Make no mistake. It is just a matter of time before the FED goes interest rate negative. But as Bill Gross kindly points out Negative Rates Are Finance Economy’s Last, Dying Gasp
Instead of historically generating economic growth via a wealth effect and its trickle-down effect on the real economy, negative investment rates and the expansion of central bank balance sheets via quantitative easing are creating negative effects,” he wrote. Negative rates threaten bank profits as well as any business models that depend upon 7-8% annual returns on assets. He’s talking mainly about insurance companies and pension funds, a topic he’s hit on a number of times. “And the damage extends to all savers; households worldwide that saved/invested money for college, retirement or for medical bills. They have been damaged, and only now are becoming aware of it.”
Negative rates are “an enigma to almost all global investors,” he says, that undermine the basic architecture of the financial markets. “But central bankers seem ever intent on going lower, ignorant in my view of the harm being done to a classical economic model that has driven prosperity – until it reached a negative interest rate dead end and could drive no more.”
I couldn’t agree more. Listen, I am not sure how far the FED is willing to go, but only desperate measures remain in their bag of tricks. And even if they do go negative, I am afraid the markets will re-adjust long before that becomes a reality.
Hedge fund manager Jeff Gundlach sees the exact same thing. Here is what he had to say in his latest webcast.
- The Federal Reserve has no business raising rates right now. Markets aren’t pricing in a hike this month in, and no one has forgotten the volatility that ensued after the first hike in December.
- The rally in risk assets is near its end. Stocks have 2% of upside but 20% of downside. And there’s still time to wait for commodities to cheapen more before buying.
- There isn’t a strong case for an imminent US recession.
- Negative interest rates are bad for the world. They are having the opposite effect on currencies like the Japanese yen, which has rallied instead. They are also hurting European banks.
And that’s probably the biggest take away here. People are trying to time the bottom here without realizing that they are working in a 2/20% environment. By the way, Carl Icahn has expressed the same point of view a few months ago. Sometimes it is better to get out the way, than to lose 20-50% of your capital.
