Up and Down Wall Street
March Madness Takes On New Meaning
In the U.S., GOP debate at times turns into a scrum. Abroad, negative interest rates seem to be minuses, rather than pluses, for economies.
By Randall W. Forsyth
Rather, it seems to be a reaction to the imposition of negative interest rates.
It’s almost March and the madness is about to begin.
On the political side, it has been beyond mad and all the way to wacky. On the financial front, more fun may lie ahead.
First came the Thursday evening cage match that was advertised as the Republican presidential candidates’ debate, out of which came the priceless screenshot of front-runner Donald Trump flanked by Sens. Marco Rubio and Ted Cruz with the closed caption: “unintelligible yelling.” Pity retired neurosurgeon Ben Carson, who pleaded plaintively, “Somebody please attack me.” No wonder Ohio Gov. John Kasich’s sensible points were buried in the din.
That was followed on Friday by Trump’s endorsement by New Jersey Gov. Chris Christie, a similarly self-effacing fellow who had been part of previous scrums among the GOP contestants. No other big-name Republican had jumped on the Donald’s bandwagon, which seems to have the momentum to carry him to the nomination.
Cynics thought Christie’s endorsement was meant to wangle a cabinet post in a Trump administration, with attorney general bruited most often. Treasury secretary would be the least suitable position, given the nine credit downgrades of the Garden State on Christie’s watch, although that would be in keeping with the multiple bankruptcies of Trump entities.
All of which precedes Super Tuesday, which kicks off the month of key primaries that may well decide the nominees of both parties. Greg Valliere, chief strategist at Horizon Investments, thinks Rubio’s best hope is to arrive at the GOP convention on July 18 without Trump having locked up the nomination. On the Democratic side, he sees Hillary Clinton having the presidential nomination wrapped up by April and reckons she’s “the luckiest politician in America” if her opponent in November is “someone who’s loathed by nearly half of Republican voters.”
For the moment, financial markets are apt to be more concerned with more mundane monetary matters, starting with this weekend’s confab of the Group of 20 major economic powers in Shanghai. U.S. Treasury Secretary Jack Lew said before heading there not to expect a “crisis response,” apparently referring to speculation about some big pact along the lines of the Plaza Accord in early 1985 to bring down the dollar and stabilize exchange rates.
China’s head central banker denies that Beijing will engage in “competitive devaluation” to boost exports.
For the most part, the People’s Bank of China has worked hard to stabilize the yuan, even at the cost of draining domestic liquidity significantly, according to Daniel Tenengauzer, head of foreign-exchange strategy at RBC Capital Markets. That was evident in a one-day spike in Chinese money-market rates last week, which sent stocks down 6% on Thursday.
The PBOC has had to offset capital outflows as wealthy Chinese try to get their money out of the country before the yuan declines further or restrictions on capital movements are tightened. Favored destinations have been property markets abroad, notably on other ends of the Pacific Rim, such as Australia and Vancouver, where housing markets are overheated, in part because of piles of money from China and elsewhere. One can only infer what’s actually happening in China because, as the New York Times reported last week, the Chinese media have been told their job is to serve the Communist Party. No news usually means bad news being covered up.
Next Thursday, March 10, Mario “Whatever It Takes” Draghi is anticipated to unveil additional stimulative measures at the European Central Bank’s regular meeting. That could mean pushing policy interest rates further into negative territory from the minus 0.3% for banks’ deposits at the ECB, plus an increase in its asset-purchase program, from 60 billion euros ($65.6 billion) a month currently.
Beware the Ides of March. Further stimulus from the Bank of Japan is likely when it meets on March 15.
The BOJ’s surprise imposition of negative rates in late January backfired by sending the yen sharply higher, not lower, as would be expected, and pushing stocks lower, especially the banks’.
All of which is prelude to the Federal Open Market Committee’s two-day meeting that winds up on March 16. There’s a 90% chance that the Fed’s policy-setting panel will stand pat, after raising its federal-funds target a quarter- point in December, to 0.25%-0.5%, according to the fed-funds futures market. That market says the probability of another hike doesn’t reach 50% until the December FOMC meeting.
Expectations also will be shaped by Friday’s release of February’s employment data, which should feature a 190,000 rise in nonfarm payrolls, according to MFR chief U.S. economist Josh Shapiro. The headline jobless rate should hold at 4.9% and yearly wage gains probably will chug along at 2.6%.
That might move markets, but will likely be rather less entertaining than the political jousting. For the moment, stocks are watching and waiting for the outcome, with the major averages adding about 1.5% last week. What stands out are the record highs set by such defensive names as Campbell Soup CPB in Your Value Your Change Short position (ticker: CPB), Kimberly-Clark (KMB), General Mills GIS in Your Value Your Change Short position (GIS), and Reynolds AmericanRAI in Your Value Your Change Short position (RAI). In a mad world, staples provide a bit of comfort, if not excitement.
THIS MAGAZINE regularly conducts Big Money polls that survey the thinking of major money managers about financial markets, economic policy, and the like. A new idea about big money seems to be emerging—that it should be done away with.
This meme is that big money in the form of large-denomination bills should no longer be issued by governments. Specifically, the U.S. $100 bill and Europe’s €500 note should be taken out of circulation, according to a parade of recent opinion pieces, starting with one by former Treasury Secretary Larry Summers in the Washington Post, in addition to editorials in the New York Times, the Financial Times, and Bloomberg (and in this week’s Barron’s ).
Their argument is that these big bills, along with the 1,000 Swiss-franc note, are favored by criminals and terrorists as readily accepted stores of wealth and means of payment that don’t involve the banking system and thus evade the view of governments seeking to fight illegal activities.
The thing about memes is that they become part of the zeitgeist almost spontaneously, as a reflection of new thinking. But the use of large-denomination bills by criminals and terrorists is anything but new. In the current vernacular, “It’s All About the Benjamins”—referring to the image of Benjamin Franklin on the $100 bill, loved by drug dealers large and small. But that song actually came out 20 years ago. And scenes of transfers of suitcases full of cash to depict all manner of nefarious activities have been staples of movies forever.
So why the sudden call to do away with large-denomination bills? To be sure, there has been a steady ascent in the total of $100s outstanding, with a doubling over the past decade, to $1.08 trillion at the end of 2015.
But in the prior decade, the total of Benjamins similarly doubled, meaning the rate of growth hasn’t accelerated.
Outside the U.S., there does seem to be a recent pickup in demand for big bills. Last week, The Wall Street Journal reported a sharp increase in CHF1,000 notes in circulation, each worth roughly 10 U.S. C-notes.
And in Japan, there has been a run on safes to store yen notes, the Journal related. There’s no suggestion of an increase of illegal activities that would utilize big stashes of cash in either country.
In January, the Bank of Japan joined the European Central Bank and the Swiss National Bank in setting rates for banks below zero. So far, negative rates haven’t been fed through to depositors but to government bond markets. The 10-year Japanese bond’s yield has dropped since the BOJ’s move last month, to minus 0.06% on Friday. In Europe, two-year German debt went for minus 0.53%. And for a 10-year Swiss bond, the yield was minus 0.4%.
With central bankers doing a reverse Buzz Lightyear and sending interest rates to zero and beyond, investors supposedly will take more risks, and consumers will be induced to spend, not save, their money. Or so conventional theory says. But rather than pay those effective charges for the privilege of lending money to these governments, it seems logical to stash cash at zero percent.
The real reason some economists don’t like cash is that it “messes with their models,” writes Convergex’s chief market strategist, Nicholas Colas. “Allow a pensioner to hold onto their savings in cash (since they are too old to earn more) and you weaken a policy maker’s ability to alter consumer behavior. Seems more like a feature than a bug to me, but I am not an economist,” he quips.
As noted previously in this space, negative rates mainly drive down currencies’ exchange rates, even though that’s supposed to be taboo among global policy makers. Competitive devaluations attempt to gain share in international markets, which have been shrinking. World trade shrank 13.8%, measured in dollars, last year, the first contraction since the crisis year of 2009, according to a report by the Netherlands Bureau of Economic Policy Analysis’ World Trade Monitor, cited by the Financial Times.
Instead of stimulating the animal spirits to spend and invest, negative interest rates may have the opposite effect—to make one want to sit on one’s cash. By coincidence, money has been flooding into gold mutual and exchange-traded funds, Chris Dieterich writes on Barrons.com’s Focus on Funds blog. Some $2.6 billion arrived during the most recent week, bringing the three-week take to $5.8 billion, according to Bank of America Merrill Lynch.
Criminals don’t need large-denomination bills. They can find alternative stores of value and means to transfer wealth, especially with the advent of Bitcoin and other electronic currencies. The sudden interest in banning big bills seems to have more to do with the imposition of negative rates, which don’t work with stashes of cash.