After almost three decades of near-zero, zero, and
now negative interest-rate policies, Tokyo has pushed its banking system to its
limit.
The country’s smaller lenders in particular are
facing an existential threat to their business models. Located in aging and
shrinking prefectures, they lack the ability to increase fee-related incomes
that major banks can raise.
Since March 2016, shortly after the country’s
negative interest rate policy was introduced, net income at major banks has
declined by a fifth. At regional banks, the decline has been steeper: Net
income is a third below its level three years ago.
Practically all of Japan’s regional banks have seen
their share prices fall in the past 12 months. More than half have had declines
exceeding 30%. They have underperformed the broader Japanese market for
decades.
At the beginning of 1995, just before the Bank of
Japan cut its benchmark policy rate to 0.5%, loans by commercial banks with
interest rates of below 1% were practically nonexistent. Over 90% of
outstanding loans carried an interest rate of 3% or more. Today, 90% of
Japanese loans carry an interest rate of less than 2%. The fastest-growing
segment is the paltry 0.25% to 0.5% bracket, which has expanded by almost a
10th in the past year.
The interest offered to Japanese depositors, however,
shifted much more quickly to very nearly zero. The upshot of this is that
profitability held up for a while but now the 1.5 percentage point spread
between interest rates on new loans and new time deposits that prevailed in the
1990s has declined to just 0.5 percentage point. Even with the country’s
rock-bottom default rates, the resulting profits simply aren’t sufficient to
run a bank.
Some of Japan’s major banks have found an apparent
workaround, but one with its own serious risks. Those with the expertise and
ability to do so have ventured overseas, acquiring assets and lending in
currencies without such low interest rates.
The precarious position of Japanese banks isn’t an
example of negative interest rates failing but of them working perfectly well.
Central bankers often complain about problems with monetary transmission—often
a byword for banks not passing on interest-rate cuts—but Japan’s have done so.
Critics of Japan’s monetary policy would be wrong to
imagine that higher interest rates would help either. As with lower rates, the
change would take years to filter through, during which time defaults would
rise and economic growth would stall.
A developer, Misuma Limited, is selling a £2.1m house
in Kentish Town through a housing competition. To enter, you pay £10, plus a £1
booking fee. You then receive a ticket, which, if you win, entitles you to the
house.
The competition…will run until the end
of the year. More details on winmydreamhome.com.
Housing competitions – an alternative and
controversial way of selling a property, wherein the business model of the
casino is disguised as a charitable endeavor – have kept cropping up over the
past few years.
They typically involve a question, which is a legal
requirement, because otherwise a competition that charges for entry and selects
a winner at random is a lottery, which requires a license.
What’s slightly different about winmydreamhome.com is
that it’s run by a developer, rather than a random individual who can’t sell
their house. Marc Gershon, a director of the company, told us the plan is to
“clean up” the housing competition space.
So what are the odds? The fine print is quite
important. If less than 250,000 tickets are sold, then the house is not given
away at all; instead, the competition gives away 60% of the prize pool. If more
than 250,000 are sold, the house is given away, and stamp duty of £165,6000 is
paid. In each case, the business pays 10% of the proceeds to charity.
Misuma has three other flats in development. If the
first competition goes well, they’ll look to also exit those developments
through a competition. But what we initially thought was simply a quirky
publicity exercise turns out to subtly reflect the rising pressures on
small-scale London developers post-Brexit.
Even if the project fails, you have to admire its
extraordinarily subtle capacity to bring together two concepts – gambling, and
London housing – that no one would surely ever have associated with each other.
Despite what you see
on TV, through streaming, or in the movies, teenage drug and alcohol use in the
US is actually down…with the exception of marijuana.
And while I know I
had the chart from Pew Research on population projections in 2020 and 2100
(report is from June 17, 2019), it’s worth pointing out the sheer change in
populations by 2100. Seriously.
UBS plans to levy a negative interest rate on wealthy
clients who deposit more than SFr2m (USD $2M) with its Swiss bank, as lenders
hunker down for a period of ultra-loose monetary policy.
Several banks in Switzerland and the eurozone already
pass on the cost of negative official rates to corporate depositors, although
most large players have refrained from doing so with individual clients.
But with policymakers expected to adopt a “lower for
longer” stance for the foreseeable future, UBS Switzerland will from November
charge 0.75% a year on individual cash balances above SFr2m, according to three
people briefed on the plans.
The move underscores how banks in Europe and the US
are scrambling to prepare for a protracted spell of lower rates that threatens
their profitability, having previously wagered that central bankers would
tighten monetary policy.
“We assume that this period of low interest rates
will last even longer and that banks will continue to have to pay negative
interest rates on customer deposits at central banks,” UBS said. “Following
similar moves by a number of other banks here in Switzerland, we confirm that
we’ve decided to adjust cash deposit fees for Swiss francs held in
Switzerland.”
The move comes as Credit Suisse, UBS’s main rival,
said on Wednesday it was also thinking about imposing a levy on some wealthy
clients.
And
now an extremely insightful piece from Robin Harding of the Financial Times.
This one is in its entirety with some emphasis made in bold (mine).
This will be a discomforting, defining week for the
global economy. That is not because the US Federal Reserve is set to cut
interest rates. Rather it is because of the strikingly low level of rates from
which the Fed will start: a range of just 2.25% to 2.5%.
After more than a decade of economic expansion, and
despite everything from tariffs to tax cuts, it seems this is as high as US
interest rates go. Meanwhile, the European Central Bank is debating whether to
reduce its negative rate still further. Until this month, it was possible to
imagine that pre-financial crisis levels of 4% to 5% might eventually return.
No longer.
According to their own projections, Fed officials
believe rates will settle at 2.5% in the long run. Subtract their 2% inflation
target and the real reward for capital is going to be a miserable 0.5%. The
equivalent rate in Europe and Japan will almost certainly be much lower. Such
low levels of interest rates are a profound change from the past. (The federal
funds rate was 6.5%, and the real rate was about 4% as recently as 2000.)
Although interest rates touch almost every aspect of economic life, the developed
world remains deep in denial about the consequences. Here are eight themes for
investors and policymakers to ponder.
First, there is an intimate link between long-run
interest rates and long-run economic growth. Perhaps capital is less relevant
to the digital economy, but for interest rates to max out at such low levels
sends an alarming signal about the prospects for future expansion.
Second, monetary policy is broken. In 2008-09, the
Fed cut rates by 5 percentage points and it was not enough. Today it has far
less room to respond to a recession. The Bank of Japan, which made no move on
Tuesday, has all but given up trying to hit its 2% inflation target. The ECB is
in danger of going the same way. The world is dismally unprepared for a
downturn: two of the world’s most influential central banks may start the next
recession with their policy rate already below zero.
Third, if monetary policy is broken,
fiscal policy must step in. That means either governments must approve higher
spending and tax cuts in response to a recession or else give the central bank
a fiscal tool in the form of “helicopter money”, essentially printing money to
spend or distribute to the public.
Alternatively, governments could set higher inflation targets and use fiscal
policy to reach them now. That would give their central banks more room to cut
when they need it.
Fourth, lower interest rates make
debt more sustainable. This is particularly true for public debt, because
countries actually borrow at these low risk-free rates, and somewhat true for
private debt. For many countries, it makes sense to borrow more in order to
invest. Predictions of financial crisis based on past levels of debt-to-gross
domestic product are likely to be misleading.
Fifth, capital stock should rise
relative to output. Investments that were once unprofitable now make sense:
road upgrades to save a few minutes of time; expensive, niche drugs to help a
few hundred people; or extra years of study to earn a graduate degree. Such
projects may feel irrational. They are not.
Sixth, any asset in fixed supply is now more
valuable, because its future cash flows can be discounted at a lower rate. A
monopoly supplier of water or electricity, land in a city center or the back
catalogue of Disney: the capital value of these assets must rise, so their
yield matches the lower interest rates. This trend is related to recent
movements in wealth inequality. It also puts investors at risk of identifying
financial bubbles that do not actually exist. One vital policy response would be to slash the return
on capital allowed to utilities.
Seventh, demand for housing will rise. It is, after all, the main capital asset that most people use. There are two potential outcomes. Where it is possible to build, permanently lower interest rates will trigger an increase in the housing stock. If it is not possible to build, then houses will behave like assets in fixed supply, and soar in price. Thus falling interest rates make planning and zoning rules a crucial economic issue.
Eighth, low interest rates make it harder to save. In
particular, they make it harder to save for a pension, and harder to live off
whatever capital accumulates. This fact has been obscured by the one-off rise
in price for scarce assets, many of which are owned by pension funds. But
future returns are likely to fall. The result will force workers to accept some
combination of later retirement, higher taxes, bigger pension contributions or
lower incomes in old age.
It is possible that this bout of low interest rates
will end. Perhaps the Fed is mistaken and it will have to raise rates sharply
in the future. Perhaps a burst of technological progress will raise growth and
boost demand for capital.
But no one can choose to make that happen: this is not some perverse plot by Fed chair Jay Powell and ECB president Mario Draghi to make life miserable for the world’s savers.The long-run real interest rate balances the desire to save and demand to invest. Central banks are its servants not its masters.
The trend towards lower real
interest rates has lasted for decades and is as likely to continue as to
reverse. With central banks moving to ease, it is time to stop waiting for
rates to recover and face the world as we find it.
Low mortgage rates and thriving employment should be
the recipe for a strong housing market. Instead, they’re deepening America’s
affordability crisis.
What began on the coasts, in areas like New York and
San Francisco, is now radiating into the nation’s heartland, as well as to
cities from Las Vegas to Charleston, South Carolina. Entry-level buyers are
scrambling to purchase homes that are in short supply, sending values soaring.
Expectations that the Federal Reserve will reduce
interest rates this week will do little to change the sober reality: For many,
prices have risen much faster than incomes, pushing homeownership out of reach
for a new generation of hopeful buyers. That’s cooling the market, with the
2019 spring season shaping up as the slowest for sales in five years, according
to CoreLogic Inc.
“All signs point to a housing market that should be
doing really well and it’s not,” said Danielle Hale, chief economist for
Realtor.com. “The No. 1 constraint, despite low mortgage rates, is that people
can’t find housing that they feel is affordable.”
Recent months have shown a growing divergence between
the high and low ends of the U.S. market. Prices in the bottom third jumped
about 9% in June from a year earlier, compared with 1.1% growth for the top
third, data from Redfin show. Meanwhile, sales for lower-priced homes plunged
almost 20% as buyers struggled to find properties in their range, according to
Zillow.
There are some signs of a pickup in the market.
Contracts to buy previously owned homes rose 2.8% in June from the previous
month, exceeding economists’ forecasts, the National Association of Realtors
reported Tuesday.
Still, the outlook is particularly bleak for
first-time buyers. The number of new homeowners created in the second quarter
was the lowest since 2006, and just a third as many as a year earlier, the
Census Bureau reported last week. Black homeownership fell to the lowest level
since at least 1970.
The housing recovery that began in 2012 has been
unequal from the start. About 6 million Americans lost homes in last decade’s
crash and needed time to rebuild their credit. Private equity firms such as
Blackstone Group Inc. swept in to buy foreclosed properties at deep discounts
and rented them back to many of those displaced former homeowners.
Now those people are back in the market, along with
the bulging population of millennials eager for their first crack at
homeownership. But many of the properties they want have already been picked
over. Builders have focused on wealthier buyers willing to pay bigger price
tags, and now some areas have too many expensive homes, and not enough where
they’re needed.
Affordable homes disappeared first in technology and
financial hubs like Silicon Valley and New York, where buyers with big
paychecks pushed up prices. Now values are flattening after many would-be
homeowners have been forced to the sidelines. In some areas, demand has also
been hit by a pullback in foreign buyers and new federal limits on property-tax
deductions – as well as fears that a recession may be around the corner.
A Chinese company in Guangzhou
recently exported 300 used cars to buyers in Cambodia, Nigeria, Myanmar and
Russia. The shipment was a first for China, which till now had restricted
large-scale exports of used cars in deference to manufacturers, who feared that
poor vehicle quality could damage their reputations. There will be more such
shipments — and their impact will reverberate well beyond the mainland’s
used-car lots.
With all the focus on electric and
self-driving cars, it’s easy to overlook just how big and influential the
market for old-fashioned junkers remains. In developed economies, more than
twice as many used cars are sold as new ones. For example, there were 17.3
million new vehicles sold in the U.S. during 2018 — and 40.2 million used
ones. The gap is forecast to widen in 2019, driven by the ever-escalating price
of new cars and a flood of used vehicles coming off lease. Automakers may be
forced to slash prices of new vehicles and eliminate incentives in order
to prop up sales.
Rich countries from Japan to the
U.S. have shipped at least some of their older vehicles to developing nations
such as Mexico and Nigeria for decades now. The trade has done more than get
polluting autos off the roads; it has helped boost new-car sales by reducing
the supply of secondhand alternatives.
Compared to domestic sales, of
course, the numbers are quite small: The U.S. exported just under 800,000 used
cars last year, a number that’s remained relatively steady since 2013.
Nevertheless, that accounted for nearly a third of the passenger vehicles and
light trucks exported from the U.S. in 2018. Japanese exports often approach 1
million vehicles annually. Singapore, Korea, several European countries and
Canada also export a significant number of used cars.
It makes sense that China would
join them. For one thing, inventory is building. In 2018, China sold 28 million
new cars and nearly 14 million used ones. Soon, the ratio will flip: China is
home to more than 300 million registered vehicles — the largest fleet in the
world — and it’s just a matter of time before more of them are resold. The
quality of Chinese cars has also improved to the point where many
developing-world consumers may well choose them as a cheaper alternative to
used Toyotas or Fords.
At the same time, China’s
automobile industry is in a slump and policymakers are keen to find ways to
boost it. Used-car exports, the government says, can “stimulate the
vitality of the domestic automobile consumption market.”
That spells competition and
possibly trouble for the automotive sector globally. An increase in the supply
of used cars will inevitably drive down prices, especially in the emerging
markets such as Nigeria and Cambodia to which Chinese exporters will be marketing
their vehicles.
While that’s good news for
prospective car buyers in Lagos, over the long term it will impact new car
sales and even manufacturing in developing countries, many of which are part of
automakers’ global supply chains. Likewise, as fewer cars are exported, say,
from the U.S., the competition between new and used vehicles domestically will
only stiffen.
And cars are just the beginning.
Just as China’s factories drove down the cost of new goods over the last three
decades, the growing piles of used stuff purchased — and now unloaded — by
Chinese consumers will exert downward pressure on the price of used and
new products everywhere.
China’s secondhand car exports are
starting modestly and the country will take time to catch up to more
established players. But this isn’t semiconductor manufacturing; long-term,
China will have more used cars to sell than anybody and its export business
will inevitably grow into the world’s biggest. Global automakers might want to
strap on their seatbelts.
Net bond purchases by the Federal Reserve, European
Central Bank and Bank of Japan will swing back above zero from September,
according to an analysis of their balance sheets by Bloomberg Economics. That’s
just eleven months since they collectively hit reverse having spent a decade
pumping stimulus into their economies via quantitative easing.
The outlook shows how quickly central banks have been
forced to turn tail after spending much of last year leaning toward tightening
monetary policy, only to now be looking to loosen it as the world economy
slows. It also underscores how their balance sheets are likely to remain
permanently larger than the pre-crisis years.
For investors, the switch back, coupled with shifts
toward lower interest rates, strengthens the case for buying bonds given the
increased demand and shrinking supply of them. That could add fuel to a rally
that’s already pushed average yields on global bonds down by almost 1
percentage point since November, left an almost $13 trillion pile of
negative-yielding bonds and sparked predictions that U.S. 10-year borrowing
costs could also hit zero. Those lower yields would tend to push investors back
into stocks.
Since the Fed began reversing QE in October 2017, it
has shed about $370 billion in Treasuries from its balance sheet which had hit
$4.5 trillion in 2015. Those holdings will begin to rise later this year as the
Fed ends the unwind and engineers plans to move back to pre-crisis norms of
holding only government debt by slowly replacing its $1.5 trillion in
mortgage-debt holdings with Treasuries.
“The Fed’s plans for the balance sheet are to shift
out of MBS and into Treasuries and, given their guidance, they should be buying
some bills,” said Mike Schumacher, strategist at Wells Fargo. “That will cause
the curve to steepen.”
As for the European Central Bank, Bloomberg Economics
is among those predicting it will announce in September that it will be
purchasing bonds again. Its base case is that the ECB will start 45 billion
euros of monthly net asset purchases to run for a year, starting in the fourth
quarter.
As the IMF note, most $100 bills are held abroad
and geopolitical uncertainty may well be driving global demand for holding
plenty of “Benjamins”. (The Federal Reserve Bank of Chicago says
nearly 80% of $100 bills — and more than 60% of all US bills — are
overseas, up from roughly 30% in 1980.)
On a cloudy evening on June 16, the MSC Gayane was
making its way into Delaware Bay for a stopover at the Port of Philadelphia
when it was intercepted by boats carrying about a dozen armed U.S. Customs and
Border Protection and other federal agents.
Customs officers escorted the 1,031-foot-long ship,
part of a Mediterranean Shipping Co. fleet that handles a significant share of
the world’s seaborne trade, to the port in South Philadelphia, and early the
next morning seven of the boxes were X-rayed and opened to reveal “bales and
bales of cocaine,” according to U.S. officials.
It took about a week to weigh and document the
bricks. In all, they weighed 39,525 pounds—nearly 20 tons. The haul, with an estimated street value
of $1.3 billion, was the largest drug seizure in the 230-year history of the
U.S. customs agency and one of the biggest ever by American authorities.
It was the result of what shipping executives say is
a growing trend in drug transport. Smugglers who have long used small planes,
speed boats, trucks and other transport have grown bolder about stuffing large
amounts of narcotics into commercial distribution shipping networks, trusting
that illicit cargo won’t raise alarms in the enormous stream of goods moving
between countries.
In February, customs agents seized 1.6 tons of
cocaine on the MSC Carlotta at Port Newark in New Jersey. Then in March,
authorities found 1,200 pounds of cocaine aboard the MSC Desiree at the Port of
Philadelphia.
Shipping executives say the ship’s role in one of the
few South American services connecting to Europe likely drew the interest of
smugglers. The route and the earlier busts raised alarms for law-enforcement
authorities.
MSC, the world’s second-biggest container-ship
operator by capacity, faces big losses after paying $50 million in cash and
bond to release the vessel after it was held for nearly a month.
The U.S. Attorney for the Eastern District of
Pennsylvania says it plans to seek permanent forfeiture of the ship, which is
less than two years old and worth an estimated $90 million.
An MSC spokesman said the firm wasn’t the target of
any probe. The company said it chooses its crews from a pool of seafarers that
have been vetted by U.S. authorities and given special visas.
Following the bust, the carrier said it was adding
security guards on ships sailing from the western coast of South America,
adding closed-circuit cameras on its vessels and implementing cabin checks on
board to ensure workers don’t have contraband container seals or other evidence
of drug smuggling.
It’s hard to wrap your head around just how low U.S.
interest and bond yields are—still are—a decade after the Great Recession
ended. Year after year, prognosticators said that rates were bound to go back
up soon: Just be ready. That exercise has proved to be like waiting for Godot.
Thirty-year mortgage rates are a fraction of long-run
averages, and companies too are paying very little to borrow. All that cheap
money has been helping the economy along. On the other side of the ledger, bank
depositors are getting paid only a fraction of 1% on their savings.
The longevity of low rates has upended long-standing
assumptions about money and reshaped a generation of investors, traders,
savers, and policymakers. The Federal Reserve has tried to push the U.S. into a
higher-rate regime, raising rates nine times since 2015, when the key
short-term rate was near zero. But now the central bank appears ready to
reverse course and start cutting again when it meets at the end of July.
Anne Walsh, chief investment officer of fixed income
at Guggenheim Partners, says there’s been “a paradigm shift of epic proportion
for investors.” Not only are short-term rates low, but long-dated bond rates
are minuscule, too, suggesting that investors see little likelihood of
rates—and the economic conditions they reflect—changing anytime soon.
Borrowers of all kinds have been clear benefactors of
this sea change, with many nations and companies locking in low rates for as
long as a century. Belgium and Ireland have sold 100-year bonds, as did Austria
this year at a yield of 1.171%. In 2015, Microsoft Corp. sold 40-year bonds and
the University of California issued 100-year debt. Subdued rates have also
buffered the U.S. Treasury from rising interest costs on the federal debt.
Individuals have had to get used to earning paltry
rates. The national average rate on savings accounts is 0.10%, little changed
from four years ago and down from 0.30% in 2009, according to data from
Bankrate.com. In 2000, well before the financial crisis, the rate was 1.73%.
The problem is the same for institutions that manage
savings on behalf of others. Pension funds, overseeing trillions in retirees’
future cash, have been ratcheting down return expectations. The 30-year
Treasury bond, a favored debt security, yields about 2.5%—compared with an
average 6.5% since the 1970s. Even a record rise in stock prices hasn’t solved
the low-return problem for pension funds, because many of them cut their
allocations to equities after the financial crisis.
Where low rates really bite isn’t in current returns
but in the future gains investors can reasonably expect. Interest rates set a
kind of baseline for the return on all assets. As they fall, bond values rise
and stocks often do, too. But once rates have settled at or near rock bottom,
there’s less room for that kind of price appreciation.
While some Fed officials wish they could get back to
more-normal rates, so they have more room to ease again in the future if they
need to fight a downturn or fresh financial crisis, they seem to have their
hands tied. For all the problems low rates may cause, policymakers see them as
a stimulant to growth. Although unemployment rates are very low, the economy
took an agonizingly long time to recover from the financial crisis. And now a
slowdown in global growth and headwinds from Trump’s trade war have made risks
to U.S. output too strong to ignore.
The surprising persistence of low rates has even
quietly reordered the hierarchy on Wall Street. Hedge fund managers may still
be glamorous on shows like Billions, but in real life they’ve had to fight to
retain clients. Partly that’s because many hedge fund managers thrive on
volatility, and in a world where the dreaded spike in interest rates has never
arrived, there’s been too little of that for them. The long fall in rates has
made it easier so far to earn money with simple investments such as stock and
bond index funds. Meanwhile, cheap financing costs and rising asset values have
been a boon for private equity firms. Investors have committed about $4
trillion to them in the last decade, according to data from research firm
Preqin Ltd.
In 2009, bond powerhouse Pacific Investment
Management Co. saw all this coming, when they dubbed their multiyear investment
outlook “the new normal” and predicted lower long-term yields. They saw the
same issues the Fed and central bankers around the world are grappling with
now: slow growth, a combination of technological innovation and low-cost global
labor that eases inflationary pressure, and a glut of savings as the
populations of rich countries age. Looking ahead, with many of those 2009
factors remaining, “the new wrinkle is concern around global trade and
countries looking more inward,” Pimco Group Chief Investment Officer Dan
Ivascyn says. “Yields can absolutely go a lot lower.”
