6. Market Update: China Slowdown
4
sources: HiddenLevers, China Banking Regulatory Commission, Peopleโs Bank of China, NY Times,
China
bad loans
now $645b
Jan 2016
Record Bank
Lending
Reducing
required
coverage
First World
markets
over China?
China markets plummeting. USA not reacting.
US subprime
crisis began
at $600b
Domestics
moving
money out
9. RIP: Interest Rates Worldwide
sources: WisdomTree, MW
Yield curve shows long
duration on low interest debt
10. RIP: Battle Against Deflation
sources: JP Morgan, Markit
Negative interest rates not
lowering currency value as
hoped in Japan, Euro area.
25% of Developed
Govโt debt has
negative interest rates.
($23tn universe)
Inflation
still ~0
11. RIP: Why Negative Rates?
sources: HiddenLevers, Whitehouse.gov, Financial Times,
devalue currency
get people spending
robot takeover
commodities perfect storm
first world demographic shift
Using negative rates to fight deflation is like using plastic forks to fight an atom bomb
jumpstart growth
12. RIP: Impact on Borrowers + Savers
Effect on Savers
โข Fees on deposits
โข Switch to other stores of
value (gold, bitcoin, etc.)
โข Insurance companies +
pension funds at risk
โข Take on higher risks in
search for yield.
Effect on Borrowers
โข Low borrowing costs for
companies/households
โข Banks unwilling to lend
โข Who would buy a -1%
corporate bond?
sources: Economist, NYTimes
13. Negative Rates: Impact on Banks
sources: Credit Suisse, HiddenLevers
Negative rates have
led to drop in bank
stocks in EU / Japan
BUT โ the underlying
factor is interest rate
margin, not rate level
14. RIP: Global Bank Comparison
sources: HiddenLevers, Economist
2008-09
US banks recapitalized,
Europe not so much
Japan banks in 5y ditch
2015-16
US banks lending Europe
not recovering
Japan banks in 10y ditch
-38% Japan
-28% Europe
-16% USA
15. RIP: Fed Report Card (post-2008)
sources: HiddenLevers
US GDP - Meh
US Inflation - Fail
16. RIP: Central Banks Irrelevant in 2016
source: HiddenLevers, Fiscal Times, Telegraph, Economist
Japan
-0.10
ECB
-0.30
Switzerland
-0.75
Fed:
+0.50
Negative
rates not
working
abroad.
Central
banks
out of
ammo?
Denmark
-0.65
Sweden
-0.50
17. RIP: Central Bank Irrelevant in 2016
source: HiddenLevers, Fiscal Times, Telegraph, 2, Economist
Japan
-0.10
ECB
-0.30
Switzerland
-0.75
Fed:
+0.50
Negative
rates
abroad
Rate
hike in
USA
Surprise
results
Denmark
-0.65
Sweden
-0.50
yen euro
10y
Treasuries
unemployment
euro
peg
franc
19. GOOD: Reflation Continues
source: HiddenLevers,
CPI trending up in USA, despite Oil Crash
Rising Rents
+
Home Prices
CPI rising since
Jan 2015
Healthcare
Inflation UP
20. BAD: Financials Struggle
No rate hikes = no margin for big banks
source: HiddenLevers, Foreign Policy,
low
commodities
mitigate
pressure on
equities
persists
recession
avoided
-14%
-7%
21. UGLY: USA Joins Club
new all time
lows on 10y
treasuries
source: HiddenLevers
first world
demographics
to blame
Fed follows Japan + Europe into negative rates
mild recession
a la EU/Japan
savers likely go
to cash + gold
gold
22. Scenario: Negative Rates?
12M T-bills
-0.3%
S&P
-20%
12M T-bills
0.1%
S&P
-8%
12M T-bills
0.8%
Fed is able to raise rates as
inflation trends toward 2%
in the USA. This enables
financial sector margins to
recover.
Inflation below target forces
the Fed to cut rates.
Financial sector hit hard,
while market as a whole
nears a bear market
(measured from 2015 high)
USA joins EU and Japan in
negative rate territory, as
deflation pulls US into mild
recession.
Good:
Reflation
Continues
Bad:
Financials
Struggle
Ugly:
USA
Joins
Club
S&P
+8%
23. RIP Central Banks โ Take Aways
NIRP hits financial sector hardest NIRP causes flight to safety
First World Deflation overwhelms
Monetary Policy
NIRP does NOT weaken currency