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Dead Meat in Jackson Hole

Summary:
The Pointlessness of Negative Yields If there are any virtues of debt instruments with negative yields we have yet to realize them. Certainly, we understand that as bond yields fall, bond prices rise, and bond investors are rewarded with capital appreciation. But when capital is appreciating as a consequence of negative yields, we suspect there is something fundamentally wrong with the capital itself. Not only is the stock of negative-yielding debt at a new record high of almost trillion, lately there has been a big surge in corporate debt sporting negative yields-to-maturity. [PT] Capital markets, as we have always understood them, are centered around lenders buying debt – such as a bond – at a yield that compensates for the risk

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The Pointlessness of Negative Yields

If there are any virtues of debt instruments with negative yields we have yet to realize them. Certainly, we understand that as bond yields fall, bond prices rise, and bond investors are rewarded with capital appreciation. But when capital is appreciating as a consequence of negative yields, we suspect there is something fundamentally wrong with the capital itself.

Not only is the stock of negative-yielding debt at a new record high of almost $17 trillion, lately there has been a big surge in corporate debt sporting negative yields-to-maturity. [PT]

Capital markets, as we have always understood them, are centered around lenders buying debt – such as a bond – at a yield that compensates for the risk of default over a contracted duration. The acceptance of negative yield is an abstraction that violates the form and function that capital markets are built on.  In fact, negative interest rates undermine the foundational business model of banking in general.

How can banks lend money if they’re not compensated for the risk that some loans will go bad?  And if banks can only lend money at a loss, why lend money at all?  If there is no profit motive, what is the point?

There is currently about $17 trillion in combined government and corporate negative yielding debt in existence.  The European Central Bank and the Bank of Japan, with policies of mass money debasement that far exceed those of the Federal Reserve, are the primary culprits.  Their fake money and fake interest rates have produced fake capital markets.

In effect, Negative Interest Rate Policy (NIRP) destroys a commercial banks ability to build capital and offset losses. In other words, NIRP destroys commercial banks.  By extension, NIRP via central banks leads to the implied nationalization of commercial banks.

They certainly do look destroyed – the EuroStoxx Bank Index is down 84% from its 2007 high. Maybe NIRP wasn’t such a great idea after all… [PT]

Japan and Europe are already past the point of no return.  President Trump beats on Fed Chair Jay Powell practically every day to go negative.  Will he acquiesce?  In truth, he doesn’t have a choice…

Roadkill

In western Wyoming, between the Teton Mountain Range and the Gros Ventre Range, sits a high altitude mountain valley.  The near vertical slopes used by Davy Jackson and other 19th century fur trappers to enter the valley from the north and east gave the sensation of entering a hole. The name stuck.

The conditions are harsh along the Jackson Hole valley floor.  Radiational cooling, where low lying cold air from the snow covered ground plunges the temperature as the air migrates down the valley.  This cooling effect, an effect similar to negative yielding debt, has produced temperatures of negative 66 degrees Fahrenheit.

However, for a brief period each year, the conditions in Jackson Hole are near perfect.  In late summer, the valley’s paradise.  Still, perfect conditions do not mean all is perfect in Jackson Hole.

Jackson Hole – where Moose go to die. According to the Jackson Hole Conservation Alliance, we are now at “22,390 dead moose” – and counting. If you happen to be a moose, we would strongly urge you to avoid the area. [PT]

On Sunday night, for example, resident Gale Wilson took a photo of a moose and her calf near Highway 390 and the Snake River.  When she stepped outside on Monday morning she was greeted by the dead calf’s body.  “It just ruined my day,” said Roosevelt.

Unfortunately, moose roadkill has become such a common occurrence along this stretch of Highway 390 that Mark Gocke, with the local Game & Fish, has lost track of how many moose have died.  To better square up the runaway roadkill, Mr. Gocke is hard at work – or, perhaps, hardly working – on an official tally.  He may need to add several new entries to his log before the weekend is over…

Dead Meat in Jackson Hole

This Thursday through Saturday, for the 37th consecutive year, the Kansas City Federal Reserve is hosting its economic symposium in Jackson Hole. Central bankers from the Federal Reserve have descended upon the valley like 19th  century fur trappers.  Who they bill their expense reports to is a question better not asked.

At the time of this writing, Fed Chair Powell has yet to give his speech.  There are many things he could say.  There is little that he will say. There are things he definitely won’t say.

The plethora of pressures Jerome Powell is laboring under: serenades asking for more cowbell, hopeful bovines in ACME trucks, subtle suggestions from Wall Street and a certain politician, heartfelt prayers… [PT]

For example, Powell won’t say that the world’s central banks are tripping and stumbling as they race to out-stupid one another.  Nor will he say that locking in a guaranteed loss on bonds that are held to maturity is a terrible way for investors and pension funds to meet their long-term liabilities. Or that sometime over the next decade retirees will be eviscerated. He won’t say any of that…

Powell also won’t say that the Federal Reserve’s days are numbered.  That the central bank is obsolete and one crisis away from its own destruction. That it has cannibalized the nation’s time and treasure, transferring individual wealth to Washington for Washington’s ends.

Powell certainly won’t say that he may very well be the last Chair of the Federal Reserve.  That the economic model of the 20th century is over.  That increased issuance of debt no longer translates into increased economic growth.

That the Fed merely provokes wild asset price swings, negative yielding bonds, casino style speculation, and epic bubbles and busts. And that with full knowledge of this, he will still take the nation into the hole of negative yields.

Meet the next yield target… [PT]

Indeed, the rash of moose kills in Jackson Hole is acutely instructive. The central bankers are dead meat. And they know it.

Charts by Invesco, Bloomberg, investing.com

Chart annotations and image captions by PT

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

 

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Dead Meat in Jackson Hole 
 

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