in China shrank 8.7 percent in September on-year, it said.

Signs of corporate difficulties are mounting. Producer Angang Steel Co. warned this month it expects to swing to a loss in the third quarter on lower product prices and foreign-exchange losses. The company’s Hong Kong stock has lost more than half its value this year. Last week, Sinosteel Co., a state-owned steel trader, failed to pay interest due on bonds maturing in 2017.

Crude steel output in the country fell 2.1 percent to 608.9 million tons in the first nine months of this year, while exports jumped 27 percent to 83.1 million tons, official data show. Steel rebar futures in Shanghai sank to a record on Wednesday as local iron ore prices fell to a three-month low.

Losses and unwieldy debt will have a feedback mechanism that escalates on the already dire conditions.

And more of China’s ‘epic bubble’ as shown in charts from the Bloomberg… (bold mine)

Companies with less cash than short-term debt, net losses and contracting revenue have jumped to 200, according to the filings through June 30 compiled by Bloomberg from firms listed on the Shanghai and Shenzhen stock exchanges. About half are in the commodities sector while about 20 percent are industrial companies. A maker of carbon materials used in batteries is among borrowers that may have trouble repaying obligations by year end, Guotai Junan Securities Co. said….

Desperate for yield, the mania on bonds intensifies

Investors are chasing lower-rated bonds after the central bank cut interest rates six times in a year. That’s dragged down the extra yield on five-year AA graded corporate securities over government notes to 196 basis points, near the lowest in five years. Brokerages including Oversea-Chinese Banking Corp. and Industrial Securities have warned that the exuberance may be creating a bubble.

The rise in corporate debt loads is outpacing economic expansion. Borrowings by companies listed on the Shanghai and Shenzhen stock exchanges jumped 22.7 percent in the most recent filings compared with the end of last year, exceeding the 6.8 percent economic growth for 2015 that analysts surveyed by Bloomberg forecast.

You see, these are great reasons to panic buy risk assets. Who knows, these frantic measures by central banks may just spark the much awaited miracle. It’s been a long wait since though. Central banks have been easing since late 2008. And in nearly 7 years, instead of stability, we see more signs of instability which is why we go back to square: Central banks freaking out!

Of course, if central banks fail, well then, the fool and his money are soon parted.

Headlines of the Day: MOOOOAAAARRRR....Monetary Narcotics!!!!!!!!!!

Pavlov's dogs drooling....

From Wall Street Journal

From Bloomberg

From Bloomberg

From Bloomberg