The New Mayhem: Low Interest Rates & Rigged Soaring Capital Markets

The exit of England from the European Union will take months if not years to complete, however, any look of indices reveals a staggering confidence born from Central Bank accommodative policy, not consumer spending.  This has all the markings of a confidence trick and it may well end badly.

When the decision to leave was accomplished, U.S. Treasury yields dropped, even German and Japanese yields sought negative territory.  All this ramped up with recent smashing gains on Wall Street.  Something is amiss here. . . with have negligible growth sustained at zero inflation, massive carry trades and arbitrage wrecking most portfolio’s, so where’s the origin of recent gains in capital markets.

Well, its really about the Central Bank managing expectations.  

Interest rates remains a center piece in western capital markets, it remains the sine qua non of the entire edifice.  It is the last stronghold Central Bankers have in a world of digital fiat money.  However, as every trader knows, the driver of profits is the shape of the yield curve, the chart of interest rates covering specific durations.  The smaller the gap between short/long rates, the flatter the yield curve, the harder it is for banks to seek profit.  This turns deadly when interest rates turn negative, hence the crisis enveloping Deutsche Bank.  But the problem is really twofold, for even as banks admit to declines in assets, it becomes impossible for banks to reduce the cost of their liabilities.  This is perhaps the largest structural problem sustaining banking crisis’ throughout the world.

Nevertheless, short-term interest rates and government bond yields remain the only risk free rates forming the basis of financial returns.  A terrible irony has engulfed central bankers throughout the world:  extremely low-to-negative-rates were imposed as a distinct policy to save the financial sector.  The expectation was that banks would use their lending mechanism to fund sector growth.  It never happened.

All we’re left now is an all powerful hollowed out institution seeking to manage psychological gain by ginning up the balance sheets of highly leveraged companies willing to run out on a dangerous risk curve.

George Steiner was right, when the King is dying, the charlatans cash in.

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About William Holland

Systematic Theologian/International Relations
This entry was posted in Economics, International Relations, Political Economy, Uncategorized and tagged , , . Bookmark the permalink.

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