We have written on NIRP and continue to evolve analysis and forecasts based on its expanded and deepening usage. Here are two of our recently published commentaries: “Tug of War,” published on March 10, 2016, and “ECB Policy Shift.
My friend Chris Whalen, a GIC board colleague and seasoned analyst of banking and credit, has added a substantial essay to the discussion, entitled “Will Negative Interest Rates Save Europe’s Banking System?”. For those who do not know Chris, he is Senior Managing Director and Head of Research at Kroll Bond Rating Agency and co-author of Inflated: How Money and Debt Built the American Dream (Wiley, 2010).
Chris is looking at NIRP and the European Central Bank through a lens that has been sharply honed by his years of experience rating banks. His credentials include early warnings on Wachovia, Lehman, and a long list of others. His views and those of his teammates at Kroll are well worth reading.
We thank him for sharing this superb commentary and giving us permission to present it to our readers.
Separately and coincidentally, I had an opportunity to interview with Asset TV on the dichotomies arising from NIRP. Asset TV has permitted us to share that 5-minute clip with our readers. Click here for the article.
There are some who say zero is just another number on the scale. They argue that minus 40 basis points or plus 40 are only 80 apart and the scale selection between minus and plus is simply arbitrary. They may be right.
But in our view that is not correct. We think NIRP means a lot more time before any NIRP policy maker can get back to a positive and traditional PIRP. We think Europe and Japan and others are now likely to be at zero or lower for the rest of the decade and maybe longer. We think the impact on asset prices is profound. And we think markets are underestimating the power of NIRP on asset prices just as central bankers are overestimating the power of NIRP for achieving economic growth.
That said, we agree with Chris. It isn't about liking NIRP or disliking it. We have it; and, given the failures of governance in fiscal matters, it is all they have left.
Asset prices in certain NIRP jurisdictions are headed higher. Maybe much higher. In other jurisdictions, such as the US, the issue is more complex. We have written about that "tug of war," in the piece link to above.
For now we have some cash reserves in our various ETF strategies. We were fully invested in some of them, but the rally back to the April 1 high gives us some pause.