Friday, January 29, 2016

Japan Enters Twilight Zone: Negative Interest Rates

I guess the most recent hot news in the financial world is the that the BOJ has set their benchmark interest rate to -0.1%. Yup, NEGATIVE 0.1%.

Pay people to not let you hold your money and lend it out for a profit? THAT MAKES SO MUCH SENSE. NOT.


Less than a year ago I talked about how Europe has booked themselves permanent long-term stays in Crazy Town. They used Shopback on an Agoda promotional booking, so they got themselves a good rate for a long ass stay over there. Anyone knows when they are scheduled to come back to Reality?

(Eubel: Negative interest rates? What's that? Can eat one or not?)

Most models (I'm talking about mathematical ones, not the ones in bikinis... but then again, I guess this applies to them too) don't know how to deal with negative interest rates. To be frank, most people just can't even. I can see how it makes sense to never wonder about negative interest rates, since tending towards zero you will go exponential. It's basically the y = 1/x graph. In that sense, rates can NEVER go negative. But they already are negative. So WTF?  David Merkel wrote a great post about tackling this idea.

The way that it is currently being analyzed now is that these numbers, positive or negative, are just arbitrary and only important relative to one another. This means that moving from 5% to 3% is considered the same as moving from 1% to -1%.

Is this how we should think about it? Honestly, I don't know.

What I find cute is that bond investors aren't rushing into the much obviously higher yielding assets of precious metals. Yes, they yield 0%, but hey, there's still more than -0.1%, right? But that isn't a good example because metals do have storage costs, but it is an interesting notion to think about, especially since everyone is supposedly "reaching for yield".

My take is that the smart people are reaching for safety now, while everyone is still following the yield-train off the cliff.

Readers who have read my previous posts about Japan should know my stance pretty clear: Japan is batshit crazy. I'm not talking about the general population. If you like weird anime porn, whatever floats your boat man. I'm talking about the crazy people running it. To me, they are a massive Ponzi scheme and I have a very bleak outlook regarding their future. Something was said in the BBC article which I strongly agree with, which is that "(Japanese) businesses don't need money - they need investment opportunities. And that can only be achieved by structural reforms, not by monetary policy".

Slow clap, because I think he's spot on. 

So while the rest of the world is allegedly freaking out about the inflation monsters, central bankers have decided to bring out the bazookas to chase them out. Clearly, what the world needs in a slowing global economy is inflation! Stagflation is always the best, isn't it?


Honestly, I'm not sure which sort of armeggedon I would prefer - hyperinflation or outright deflation. Both seem very appealing to me.

And people still say I'm the crazy one.

1 comment:

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