Once upon a time, falling interest rates were great for banks. A lower cost
of capital gave lenders access to cheap raw material while causing borrowers
to clamber for what banks were selling. Large profits usually ensued.
But not now. Rates have fallen past the banks' sweet spot to levels that just
don't work. Borrowers appear to be spooked rather than energized and trading
desks are imploding amid "catastrophic
volatility". See German
bond yields collapse below 50bps for first time ever and UBS's
investment bank earnings decline 63% on equities trading.
And now yield curves are inverting -- that is, long rates are falling below
short rates, which means banks' borrowing costs (the short end of the yield
curve) are starting exceed their lending revenue (the long end of the curve).
See Japan's
yield curve faces further pounding amid BoJ aftershock and US
Treasury yield curve inverts.
To add a little spice to the toxic stew, capital controls are coming back
into style:
Germany
proposes new cash ban and capital controls as Europe rushes towards NIRP
(Examiner) - Last Friday, Japan was the first major economy to cross the
'Rubicon' by implementing negative interest rates (NIRP) in an attempt to
force their people to spend, and slow deflation as the 3rd largest economy
moves into recession. However, in this Japan is not an island, with several
other nations already preparing to do the same to protect their diminishing
economies.
And in all of this there is one surprising country that appears to also
be preparing for NIRP as on Feb. 3, coalition group of German legislators
introduced a bill to limit the use of cash, and to ban the use of the 500
Euro bill in personal and non-bank transactions.
The significance of this is that when a central bank implements policies
that make holding your money in a bank a liability, then the natural recourse
is for depositors and account holders to simply take it out and move their
wealth into assets that are either outside their nation's currency, or into
commodities such as gold and silver which provide no benefit to an economy
that desperately needs its people to spend and create inflation and growth.
Not surprisingly, US bank stocks are getting whacked. As of 9am on Wednesday
Feb 3:
Bank of America (BAC) stands out as especially cringe-worthy, having fallen
from north of $18 per share to below $13 in just a few weeks:
What does all this mean? The broad-strokes answer is that these huge, nearly-omnipotent
entities that have dominated and defined the world's economic and political
landscape may finally be receding towards a more reasonable level of power.
One way to gauge this is by the rhetoric coming out of the current presidential
candidates, all of whom have decided that it's not just safe, but profitable
to bash Wall Street. Dimon, Blankfein, et al are clearly not the bullies they
once were.
More immediately it means there's a new black swan in the sky. As a group
the world's biggest banks are leveraged to an extent that probably has the
authors of the Glass-Steagall
Act spinning in their graves. The notional value of their over-the-counter
derivatives books dwarfs the global economy, while their exposure to now-moribund
sections of the oil and gas industry guarantees massive write-offs in the year
ahead. The question isn't whether the big banks will report huge losses, but
whether one of them will be destroyed in the process, giving us another Lehman
Moment.
