NIRP – a Central Bank Roadblock to Wealth

NIRP – a Central Bank Roadblock to Wealth

You’ve probably heard some references to the idea that the central bank policy of keeping rates artificially low or negative hurts savers and is partially responsible for the widening wealth gap – the rich get richer and the not-so-fortunate face bigger headwinds. There are a few ways in which this policy harms the less-than-uber wealthy, some obvious and some not too obvious. I recently experienced one of the less obvious first-hand, and I’m still pretty peeved thank you very much, Mr. Mario Draghi.


The most obvious way is by reducing the level of income that can be generated from relatively safe investments. At the start of 2000, the 10-year Treasury bond yielded over 6.5%. Today it yields all of 2.4% while the High Yield 100 yields just 5.6%. Yep, junk bonds today yield less than the 10-year Treasury did at the start of the millennium.


What that means is savers have to take on a lot more risk to generate even less income than was possible 17 years ago. Think about that when you read about the shrinking Middle Class, part of our Rise and Fall of the Middle Class investing theme.


Good thing that the largest generation in American history is at or near retirement when they most need to generate income from their savings – argh! What this means is that this generation, which is the key demographic driver behind our Aging of the Population investing theme, is forced to take on way more risk than any prior generation to get a lot less out of their savings. The potential ramifications of this reality when we inevitably get a meaningful pullback in the markets is unnerving given the state of the average retiree’s level of savings and the dire straits of most pension plans. According to Vanguard’s 2016 How America Saves Report, the average 401K balance is $96,288, but for those Baby Boomers that are now turning 70 the average 401(K) balance is $200,358.  Yes, you read that right… no wonder we keep reading the average Baby Boomer is under saved for their golden years.


There is another way in which these policies make it more difficult to become rich. One of the paths to wealth has been investing in new and upcoming companies – finding the next up and coming companies set to ride our thematic investing themes much the way Microsoft, Facebook, Qualcomm or Google have. This is often done through private equity/venture capital firms who pool together investors’ money and then put it in a selection of privately held companies.


The dynamic between companies looking for funding and those looking to invest involves competition on both sides. Those looking to invest compete to find those that are most likely to succeed to the greatest degree. Those looking for funding look for those that will be most useful to them in terms of developing and building the business as well as those that will give them the highest valuation because a higher valuation means giving away less of the pie.


Now we get to what has me steaming.


Recently I was involved in a process to invest money into a privately held company in southern Europe. The idea was that the funds would be used to buy up some of the competition, grow the business and then take it public in around 5 years – pretty standard stuff. All parties involved knew that there were multiple firms looking to put money into this company as well, so all were aware that each would have to give the highest valuation possible within required return constraint to the company.


After more months’ work than I would like to recall, the offers were submitted. A bit later everyone learned that all the offers received were tightly grouped, except for one that gave a valuation that was more than 25% higher than the second highest!


What the hell?


Turns out the investing group with the highest valuation was a fund of one of the biggest global banks and doesn’t source the funds it invests from private investors, but is instead able to pull directly from the European Central Bank at a negative interest rate! The returns this fund generates simply goes to the bank’s bottom line. Not to cry foul, but that’s a very different landscape to be playing on.


With the yield curve increasingly flat these days, it doesn’t take much to improve a bank’s bottom line. The rest of the investing suitors instead had to price their offerings at levels that would generate attractive enough returns to make it worth their investors’ while to have their money locked up for many years. The bank’s cost of capital may be negative thanks to the European Central Bank’s policies, but have you met anyone who is happy losing money on an investment?


ZIRP (Zero Interest Rate Policies) and NIRP (Negative Interest Rate Policies) hurt those trying to build wealth by not only suppressing interest rates, but by giving those who can access central bank provided lending directly, an impossible advantage. Aside from seriously ticking everyone in the aforementioned investing beauty pageant off, this policy also results in highly concentrated assets and wealth. Those closest to the central banks, which means those who are already uber-wealthy and powerful, have access to cheaper capital than the rest of us, giving them a serious advantage.

This problem affects all investors. Most of those who invest in private equity funds have no visibility into just how many investments their fund managers have lost to competitors like this. The story I just told ripples across all types of investments, forcing savers to accept lower returns along with higher risk levels.


Now I’m off to spend some quality time with my two favorite men, Ben and Jerry. Perhaps at this point, you’ll want to join me.

Market Highs Again – Where Next?

Markets are at all time highs, what is an investor to do? On August 13th I had the pleasure of speaking with Stuart Varney on Fox Business concerning the sky high valuations in the stock market amid contracting earnings, earnings which are also highly deceptive given the level of financial engineering management has used to artificially boost earnings per share through share-buybacks, which are often debt funded!

We’ve yet to see the economy return to pre-crisis normal growth rates and businesses around the country consistently site government red tape as one of if not their biggest burden. Meanwhile the markets wait breathlessly to dissect the latest words out of a Fed officials mouth. We now live in a world in which the asset prices are heavily dependent on commentary from unelected bureaucrats. Me thinks it unlikely that this all ends well!

Not entirely sure why I was smiling that much… I suspect I may have had just a tad too much coffee. Apologies for the dental display!

Italian Bank Stress Test Results

On July 29th I spoke with David Asman on Fox Business concerning the results of the Italian Bank stress tests along with Adam Shapiro, Charles Payne and Steve Forbes. The recent vote in the UK to leave the European Union put a good deal of pressure on the banks in the remaining European Union, with the banks in Italy struggling the most.  Like any good Italian drama, this is likely to be a tight ride until the very end… at which point tutti bene, at least for the next few months!

Better Retail Data Doesn't Guarantee Fed Rate Hike

On May 13th I spoke with Neil Cavuto on the Fox Business Network about the impact of the recent retail sales report on a potential rate hike by the Federal Reserve.  My concern is that employment isn’t nearly as strong as the headlines would lead one to believe. wrote an article about my discussion as well as some points made by my co-author for Cocktail Investing, Chris Versace, which you can read here.

In the fourth quarter of 2015, productivity declined by 1.7% then fell again in Q1 by 1.0% while labor input rose 2.5% and non-farm business output averaged around 1%. That means from last October through March, the aggregate hours worked outpaced production 2.5 to 1 – obviously that is unsustainable.

If we look at Challenger’s reported layoffs for the first four months of 2016, we see they were up 24% over the first four months of 2015 and the highest we’ve seen since 2009. In April alone layoffs were up 35%, so the pace looks to be accelerating.

This is the fifth quarter of falling sales and the fourth quarter of an earnings recession, what exactly would drive more hiring when the employees companies currently have are delivering declining productivity?

The three month moving average for retail sales is still at recessionary levels AND today, 47% of Americans don’t have enough savings to cover a $400 emergency! How’s that recovery working for you?

Elle On RT's Boom Bust Talking June Rate Hike

On May 4th I spoke with Ameera David on RT’s Boom Bust about the likelihood that the Fed will hike rates in June. We discussed the ongoing earnings recession facing companies, the continued decline in top line revenue and how that will affect the recent uptick we’ve seen in wage pressures. We also talked about the impact of the Brexit vote on any hike in June and what we can learn about the global economy by looking at what’s happening in China.

Cavuto and Fed Rate Hike

It was all rate hike, all day as I spoke with Neil Cavuto on Fox News concerning the likelihood of a rate hike and its impact on the economy. Please excuse the hair – I have no bloody idea what the hair/makeup department was thinking!  Apparently they thought I needed more body – perhaps this was a bit of an overshoot!?

Hopefully I was able to deliver some thoughtful comments that could override the astounding helmet head!

Talking Fed Rate Hike with Maria Bartiromo

Talking Fed Rate Hike with Maria Bartiromo

With the Fed rate hike decision looming, on December 15th I had the great pleasure of being on Mornings with Maria (Bartiromo) for the entire three hours of her show. She is one incredibly talented and elegant woman, not to mention my new level of respect for being able to sit on set for three hours straight, starting at 6am. That meant being at the studio by 5:15am, which naturally demanded plenty of coffee; a beverage choice I came to understand as a serious oversight around the 1 hour 45 minute mark!

But I digress…

With the Fed’s decision and a rate hike hitting the markets the next day, there’s was plenty to discuss concerning the wisdom of to hike, or not to hike.  There are signs of the economy weakening, with many indicators at levels not seen outside a recession: 3 month moving average for retail sales, Durable Good orders, and manufacturing is in contraction.

For those who say manufacturing doesn’t matter… the ISM Purchasing Manager’s Index very closely correlates to year-over-year changes in the S&P 500.. and it is flashing warning signs. The chart below shows the ISM Purchasing Manager’s index versus the year-over-year change in the S&P 500 – think there might be a relationship!?

2015-12 ISM v SP500

All that being said, with how much the Fed has been talking up a hike, we’ve hit the point where the Fed must act or lose enormous credibility.

Speaking with Wall Street Journal Chief Economics Correspondent Jon Hilsenrath and Wilmington Trust Chief Economist Luke Tilley

Speaking with Savita Subramanian

Fed in a Rate Hike Corner

The Fed has trapped itself in a rate hike corner, having told the markets for nearly a year that the economy is doing great and it will need to raise rates, soon…very soon. Now there are signs of the economy weakening, other nations are devaluing their currencies and the U.S. is still stuck in ZIRP (Zero Interest Rate Policy). We’ve hit the point where the Fed must act or lose enormous credibility.

Yesterday was the biggest one-day decline in the Dow Jones Industrials Average since 2009 after the ECB provided less stimulus than was expected. This continued the decline that began with Janet Yellen’s testimony before Congress Wednesday, which left most market watchers thinking that a rate hike is all but assured. This morning we learned that private sector job growth for November came in above consensus expectations, which will have the market fairly convinced that a rate hike is all but assured. So what is this rate hike thing all about?

Why Do We Care About the Fed Rate Hike?

The rates set by the Fed act as the building blocks for all other interest rates, from the rates on your mortgage, to your auto loan, to rates of return on CDs and even corporate bond rates. When the Fed changes its rates, the rates on everything else move up or down with it as well. If the Fed does hike rates this month, for example, home mortgage rates will rise.  However, given that the Fed rate hike isn’t expected to be much, the increase will likely be minimal.

Why are super-low, zero rates a problem?

The problem with low rates is all about risk versus return. When the Fed pushes rates really low, it makes it hard to generate a reasonable return on savings. Right now this is particularly difficult for the nation given the baby boomers, the largest generation, are either in or about to enter retirement, when they need to generate income off their savings the most.

In order to deal with the low rates, investors are forced to take on more risk than they would otherwise.  You can think of risk as the likelihood of success. The higher the probability of success, the lower the demanded rate of return – no need to pay much to get people to invest in a nearly sure thing, but a really risky venture – now that takes a bigger promise of return to attract investors. So we have all these people needing to generate income from their retirement savings and they are being forced to take on more risk than they really should because interest rates are so low.

This has some major implications for the economy:

  • Some retirees/investors will refuse to take on excess risk. This means they have to live on less as their retirement cannot provide the kind of income that as reasonable to expect years ago. So they will spend less – that impacts the economy.
  • More “risky” investments are getting money than is normal. Risky investments by definition have a higher failure rate. This means we will have a higher failure rate in the economy, which means more money lost than is normal. This also impacts the economy. More money lost, less money to spend and invest in the future.

Fed in Danger!

The next problem is the Fed has presented itself as being able to jump start the economy. The first quantitative easing problem began in November 2008 – seven years ago! If the Fed hopes to have any credibility concerning its ability to affect the economy, at some point it has to be able to say, “Look, it worked. The economy can stand on its own now!”

The Fed also faces asymmetric risk in that if the economy strengthens, it has plenty of room to hike rates, but if it weakens, there isn’t much room to maneuver as there is no evidence that negative rates at a central bank are stimulative.

The Fed has also been telling the markets for over a year that the economy was just about, almost there, oh so close… to being ready to stand on its own without the super low rates to support it. Chairwoman Janet Yellen has been telling us that she needed to see table job growth…well, we’ve been seeing at least headline job growth. (The underlying reality of the quality of the jobs is another thing entirely.)  Once again, the Fed is facing a credibility problem if they don’t raise rates here after so much lip service.
Problem is, our domestic rates are effectively being raised when other central banks around the world lower their rates.  The ECB just lowered their primary rate to NEGATIVE 0.3%.  Yup, they now charge interest on the money banks leave with them… That’s like Wells Fargo charging ME for the money I have in a savings account with them. However, the ECB didn’t lower rates as much as was expected which has given Yellen and company a much needed reprieve! Since the ECB didn’t go as negative as was expected, the dollar index actually fell over 2% yesterday for its largest single day decline since 2009.

You can almost hear Draghi, “Here’s your chance Janet, if you are ever going to do it, do it now!” Want to bet that after the Fed raises this month, the ECB will lower rates again further?

Strong Dollar Implications

With the US raising rates while other major economies are lowering rates… some to even below zero, that makes the US dollar stronger and stronger.  Now this is fantastic for traveling as an American, but it is pure hell for American businesses that sell internationally. This means they sell less and will need to look to making more of their stuff outside the US where it is cheaper.

The strengthening dollar is also a major problem for emerging markets.  Earlier we talked about how investors needed to put money in riskier stuff than normal to try and generate any sort of reasonable return. One of the places they put money was in emerging markets.  Companies in these economies figured out that Americans were desperate for returns and they could get us to invest if they sold bonds denominated in US dollars.  Given that the dollar has been falling in value since the mid 1980s, with a brief upturn around the dotcom boom/bust, these companies were confident that they could issue in USD and lower rates than in their domestic currency, but wouldn’t likely have to worry about the exchange rate changing against them.

Ooops –the dollar has been strengthening significantly, which means those bonds are becoming insanely expensive for companies in emerging markets and many will end up defaulting. Ouch!  That hurts investors, but also isn’t likely to make us a whole lot more friends around the world. An argument can easily be made that we exported the pain we would have felt from all that quantitative easing to emerging markets and now they are paying the price for us! Not helpful at a time when the US is already struggling with its international relations.

China isn't the only country slowing

China isn't the only country slowing

Slow-TurtleChina isn’t the only country slowing, as we are sure you’ve all been hearing, the global economy is slowing to a level that ought to make everyone pay attention. Earlier this month the International Monetary Fund (IMF) cut forecasts for 2015 yet again, projecting 3.1% versus its prediction in July for 3.3% and its April prediction for 3.5%.  This means that this year, despite the unprecedented level of monetary stimulus injected all over the world by government desperate to get things moving… the world economy will grow at its slowest pace since the global financial crisis.

Last week, Citibank cut its global growth forecast for 2016 for the fifth consecutive month, predicting 2.8% versus the previous forecast of 2.9%. Keep in mind that Citibank’s chief economist William Buiter has stated previously that global growth below 3% coupled with a significant output gap effectively represents a global recession. Now that’s just one person’s opinion, but it conveys the importance of these numbers.

If we take a brief tour around the globe, we’ll see that the Eurozone in 2014 finally posted positive growth of 0.9%, after having contracted in 2012 and 2013. The first quarter’s growth rate came in at 0.5% with the second quarter slowing slightly to 0.4%, giving the economy about 1.2% growth year-over-year.

In mid-November, we’ll get the first estimate for the third quarter, which so far is likely to be at around the same pace as the second. On Friday, we got some good news when the Eurozone Markit Composite PMI (Purchasing Manager’s Index) came in at 54 (above 50 is expansionary). The data for services came in nicely at 54.2 with manufacturing unchanged from the prior month at 52. So there is some growth in the region, though from a historical perspective it is still relatively weak. So let’s dig into the details.

If we dig a bit deeper, we see that the Eurozone’s largest economy, Germany, is suffering from the slowing in China and Russia, two major export partners with its 2nd quarter GDP coming in at 0.4%. Consumer confidence has been falling since the first quarter, but it still maintains an enviable unemployment rate of less than 5%, with a youth unemployment rate of 7%, which bodes well for the nation’s productivity in the future.

France, the Eurozone’s second largest economy, on the other hand experienced no growth in the second quarter, versus expectations for a 0.2% increase with an unemployment rate of just under 11% and a youth unemployment rate of nearly 25%.

Italy, the Eurozone’s third biggest economy experienced just 0.2% growth versus 0.3% expected. Unemployment has remained stubbornly high at nearly 12% with youth unemployment over 40%, which is a devastating number for the future of the country.  However, Prime Minister Matteo Renzi has made a lot of progress in reforming the government, so despite those rather dour numbers, consumer confidence is higher today than it has been over the past 12 years! Directions are important – we can’t just look at the numbers in isolation.

So things aren’t great in Europe, but they aren’t horrible either… however, significant growth seems perpetually illusive with rising concerns that the slowing in China and the emerging markets could be a tipping point for the area, which is likely why the head of the European Central Bank, Mario Draghi, hinted last Thursday that the ECB (Europe’s version of the Fed) is willing and ready to inject more quantitative easing into Europe’s economy. More QE, the now omnipresent heroin of the stock market was promised and equity indices all over soared!

So what about China? How bad it is there? Truth is, no one really knows. The country is based on an ideology that requires opacity at all levels of government, so accurate data or even an honest attempt at accurate data is something we are unlikely to ever get from official sources.

Those sources recently reported that China’s growth in Q2 was 6.9%, close enough to the official target of 7.0%, but being below, it provides a wee bit of cover for some stimulus. And wouldn’t you just know it! The People’s Bank of China, essentially their Fed, just lowered lending rates…a coincidence we’re sure!

Taking a step back, China has cut their 1-year interest rate 6 times since November of 2014, lowering the rate from 5.6% to 4.35%… but we’re sure everyone there is quite calm! The Required Deposit Reserve Ratio for Major Banks has been lowered 4 times since February, from 19.50% to 17.50%. This ratio determines how much leverage banks can have, which translates into loans. The lower the ratio, the greater the leverage which means more loans… more of nothing to see here folks? We don’t think so.

Here are a few more interesting data points:

  • China’s export trade has fallen -8.8% year to date.
  • China import trade is down 17.6% year to date.
  • Railway freight volume is down 17.34% year over year.
  • China hot rolled steel price index is down 35.5% year to date
  • Fixed asset investment is up 10.3% sounds great? (averaged +23% 2009-2014)
  • Retail sales are up 10.9%, the slowest growth in 11 years
  • China Containerized Freight Index, which reflects the contractual and spot market rates to ship containers from China to 14 destinations around the world, has just hit its lowest level in history, now 30% below where it was in February and 25% below where it was at its inception 17 years ago.

You get the point. It is slowing and we suspect it is slowing a lot more than the official GDP numbers would indicate.

Why should those of us outside China care? Because China has been a major supporter of global growth since the financial crisis. When all hell broke loose in 2007 & 2008, China put its infrastructure spending into high gear. That meant that those economies that supply commodities had a backup buyer for their exports when everyone else was crashing, which put a vital floor under the global economy.

But China couldn’t keep it up indefinitely, and we are seeing the consequences of that nation’s shift from a primarily export driven, massive infrastructure-building economy to a more domestic demand-driven economy with a lot less infrastructure spending.

China has been Germany’s fourth-largest export partner, with Russia not that far behind. Falling oil prices and sanctions have crippled Russia’s economy, so it also isn’t buying much from Germany. If Germany sells less, it’ll buy less from other nations… and keep in mind that all those Eurozone countries are just barely eking out positive growth, so small changes will have an impact.

Onto those emerging economies, many of which were benefiting from China’s infrastructure spend as they are primarily commodity exporters. If we look at what has happened to commodity prices over the past twelve months, you can get an appreciation for just how painful this has been for many of these countries. Keep in mind that 45% of global GDP comes from commodity export nations – commodity prices crater and these nations can buy less stuff from other nations – more headwinds to growth.

In fact, 2015 will be the fifth consecutive year that average growth in emerging economies has declined. This is a serious drag on the advanced economies, which on the other end of the spectrum, will likely post their best growth since 2010 – albeit growth that isn’t all that spectacular.

Japan… well it’s still stuck between barely growing and contracting, regardless of how much the Bank of Japan tries to kick start the economy. Japan’s industrial output unexpectedly fell in September, raising concerns that the nation may be slipping back into another recession. Production declined 0.5% in August following a 0.8% decline in July versus economists’ expectations for a 1% gain. Inventories rose 0.4% in August over July, and expanded in five of eight months this year, which is a hindrance to future growth as with rising stockpiles of unsold goods, companies are less likely to expand output in the future.

As for Latin America, Argentina is still a mess and Brazil is in a recession, with many of the other countries doing alright. Chile is expected to be around 2.5% for 2015. Colombia 2.8%… like we said, ok, not great.

In the US, things aren’t awful, but not exactly robust, which is why I had been predicting for months that the Fed would not hike rates in September.

  • For example, the Industrial production index came in with another decline of -0.4% in September versus expectations of -0.2%, which makes it the 5th decline out of 8 reported figures in 2015.
  • Capacity utilization, which measures to what degree the economy is taking advantage of its ability to make stuff, was expected to drop from 78% to 77.8%. Instead, it fell further to 77.6%, for the 7th decline out of 8 readings in 2015. This means the U.S. continues to use less and less of its capacity to make stuff – hardly shocking given the wide misses in manufacturing data reported by regional Federal Reserve banks for August.
  • September retail sales came in below expectations, rising a seasonally adjusted 0.1% from August versus expectations for 0.2%. The good news is the increase came from a 1.8% month-over-month increase in auto sales. Overall retail sales, when we exclude autos and gasoline, have not grown since January.
  • U.S. producer prices in September posted their biggest decline in eight months, at a drop of -0.5%, as energy costs fell for the third month in a row. This means that the Producer Price Index is now down 1.1% year-over-year as of the end of September.
  • U.S. total business sales also declined in September, down -0.58% month-over-month and down -3.09% year-over-year as of August.

Going forward, I still remain very skeptical that the Fed will raise rates. The fact that China is continuing to loosen its monetary policy and comments out of the ECB concerning it likely embarking on further easing only add to our skepticism as the moves by China and the ECB will already put upward pressure on the dollar, harming U.S. exports. A rate hike would only exacerbate the dollar strengthening against other currencies.

Fed tightening has been a trigger in nine of the last eleven recessions, so you can see yet another reason for the Fed to be cautious.

The tough thing now is that with a Fed that can’t seem to make up its mind, investors are left wondering what to do, so they end up selling the good and the bad when they get nervous. This will make for increased volatility, but that also means more opportunities for those that keep focused on the goal and don’t get distracted by shorter-term market dramatics.

Where are the Jobs?

Where are the Jobs?

Friday the Dow Jones opened down, falling as much as 258 points, to only then completely reverse direction and ended the day up 200 points for a more than 450-point swing!  This was the biggest one-day percentage reversal in about four years. What drove the crazy move? This wild move was based on the very disappointing jobs report released Friday morning. Yes, you read that right.  A market rally on a weak jobs report as we return to bad news is good news and wonder, where are the jobs?  Whoop whoop!

2015-10-05 Job Growth Slowing


  • Consensus estimate for new jobs was 201,000 but the actual was 142,000 – 30% below expectations.
  • On top of that grim number, about 60,000 jobs were removed from the prior two month’s estimates, making August’s not-so-bad 173,00 look pretty sad at a revised 136,000 new jobs.
  • This is also the sixth of the past eight reports to have had a downward revision – not a good trend.
  • To rub salt into that wound, the workweek also dropped from 34.6 to 34.5, which doesn’t at first glance look like that big of a deal, but when you put that number across the nation in aggregate… it means effectively an additional 348,000 in job losses!
  • No improvement in wages either, so don’t be waiting to see consumer spending to help out the economy here.
  • The steady unemployment rate is only because more and more people are leaving the workforce, such that the labor force participation rate has fallen to its lowest level since the grim days of 1977 at 62.4% from 62.7%.

2015-10-05 Labor Participation


I’ve been saying for most of this year that I think a rate hike is highly unlikely in 2015 and this market rally shows the market is coming around to my way of thinking.  After Friday’s report, I’d say not only is a rate hike unlikely, but another round of quantitative easing is becoming a real possibility if things continue on this trajectory.  That isn’t to say I think QE is useful, as a matter of fact I think it is quite harmful, but it is the only tune that central bankers seem to know how to sing when times get tough and the rest of the government has basically shrugged off any responsibility for providing a fertile environment for economic growth. Most seem to be more interested in tossing snappy sound bites at each other.  Good times.



I will also be watching very closely how the dollar is going to react as the strengthening we’ve seen could very well be affected by a belief that yet another round of QE is on the way, with the Fed once again joining the ranks of central bankers around the world trying to print their way into prosperity.

Looks like the refrain we’ve been singing for years of “Where are the jobs…. there ought to be jobs,” isn’t going to wrap up anytime soon. This cover is from over 4 1/2 years ago!   Oh and that Afghanistan thing… it’s sorted out right?

2015-10-05 Where are jobs