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Last weekend, when we reported that Germany’s Raiffeisenbank Gmund am Tegernsee – a community bank in southern Germany – said it would start charging retail clients a fee of 0.4% on deposits of more than €100,000 we said that “now that a German banks has finally breached the retail depositor NIRP barrier, expect many more banks to follow.”

Not even a week later, not one but two large banks have done just that.

Overnight, the Irish Times reported that Bank of Ireland is set to become the first domestic financial institution to pass on the ECB’s negative rates to customers for placing their money on deposit with the bank. The newspaper has learned that Bank of Ireland, which is 14% owned by the State, has informed its large corporate and institutional customers that it plans to charge them a negative rate of -0.1% for deposits of €10 million or more starting in October.

As with all other banks, initially only a small group of customers will be affected by the charge and while the bank has indicated that it has no plans to levy a negative interest rate on either personal or SME customers, increasingly more banks are lowering the threshold of eligibility (for example, the German community bank is now charging those with only €100,000 in the bank: low long until the minimum required balance is €10,000 or lower). However, as the Irish Times notes, this will be the first time an Irish-owned institution has applied a negative interest rate on deposits, breaking the long-held tradition of a bank paying customers to hold their money. A spokesman for Bank of Ireland said its policy was not to comment on its pricing but “we keep all our rates under review”.

Ulster Bank, which is owned by UK lender Royal Bank of Scotland, has already quietly introduced negative interest rates for a small number of large corporate clients. Ulster Bank has products priced off the back of Euribor, a European interbank lending rate, which is at an all-time low and turned negative last year. This charge by the bank does not apply to SMEs or personal customers.

Additionally, as Bloomberg reports, Royal Bank of Scotland, Britain’s largest taxpayer-owned lender, said some of its biggest trading clients must pay interest on collateral as a consequence of low central bank interest rates. Some of the bank’s institutional clients will need to pay interest on funds pledged as collateral when trading futures contracts, the bank said in an e-mailed statement on Friday. The changes for sterling and euro futures and options trading will probably affect about 60 large clients, a person with knowledge of the matter said earlier Friday.

“Due to the sustained low interest rate environment, RBS will now be passing the cost of holding such deposits onto a limited number of our institutional clients,” the bank said in the statement. RBS said it had previously applied a zero percent floor to the overnight rate charged for collateral required by clearinghouses for future traders.

As the FT adds, this is the first sign the Bank of England’s decision to cut rates to historic lows is forcing lenders to collect negative interest from deposit holders.

Ironically, unlike Europe, the UK’s rates are (still) positive, even though the BOE recently cut the interest rate to an all time low of 0.25%, as it unveiled it would resume monetizing government and corporate bonds. It may soon cut rates to negative.

And while the RBS move affects only a subset of business customers, some lenders in Europe, where both the European Central Bank and the Swiss National Bank have kept interest rates below zero for months, have been charging a wider array of customers to hold their deposits.

“What you’re seeing is there have been a few banks in Germany and a couple in Switzerland which have started to charge for deposits; importantly, it’s to corporate customers, or very wealthy people,” said Andrew Lowe, an analyst at Berenberg, quoted by the FT. “You are likely to see the UK banks follow suit, in particular if rates fall further,” he added. “Everything that applies to Europe applies to UK banks as well.”

And, after a certain period of time passes, it will also apply to less than “very wealthy people.”

The RBS charges would apply to clients who trade futures and options, and therefore hold cash on deposit as collateral. He said customers were being encouraged to put their cash into bonds instead to avoid the cost. “As you will be aware, there are a number of currencies which now attract negative overnight rates for deposits,” the letter from the bank said.

HSBC said last year it would start charging other banks for deposits held in currencies where negative interest rates apply. It confirmed on Friday that the policy would not change. Barclays also said it had no plans to apply negative rates.

As negative rates become increasingly part of the new normal, and as more depositors are swept up by the creeping confiscation of savings, we expect that the other part of the “cash trap” endgame, the actual elimination of large currency bills, will also soon accelerate, first in Europe where the ECB recently put an end to the printing of €500 bills, and soon after everywhere else.

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Submitted by Russell Lamberti via The Mises Institute,

Many central banks around the world aim to achieve some “inflation target” either as a single explicit policy goal — as in the case of the South African Reserve Bank — or part of a set of policy goals as pursued by the US Federal Reserve. But far from maintaining economic stability and fostering prosperity, consumer price inflation targeting practically guarantees a pernicious wealth transfer year in and year out, a perpetual duping of unsuspecting employees and companies, and a permanent blind spot to hidden inflation.

What Is Inflation?

Most economists define inflation as what happens when the prices of things like bread and haircuts and rent go up in money terms and consumers generally experience an overall loss of purchasing power of their money. This is known as consumer price inflation represented by the consumer price index or CPI. This definition of inflation is reasonable at describing the outcome of a larger general process, but it unhelpfully leaves more gaps than it fills. By looking at broad averages it doesn’t tell us if everyone or only some are getting poorer. It also fails to see hidden price inflation. Hidden price inflation occurs when prices remain roughly stable when they would have fallen as a result of technological progress and greater productivity. Finally, this definition of inflation doesn’t really tell us why prices are generally rising. Is it from printing more money or a loss of confidence in the currency or a large drop in production, say, during a war?

A further problem arises in measurement. The “official” CPI inflation rate is determined by measuring prices of thousands of consumer goods and services. While CPI is an important economic statistic, a myopic focus on it risks blindness to other important areas where price inflation might manifest, such as in real estate, stock markets, or foreign currency. CPI is also a broad average which doesn’t tell us whether a narrow or broad range of prices are rising.

The Monetary Cause of Inflation

These problems in definition and measurement can partly be resolved by defining inflation as an inflation or expansion of the money supply rather than as a general loss of consumer purchasing power. For one, it is easier to measure money supply in a system of national currency overseen by a central bank (though that's not without its challenges). Furthermore, being the primary cause of general and persistent price inflation, measuring the money supply offers a more fundamental perspective on the overall inflation phenomenon. For example, focus on money supply can diminish our blind spot to hidden inflation. If prices should have fallen say 10 percent due to technological progress, but instead remain flat due to say a countervailing 15 percent expansion of the money supply, we are still able to spot inflation despite prices not rising.

Looking at the money supply can also point us to an important aspect of inflation: where the new money enters the economy. In the modern monetary system, new money enters the economy as debt through the banking and financial system and goes first to the already wealthy and creditworthy borrowers — wealthy households, large businesses, and the government. This class of people get to invest the money first before it has filtered through the entire system and raised prices. A very significant wealth transfer takes place from late-to-early receivers of new money. This is sometimes referred to as the Cantillon Effect.

Inflation as a Process of Wealth Transfer

It is better to think of inflation as a process rather than a particular rate. The process starts with a particular type of monetary system, emerges in an expansion of the money supply by central bank printing and bank loans flowing into various areas of the economy, manifests itself in prices rising generally — though unevenly — higher than they otherwise would have been, finally leaving a wake of winners and losers.

This approach allows us to see inflation as not some inevitable force, but a deliberate process of wealth transfer enshrined in state policy.

How is wealth transferred by inflation? Money represents purchasing power. Creating money out of thin air, which is what central banks and commercial banks are licensed to do, confers purchasing power on those who are able to use the money first. For this new money to obtain purchasing power, it must rob little bits of purchasing power from all the other money in the economy. Purchasing power is transferred from those who hold money to those who create new money at close to zero marginal cost.

This explains how and why wealthy, creditworthy asset owners get richer while many poor people tend to resort to overconsumption and ultimately get poorer. Economist John Maynard Keynes, ironically a proponent of inflationary policies, famously noted that “by a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

Inflation as Trickery

Yet, mainstream economists believe that some degree of rising prices is “optimal.” Thus, central banks actually try to ensure consumer prices keep going up. But their reasons for this chiefly revolve around the trickery of inflation on unsuspecting people. For example, many inflation proponents argue that the best way to lower people’s wages to restore company profits is not to actually give them a pay cut, but to rather create inflation so they won’t fully notice their real wages falling.

These economists also favor tricking companies into thinking prices of their products are rising due to higher demand, when in fact it may be due to monetary inflation and therefore a misleading, temporary boost. Companies invest in new capacity only to have it made redundant when all prices rise and they realize demand for their product had not really increased. What follows the initial boom in hiring and production is layoffs and liquidations. In other words, support for inflation tends to revolve around short term, narrow considerations. But, as Henry Hazlitt has taught us, economic policies must be judged by their effect over the longer term and for society as a whole. On this basis, the process of inflation is pernicious.

Solving the Problem

Inflation can and should be abolished to rid ourselves of insidious and unjust wealth confiscation. Society can move toward this goal by the following means:

1. Adopting a broader perspective on price inflation than just CPI to include producer prices, asset prices like stocks and houses, and even foreign exchange prices. This will allow the public to better identify the inflationary process.
2. Recognizing central banks and commercial banks as the source of inflation and including changes in the money supply (appropriately measured) as a key measure of inflation. This will start to place emphasis on understanding who are the winners and losers of the inflationary process.
3. Reforming the financial system to end special money creation privileges, abolishing legal tender laws that drive people toward using manipulated currencies, and allowing any private entity to issue currency in competitive markets.

Only in this holistic way can societies begin to address the gnawing pestilence of inflation foisted upon them perennially by the financial and political elites.

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The Wall Street Journal this morning echoed many of the questions we’ve raised over the past several years about the sanctity of global markets.  How are equity markets signaling economic strength while bond markets trade at the tightest levels ever?  Why do gold prices soar while inflation remains “stubbornly” low?  The answer, of course, lies in the Central Banking grand experiment that has distorted almost every corner of global markets.  Per the WSJ:

What exactly is the market trying to say about the state of the global economy? Do the recent record highs in U.S. stock markets signal growing confidence in the recovery, or do soaring government borrowing prices and flattening yield curves as borrowing costs tumble at even long maturities signal market fears that the global recovery is a distant dream?

 

How does one reconcile this year’s 30% rise in the price of gold—usually considered a hedge against inflation—with long-term swap rates suggesting inflation will remain low
for years? And how does one explain the strength of European markets as many banking shares are trading at more distressed levels than at the height of the global financial crisis?

 

One answer to these disparities is that the markets have become so distorted by central bank activity that they are no longer transmitting very useful information about the economy at all.

As we’ve discussed on several occasions, low interest rates have created a number of distorted incentive structures that render typical market signals useless.  Perpetually declining interest rates have forced pensions to indiscriminately buy the long end of the the government bond curve in a desperate attempt to match asset duration with their liabilities (see our post “Pension Duration Dilemma – Why Pension Funds Are Driving The Biggest Bond Bubble In History“).  Meanwhile equity markets continue to soar to all-time highs, despite lackluster or declining earnings (see “The S&P Is Now Set To Report Its Second Consecutive Annual Earnings Drop Since The Financial Crisis“), on the premise that low-single-digit earnings yields are somehow adequate compensation for equity risk…an assumption they base on the low yields of the completely manipulated long-end of the curve.  The circularity of the many arguments is truly mind numbing.

And meanwhile, proving the pure lunacy of global equity flows, Chris Chapman of Manulife Asset Management recently pointed out that equity prices are blatantly being determined by the market’s interpretation of what Central Banks may or may not do.  Per a recent Bloomberg interview, Chapman pointed out:

“The message from the Fed has been conflicting and often not very clear.  So, it seems when the hawks talk up the possibility of a hike, the market discounts it as just trying to get more priced in to give themselves the option to hike rather than actually being interested in hiking.“

But, at some point, of course, the madness will all end.  As the WSJ points out, Central Banks around the world have made just about every accommodation they can make (we tend to agree given the staggering $13 trillion of negative-yielding debt around the world, see our post “With Over $13 Trillion In Negative-Yielding Debt, This Is The Pain A 1% Spike In Rates Would Inflict“) yet there is no end to the number of pending crises that can bring it all crashing down.  

The prognosis is therefore likely to be more of the same: a lackluster recovery, kept alive by increasingly extravagant central bank action—but with one proviso: The biggest risk to the markets is political.

 

This has been true for several years, of course, but the difference now is that with monetary policy approaching its limits, there is little central banks may be able to do to offset future shocks.

 

With a packed political agenda—including referendums this year in Hungary and Italy and elections next year in the Netherlands, France and Germany, all of which could raise fresh questions about Europe’s cohesion—there is no shortage of events that could throw the recovery off track. Perhaps that is why the price of gold, the ultimate safe haven, has been rising.

At some point we’ll revert to a world where good news is good and bad news is bad but we suspect that a lot of pain will have to be endured to get form here to there. 

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Submitted by Peter Schiff via Euro Pacific Capital,

Economics is far simpler than most in academics or government would have you believe. To make accurate predictions all you really need is an honest appreciation of the self-interest that is at the heart of free market transactions and an ability to understand how regulations that attempt to “correct” these realities don’t work. This is certainly the case with the completely predictable slow-motion train wrecks that are the signature U.S. domestic policy experiments of the last eight years: Obamacare and Federal Reserve stimulus. From the start, I issued countless commentaries on why both would fail spectacularly. The jury has started to come back on Obamacare, and the results are a disaster. And while the verdict on the Fed’s policies has yet to arrive in similarly stark terms, I believe that its failure is just as certain.

As I explained in my July 30, 2012 commentary “Justice Roberts is Right: The Plan Won’t Work,” the central flaw (among many others) in Obamacare is that it incentivizes younger, healthier people to drop out of insurance coverage while encouraging older, sicker people to sign up. The result would be a pool of insurance participants that would guarantee losses for those providing coverage. That’s exactly what we are seeing.

After only four years of operation, there is now wholesale defection by insurance companies to abandon the Obamacare marketplace because they are hemorrhaging money faster than just about anyone predicted. To believe that any other outcome was possible would have been the equivalent of believing in the Tooth Fairy.

According to the Wall Street Journal, the four biggest U.S. health insurance companies, Anthem, Aetna, UnitedHealth and Humana are losing hundreds of millions of dollars on their Obamacare plans. And since these companies can’t be compelled to operate a business that loses money, all four have significantly scaled back their offerings. UnitedHealth has already exited 31 of the 34 states where it sells ACA policies. Humana is now offering coverage in just 156 counties of the 1,351 counties in which it was active a year ago. The latest shoe to drop came this week when Aetna said it would stop selling Obamacare plans in 11 of the 15 states where it is currently active (Bloomberg Businesweek, 8/17/16).

It’s no secret why the companies are losing so much money. Enrollees into the new plans take out far more money in benefits than they pay in premiums, despite the fact that premiums have increased substantially. That’s because the pool of insures in the Obamacare plans differ sharply from those that exist in the private marketplace. Why this has happened should have been stunningly obvious to anyone. To quote from my 2012 commentary:

“…the ACA makes it illegal for insurance providers to deny coverage to anyone for any reason. This allows healthy people to drop insurance until they actually need it without incurring any risk. It's like allowing homeowners to buy fire insurance after their houses burn down.” Given the high cost of insurance, the law allowed millions to take a free ride.

I argued then that penalties that would hit those who remained uninsured were insufficient to compel them to make an uneconomic decision. This was the same rational that was used by Chief Justice Roberts when he ruled that the plan was constitutional. He argued that since the penalties were not high enough to compel behavior, they should be seen as constitutional “taxes,” not unconstitutional “penalties.”

Similarly, by guaranteeing that no one could be denied insurance for any reason, and that the sick would pay the same premiums as the healthy, the plans have sucked in lots of people guaranteed to take out more in benefits than they pay in premiums. Add these factors together and you get the recipe for guaranteed losses. In retrospect, it is simply incredible that supposedly smart people argued against this outcome while the law was being drafted and passed.

At this rate, there may essentially be no private companies offering insurance through the exchanges within a few years. This will mean that unless president Clinton (Trump has promised to repeal Obamacare) passes a new law requiring companies to lose money for the good of the country (not too outlandish a possibility), or if the Supreme Court allows massive increases in the penalties for not buying insurance (thereby creating the coercive force that Justice Roberts argued was absent in the original law), then the government itself will have to step in and absorb the losses that are currently hitting the private insurers. At that point, Obamacare will become just what its critics always thought it was: an enormous new unfunded and open-ended government entitlement.

While the flaws of Obamacare were incredibly easy to see, so too are the flaws in the Federal Reserve’s stimulus policy. What’s amazing to me is that more people aren’t able to see through it as easily.

Although few realized it while it was occurring, everyone now sees that the dotcom mania of the late 1990’s was a bubble that had to end badly. Most also realize now, as they didn’t realize then, that the housing bubble of the early years of the 21^st Century (which took us out of the 2001 Recession) was a bubble created by the Federal Reserve’s unprecedented low interest rates in those years.

But while we have gotten better at recognizing bubbles after they have burst, we are still totally blind to the ones that are currently forming. Ever since the Recession of 2008, the Federal Reserve has held interest rates at zero and has injected trillions of dollars into the financial markets through its quantitative easing policies. These moves have clearly inflated prices in the bond, stock, and real estate markets, an outcome that was an expressed aim of the policies.There is also clear evidence that these asset prices will come under intense pressure if interest rates were allowed to rise.

Recent history confirms this. Back in January of this year, just a few weeks after the Federal Reserve delivered the first rate increase in nearly a decade, the stock market entered a free fall. We had the worst opening two weeks of the calendar year in stock market history. The bleeding stopped only when the Fed backed off significantly from its prior rate hike projections. Since then, the market action has been clear to see: stocks rally when they believe the Fed will keep rates low, and then fall when they think they will rise. And so the Fed has played a continuous game of footsy with the market…forever hinting that hikes are possible but never actually raising them.

But given how close the economy could be trending toward recession, can anyone seriously believe that the Fed will risk kicking a potential recession into high gear by actually delivering another rate increase? It should be clear that it won’t, but somehow the best and brightest on Wall Street appear convinced that it will. Perhaps this explains why hedge funds have so consistently underperformed the market thus far in 2016.

To me, the fate of the Fed's stimulus policy is as clear as that of President Obama's failed experiment in healthcare. It's a disaster hiding in plain sight. The stimulus itself has so crippled the U.S. economy that it can now barely survive without it. As it limps along the crutch must grow ever larger, as the support it provides weakens the economy to the point where it becomes too small to provide adequate support. But rather than acknowledging that the Fed's policies have failed (an admission that any honest proponent of Obamacare should make), the proponents of stimulus are doubling down.

Earlier this week, John Williams, the president of the San Francisco Fed and widely believed to be a close confidant of Chairwoman Janet Yellen, issued an economic letter on the FRBSF website that lays the foundation for much greater stimulus for years to come. The centerpiece of Williams’ suggestions is that he would like to see the Fed raise its inflation target past the current 2%, and that the government be prepared to run much larger deficits to combat persistent economic weakness. In other words, ramp up the dosage of the medicine we have been taking for years, even though that medicine hasn’t worked. This shows a stunning inability to recognize a failed policy when it is staring at them in the face.

Absent from his analysis is any understanding that the stimulus policies of the past two decades may have actually created the conditions that have locked our economy into a perpetually weakened state. By preventing needed contractions, debt reductions, investment re-allocations and rebalancing, perennial stimulus has frozen in place a listless economy dependent on monetary support just to tread water. Just as Federal tax policy and healthcare regulations raised the costs of healthcare to the point where another bold (and ultimately futile) regulatory framework was launched to solve the problem, new forms of stimulus are being conjured to fix problems created by prior stimulants. But since Williams does not realize the stimulus he and his fellow quacks at the Fed have prescribed actually acts as a sedative, he has misdiagnosed the resulting condition of slower economic and productivity growth and as being the new normal.

Proof of this circular logic is Williams expressed desire to use monetary policy to push up “nominal GDP,” which is simply the GDP figures that are not adjusted for inflation. What good will it do for the average citizen if we get a higher GDP number that results merely from rising prices rather than actual economic growth? While the stimulus crowd likes to suggest that rising prices are a required ingredient for real growth because they encourage people to go out and spend before prices rise further, their asinine theory is completely unfounded. The entire purpose of deflating nominal GDP is to separate actual growth from rising prices. Pretending the economy is growing by targeting nominal GDP will only stifle real economic growth that might actually solve the problems the Fed still has no idea it created.

It is somewhat heartening that there is a greater recognition now of the inherent flaws in Obamacare. Hopefully such realizations will soon be widely raised about our current stimulus experiments, and that these insights will arrive in time to change course. However, confidence should be extremely low on that front.

To me, the fate of the Fed's stimulus policy is as clear as that of President Obama's failed experiment in healthcare. It's a disaster hiding in plain sight.  The stimulus itself has so crippled the U.S. economy that it can now barely survive without it.   As it limps along the crutch must grow ever larger, as the support it provides weakens the economy to the point where it becomes too small to provide adequate support.  But rather than acknowledging that the Fed's policies have failed (an admission that any honest proponent of Obamacare should make), the proponents of stimulus are doubling down.

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While over the past week more attention has been paid to the George Soros Open Society leaks than to the latest 13F filed by Soros Fund Management, the family office of the Hungarian billionaire, it is worth recalling that earlier this week we showed that confirming Soros’ latest bearish turn, the hedge fund had loaded up on enough S&P puts to bring its total holdings as % of AUM to just shy of all time highs.

However, a more interesting 13F filing which largely slipped between the cracks over the past week, was that of Tudor Investment Corp, the hedge fund belonging to Paul Tudor Jones, the “legendary macro trader” as defined by Bloomberg, which as we reported two days ago had fired 15% of its employees, and which is now said to be implementing minimum risk levels and urging its traders to take on much more risk to stem the losses.

It was interesting, because it revealed that Paul Tudor Jones is even more bearish than George Soros (and perhaps even of Carl Icahn), based on the surge in the fund’s S&P puts, which rose from $490 million notional to $1.7 billion notional, a nearly four-fold increase, and making it the biggest such position in the fund’s history, dwarfing the $301 million in notional calls the fund had on at the same time.  This was the biggest delta between Tudor’s puts and calls on record.

In fact, as of this moment, PTJ’s gross put exposure amounts to 37% of his entire disclosed long equity exposure of just over $4.7 billion.

The chart below shows the dramatic increase in Tudor Investment Corp SPY puts…

… relative to the reported long equity exposure as per the fund’s monthly 13F filings.

Considering his performance, and the $2.1 billion in redemptions already in the public domain, it won’t come as a surprise that PTJ is also hurting. However, considering the surge in bearish sentiment, it appears that the reason for this hurt is that yet another billionaire decided that the market was far too frothy and was actively hedging (and likely shorting, although those positions are not revealed in 13F filings), only for central banks to rip it even higher courtesy of the now record $200 billion in monthly QE, the result of which is that yet another trading legend may soon be crushed.

Those curious if PTJ will keep his massive S&P put position – just as Carl Icahn has confident that he will win this particular war with the central banks – or if instead he will unwind it, will have to wait until mid-November when the fund’s Q3 13F is released.

Source: 13F

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Crude prices had slipped back into the red ahead of Baker Hughes rig count data (after topping $48.50 Sept 16 overnight). For the 8th straight week (and 11 of last 12) the US oil rig count rose (up 10 to 406), tracking the lagged recovery of WTI Crude prices and up 28% from cycle lows.

The us oil rig count is now up 90 from the late-May lows at 316 (and based on the lagged oil price, is set to keep rising for another month)

The reaction… NOTHING

Charts: Bloomberg

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