A Stunning Admission From Deutsche Bank Why A Shock Is Needed To Collapse The Market, And Force A Real Panic
ZeroHedge.com Aug 13, 2016 9:59 PM In what may be some of the best, and most lucid, writing on everyone's favorite topic, namely "what happens next" in the evolution of the financial system, Deutsche Bank's Dominic Konstam, takes a look at the current dead-end monetary situation, and concludes that in order for the system to transition from the current state of financial repression, which has made a mockery of all asset values due to central bank intervention, to a semi-credible system driven by fiscal stimulus, there will have to be a crash, one which jolts policymakers out of their stupor that all is well simply because stocks are at all time highs. And since a legitimate fiscal stimulus is what is needed to re-ignite the economy, US and global GDP will continue declining, even as stocks keep rising to new all time highs, not on fundamentals (which are all pointing in the opposite direction), but due to even more central bank intervention and financial repression, thus a Catch 22, which ultimately - according to DB - ends in the only possible way: with a major crash. As Konstam puts it, "the status quo could continue for several years yet – if nothing “breaks” in the system" but "without an external economic shock it is hard to see policymakers being prepared to take dramatic, fiscal action to jumpstart the global economy and bounce it out of a financial repression defined by low and falling real yields to one that at least initially is defined by rising nominal yields through higher inflation expectations." As for the conclusion, or why a financial shock is long overdue, KOnstam says that "ironically the shock that is needed would require a collapse in risk assets for policymakers to then really panic and attempt dramatic fiscal stimulus. "This is critical - and inevitable - as only a shock can lead to an "unwind of the falling yield/rising equity market where all financial assets trade badly."In other words the end of financial repression will see price levels fall so that yields once again look attractive, or said otherwise, there will be a demand for Treasuries, even without the perpetual implicit backstop of central bank purchases. For such a move to be sustainable itself requires the economic fundamentals to shift – inflation needs to be more secure against an underlying backdrop of robust real growth. Most people now understand that this is not a job for monetary policy alone. Yet the current reach for yield simply prolongs the status quo for policy disappointment. Which brings us full circle: recall that over the past few months virtually every prominent investment bank, from JPMorgan to Goldman Sachs have warned clients that a selloff is coming. Now, Deutsche Bank has taken it to a whole new level, explaining why a financial crash has to happen to purge the system from the toxic aftereffects of 7 years of financial repression, and to kickstart a fiscal stimulus that will not happen unless markets tumble in the first place. And while Konstam's line of reasoning is absolutely correct, we doubt just how his employer would look upon a market plunge that wipes out 30%, 40%, or even 50% of global equity values: would Deutsche Bank even survive such a crash? As such we doubt that the strategist's analysis and forecast, correct as it may be, will be endorsed by his employer, even if by now it is clear to all that only a major crash, i.e. a global reset, can kick start the world out of its zombie-like, centrally-planned existence, into the long overdue phase of whatever it is that comes next. * * * Below is Konstam's full must read analysis: Stocks must fall for yields to rise – but unlikely to happen anytime soon It is pretty much understood that we are in full on financial repression mode, as witnessed by super benign core yields lead by lower real yields with more recently the further downward drift in euro peripheral yields, including the UK. The new high in equities is consistent with our view of financial repression that necessarily has yield returns on all assets being incrementally replaced by price returns – stretched relative valuations follow already increasingly stretched absolute valuations. The last round of economic data does little to suggest any change in this dynamic. As we highlighted last week the conundrum for the US is how an overly strong labor market without meaningful wage inflation resolves itself against markedly weak productivity data with a GDP cake that if anything seems to be stagnating. With the current status quo, it is clear to us that US yields if anything are still too high – we think they are near the upper bound of a range that pivots closer to 1.25 percent with real yields in particular too high. This probably still reflects a reluctance of investors to get meaningfully long the market although much of the short base has been covered and this in turn reflects a still fairly strong consensus on the economics front that the labor market strength can still resolve itself through higher wages and a virtuous circle of rising demand and productivity – a scenario we would not rule out but not our central view. More importantly however are what prospects there may be to jolt us out of this financial repression and to what extent regardless of proactive policy, is there a natural end to financial repression – at some point does something have to break in the system. On the former the most likely candidate is obviously some form of global fiscal stimulus. Despite optimism around this in early July we have not exactly had the green light on either helicopter money in Japan or Italian bank bailout. It is still too early to call the US election and stimulus prospects here but the general sense is that it is still difficult to sense the urgency when equities make new highs. Policymakers aren’t used to dealing with financial repression and that unfortunately is one of the defining characteristics of stagnation. We suspect the fall will be defined by markets looking for dramatic policy news that somehow “responds” to super low bond yields and underwrites rising risk asset prices but only to be disappointed precisely because policymakers don’t bide the urgency. The result is that yields can fall still further even with risk assets still trading well – hanging onto their relative valuation rationale. The failure of a policy response allows for more financial repression. We are anyway already beyond the point of preemptive policy since preemption is supposed to recognize and avoid looming problems beforehand. It is clear that the nature of those problems are already material including squeezed interest margins for banks, insurance solvency issues etc. But to be fair, the lack of a fiscal response itself bears witness to the perceived fiscal stress during the 2008 crisis and the need to insulate taxpayers. Additional fiscal burdens can be thought of as a variant of financial repression where future inflation and negative real rates do the redistribution as opposed to the structure of the fiscal regime. Helicopter money fuses financial repression from the money side with the fiscal response in a potentially dramatic way whereby the would be spenders get to spend a lot more directly at the expense of the ongoing savers. And while it may have its own political hurdles that ultimately are insurmountable, it offers a perfectly reasonable alternative equilibrium option where the goal is to raise the price level as well as improve the real growth outlook by overcoming excess savings. The fusion of fiscal with monetary policy can also be appreciated in the context of the fiscal theory of price where monetary policy can offer infinite paths for money growth and potential nominal growth but fiscal policy effectively selects which path is realized based on an equilibrium condition that the NPV of all future budget deficits needs to sum to zero. * * * The status quo could continue for several years yet – if nothing “breaks” in the system. There are ways of course for either avoiding breaks or at least patching them – mitigating the impact of negative rates on banks is now in vogue with subsidized bank loans for on lending. And we may yet see soft forms of bank bailout still being allowed. This is similar to the use of alternative yield curves for discounting insurance liabilities. The conclusion is that without an external economic shock it is hard to see policymakers being prepared to take dramatic, fiscal action to jumpstart the global economy and bounce it out of a financial repression defined by low and falling real yields to one that at least initially is defined by rising nominal yields through higher inflation expectations. Ironically the shock that is needed would require a collapse in risk assets for policymakers to then really panic and attempt dramatic fiscal stimulus. The logic would also fit with the same correlation structure for financial assets - an unwind of the falling yield/rising equity market where all financial assets trade badly. In other words the end of financial repression will see price levels fall so that yields once again look attractive. For such a move to be sustainable itself requires the economic fundamentals to shift – inflation needs to be more secure against an underlying backdrop of robust real growth. Most people now understand that this is not a job for monetary policy alone. Yet the current reach for yield simply prolongs the status quo for policy disappointment.
0 Comments
The Feds Don't Care If You Dropped Out of College. They Want Their Money Back Half of recent dropouts are delinquent on their student debt. Shahien Nasiripour Bloomberg.com August 8, 2016 — 8:01 AM EDT When it comes to collecting on student loans, the U.S. Department of Education treats college dropouts the same as Ivy League graduates: They just want the money back. New data show the perils of that approach. Dropouts who took out loans to finance the degrees they ultimately didn't obtain often end up worse off for attending college. Unlike their peers who earn degrees, dropouts generally don't command higher wages after leaving school, making it harder for them to repay their student debt. The typical college dropout experienced a steep fall in wealth from 2010 to 2013, figures from the Federal Reserve in Washington show, and an 11 percent drop in income—the sharpest decline among any group in America. It should therefore come as no surprise that half of federal student loan borrowers who dropped out of school within the past three years are late on their payments, according to Education Department figures provided to Bloomberg. More than half of those delinquent borrowers are at least 91 days behind. By comparison, just 7.2 percent of recent college graduates are more than three months late on their debt. These debtors are struggling despite the widespread availability of repayment plans meant to prevent distress. That doesn't need to be the case. "Many borrowers believe that getting a better payment plan with their servicer is like buying a car—a high stake, pulse-pounding negotiation they are likely to lose," said Legal Services NYC, which represents low-income New York City residents with student loan problems. Treasury Deputy Secretary Sarah Bloom Raskin has publicly questioned whether the government's loan contractors are doing right by borrowers. The consequences—ruined credit scores, the loss of occupational licenses, and wage garnishments—"can have a serious impact on our economy," she said last month. There are two immediate takeaways from the figures. Higher education experts eager to put families at ease about the increasing cost of college are likely to conclude that whatever crisis exists in student loans is concentrated among college dropouts, so graduates needn't worry. This is largely how the Education Department and the White House view the issue. The department recently focused its efforts on improving graduation rates, hoping it will lead to fewer loan defaults. But it's unlikely that approach will yield benefits soon. Graduation rates have increased by less than five percentage points over the past dozen years, federal data show. The second takeaway is that it's time for the Education Department and its loan contractors to pay special attention to the groups of borrowers most likely to struggle with their debt. The Education Department outsources the work of collecting payments and counseling borrowers on their repayment options to loan contractors such as Navient Corp. and Nelnet Inc. The government pays these contractors about six times more for accounts that are current rather than seriously delinquent, regardless of the costs the companies incur to help borrowers resolve their delinquency. Loan companies say they simply don't get paid enough to help the neediest borrowers. The Education Department has known for years that the typical borrower who defaults on her debt didn't graduate with a credential, federal records show. Yet its Federal Student Aid office—the somewhat independent unit that runs the government's student loan program—doesn't mandate special procedures for its contractors' dealings with borrowers most at risk of default. Instead, FSA gives its loan contractors "broad latitude" to handle borrowers' accounts. To their credit, some of the government's loan contractors (including Navient) have urged FSA and the department to change its approach. After all, dropouts and borrowers who graduated from low-quality schools are more likely to default than peers who attended highly selective colleges. Yet under FSA's contracts, everyone is treated the same. Last year, Navient told the feds that the contracts encourage servicers such as itself to pay little attention to the borrowers that are most likely to struggle paying back their loans. Bottom of Form Despite the contracts, Navient spokeswoman Patricia Christel said the company tailors its outreach to borrowers most at risk of default. Michele Streeter, a spokeswoman for Education Finance Council, a Washington trade group that represents student loan companies, said some of its members do the same. Representatives for the Education Department and the government's three other major loan contractors—Pennsylvania Higher Education Assistance Agency, commonly known as FedLoan Servicing; Nelnet; and Great Lakes Educational Loan Services Inc.—didn't respond to several requests for comment. It may be years before the department makes any changes. Its contracts with its four major loan servicers expire in 2019. Last month, the department directed FSA to structure its next round of contracts in a way that guarantees that dropouts would quickly get help with their loans from specially trained customer service representatives. It's up to FSA to carry it out. Negative Rates for the People Arrive as German Bank Gives In
Jeff Black Jeffrey_Black Julia Hirsch julialuc2015 Bloomberg.com August 11, 2016 — 12:37 PM EDT Updated on August 12, 2016 — 5:57 AM EDT When the European Central Bank introduced a negative interest rate on lenders’ deposits two years ago, few thought things would ever go this far. This week, a German cooperative savings bank in the Bavarian village of Gmund am Tegernsee -- population 5,767 -- said it’ll start charging retail customers to hold their cash. From September, for savings in excess of 100,000 euros ($111,710), the community’s Raiffeisen bank will take back 0.4 percent. That’s a direct pass through of the current level of the ECB’s negative deposit rate. “With our business clients there’s been a negative rate for quite some time, so why should it be any different for private individuals with big balances?,” Josef Paul, a board member of the bank, said by phone on Thursday. “As it looks today, charges on deposits won’t be extended to customers with lower amounts” than 100,000 euros, he said. Raiffeisen Gmund am Tegernsee may be a tiny bank that’s only introducing penalties to well-off customers -- it says fewer than 140 will be affected -- but in principle the ECB’s negative deposit rate was meant to encourage spending and investment in the euro area’s sluggish economy, not to tax thrifty Bavarians. A spokesman for the Frankfurt-based central bank declined to comment. Indeed, introducing the sub-zero policy in June 2014 with a cut to the deposit rate to minus 0.1 percent, ECB President Mario Draghi said the move was “for the banks, not for the people.” Should banks decide to transmit the reduction to savers then that’s their decision. “It’s not us,” he said. Since then, the ECB has chopped its deposit rate -- what banks pay to park excess funds overnight -- three more times. So far, policy makers have said there haven’t been any serious negative side-effects, such as customers withdrawing their cash and stashing it elsewhere. In that time, amid a moderate recovery, bank lending has returned to growth. The risk for ECB policy makers now is that negative rates begin filtering through to the real economy while growth and investment is still sluggish, bringing the downsides of the policy without the upsides. Euro-area growth slowed in the second quarter, data released Friday show, leaving it vulnerable to any fallout from the U.K.’s vote to leave the European Union. In that environment, lenders in Europe regularly complain -- and the ECB has acknowledged -- that negative rates depress their profitability. Some are already charging corporate clients with large deposits. The Bundesbank estimated last year that the low-rate environment would cut the pretax profit of German banks by 25 percent by 2019. Retail Taboo But only two weeks ago, ECB board member Benoit Coeure said retail customers were staying with their banks because of signs they wouldn’t be charged for their savings any time soon. “Deposits of both households and non-financial corporations have been growing over the past two years, at a similar pace to the period before we entered negative interest-rate territory,” he said in a speech on July 28. “Rates on retail deposits seem to have a zero lower bound.” Whether Coeure is essentially right -- that Gmund am Tegernsee’s Raiffeisen is a rare case and on a broader scale the rates for ordinary depositors won’t go below zero -- may depend on how lenders in Germany and elsewhere respond to the taboo on charging retail clients. Michael Kemmer, head of the Association of German Banks, said in a statement on Thursday that he doesn’t expect others to follow suit. “It’s up to each bank whether and how to charge for deposits,” he said. “The competition between banks and saving banks in Germany is much too strong.” |
Archives
December 2020
Categories |