John Mauldin’s trilogy on negative rates

It is not just Steven Spielberg or George Lucas who have a trilogy. John Mauldin has one too. He first wrote on Aug. 29 about ‘Six ways NIRP was economically negative’.

Here is an extract from his letter of August 29:

I thought about this at the Camp Kotok economic retreat in Maine a few weeks ago. The little town of Grand Lake Stream is beautiful, remote, and poor. Our group’s annual visit gives a big boost to the local economy. The residents roll out the red carpet and make us feel very much at home.

Attending the event every year for over a decade, I’ve come to know many of the locals. They are fine people who love their home and want only to live there in peace. They are far more like the people I grew up with out in the West Texas country than many of the denizens here in downtown Dallas. I know they struggle financially but had never really asked them for details. This time I did.

My son Trey, my colleague Patrick Watson, and I were out in a small boat in the middle of a big lake. With us was our guide, Jeff Cochran. Jeff spent 30 years working hard at a Maine paper mill. Patrick and I were talking about economics, of course, and we drew Jeff into the conversation.

Jeff retired from the paper mill with a small pension that he had to roll into a 401(k) that at one time would have enabled a modest living. Now, thanks to the Fed, it doesn’t. He earns extra income as a fishing and hunting guide but is still drawing down his pension far faster than experts would advise. I asked him about that, and he admitted that he was truly living on the edge.

He’s not the only one. Many of his neighbors are in similar situations. People all over the country are just folks who played by the rules and then found out the rules could change. It’s easy for someone like me to look at aggregate numbers and pontificate. Then I see the people behind those numbers, and it all becomes very real. I have been carrying around a true sense of outrage ever since that morning at Grand Lake Stream.

You can find the PDF here.

He followed it up with another on September 4. Then, he followed it up with another one on September 14.

An extract from John Mauldin’s ‘Monetary Mountain Madness’ published on September 4, 2016. I think Tom Keene makes a mistake here. He refers to Mervyn King wrongly as Olivier Blanchard.

Putting Investors Before Savers
It is hard to know where to start, so let us start with what was most outrageous, an interview that had me muttering multiple expletive deleteds.

Last week Tom Keene of Bloomberg Radio interviewed Fed Vice Chair Stanley Fischer. (Tom is one of my favorite media personalities, because he asks the best questions and helps you say what you really want to say. You have to be careful, though, because Tom will also give you enough rope to hang yourself. When you are sitting with Tom Keene, you need to bring your A game, which is why he’s so popular.) Dennis Gartman transcribed part of the Fischer interview in his Aug. 31 letter. Here it is, with some bold emphasis added.

MR. KEENE: What did you learn about negative rates in the crucible of the markets? What have you learned in the last number of months?

DR. FISCHER: Well, we’ve learned that the central banks which are implementing them – there were four or five of them – basically think they’re quite successful and are staying with their approach, possibly with the exception of Japan. They’re thinking it through, and they have said they’ll come back to try and make negative rates work better. So we’re in a world where they seem to work. I think one of the most interesting developments I’ve seen in theory is a paper that says, yes, they work up to a certain point and then they become counterproductive.

MR. KEENE: Precisely. Yes, that’s a critical point. I mean we have within the interviews of Bloomberg Surveillance that Francine Lacqua and I have had, Olivier Blanchard [former Bank of England Governor during the crisis and a friend] calls them an outright scam. Granted, he’s not a public official anymore, I understand that. There is a raging debate about the efficacy of negative interest rates for central banks, for governments, and again for banking itself. What about the efficacy of negative rates for savers and the people of these different nations?

DR. FISCHER: Well, clearly there are different responses to negative rates. If you’re a saver, they’re very difficult to deal with and to accept, although typically they go along with quite decent equity prices. But we consider all that, and we have to make trade-offs in economics all the time, and the idea is, the lower the interest rate the better it is for investors.

I have to say, reading that last part made my blood boil. For the vast majority of people with savings all over the world, zero or negative rates are not just “very difficult to deal with.” They are in many cases the difference between living with a modicum of dignity and living in abject poverty. Or, if you’re slightly better off, you may feel forced to take too much risk in your portfolio at the very time of your life when you should be taking few risks. But that’s okay with Dr. Fischer, because negative rates also bring “quite decent equity prices.”

Let’s read that sentence again: “… the idea is, the lower the interest rate the better it is for investors.” They are sacrificing mom-and-pop middle America, the hard workers who have played by the rules and retired and saved and now want to live out their lives enjoying their grandkids and a little well-deserved relaxation, and they find they can’t do that because the Federal Reserve thinks that protecting Wall Street and wealthy investors and bankers is more important.

If you ask other Fed decision makers outright whether they support this remarkable view of Dr. Fischer’s, they would of course cough, mumble, and then launch into a jargon-laden digression, since Fischer’s little “trade-off” is so obviously politically incorrect. But the reality is that protecting investors at the expense of savers is precisely what Fed policy aims to do; and here Fischer, in an astonishing moment of candor, has come right out and admitted it. How in the name of all that is holy and just can you think that the public’s savings have to be sacrificed on the altar of equity prices?

I should point out that we’re not just talking about middle-class America, Europe, and Japan. The [multiple expletives deleted] central bankers are jackhammering to smithereens the very foundation of our retirement system. They are making it impossible for pension funds and insurance companies to meet their targets and to provide their services without massive contributions that will have to come from taxes and skyrocketing insurance rates that will have to be paid mostly by the middle class.

“We’re in a world where they [negative interest rates] seem to work.” Oh, really? For whom? And in whose reality? Europe ex-Germany is flirting with recession, indebted beyond any hope of growing out of the problem. Italy has just left the dock of the European budgetary agreement to sail back out into the choppy seas of ever-higher deficits and ever-greater debt, threatening to rival Greece. Italian debt is 132% of GDP today, and if they enact their announced tax and spending policies, they will soon be looking at 150% debt to GDP. And rising.

For all intents and purposes, Italian Prime Minister Renzi has looked the ECB’s Mario Draghi in the eye and said, “I double dog dare you to stop buying Italian bonds, even though we are no longer keeping the agreement on deficits. You stop buying my bonds and allow my interest rates to go to market rates (which would blow Italy out of the water), and you will force us – your Italian countrymen! – to leave the European Monetary Union. You said you will “do whatever it takes”? What it is going to take is you buying my debt, no matter what we do. And if you don’t keep buying, it will be your fault that the euro collapses.” Side bet: Draghi blinks. Or decides to take a cushy consulting job in some big investment bank.

Japan has been lost in a two-decade eternity of growth paralysis. They have dug a huge hole for themselves, and amazingly, they just keep digging. As if low – and now negative – interest rates and gargantuan deficits will somehow now magically do for the Japanese economy what they have not done for the past 20 years…

The ultra-easy monetary environment of the US has produced 1% GDP growth over the last six months, almost no productivity growth, and an employment reality in which seven million men between the ages of 25 and 54 – prime working age – are no longer even looking for work. The only way you can possibly think your monetary policy is working, Dr. Fischer, is if you are measuring it only by the Dow Jones average. Which is not what most of us out here in the real world actually think about when we think of a thriving economy.

Whether equity prices are decent, indecent, or somewhere in between should have nothing to do with the Fed’s monetary policy decisions. Their job is to encourage full employment and to minimize inflation. That’s it. Propping up the stock market is not in the Fed’s wheelhouse, yet it has obviously become the main driver of policy since Ben Bernanke and arguably since Alan Greenspan.

He ends with asking baby boomers to man the barricades again:

Perhaps the Boomer generation should once again man the barricades, this time in protest of something really damaging to the future of the country.

You can get the full PDF here.

He followed it up with one more piece dated September 14, 2016. It was a long one, by his usual standards. It is titled, ‘Negative rates nail savers’. He is not done with Prof. Stan Fischer. He repeats that Q&A of Prof. Stan Fischer with Tom Keene again.

You will read in the second letter my reaction to some truly outrageous comments by Federal Reserve Vice Chair Stanley Fischer, who shared a moment of perfect candor with Bloomberg’s Tom Keene, not realizing that some of us out here in the real world might take offense. Keene asked him about the impact of negative interest rates on savers (emphasis mine).

DR. FISCHER: Well, clearly there are different responses to negative rates. If you’re a saver, they’re very difficult to deal with and to accept, although typically they go along with quite decent equity prices. But we consider all that, and we have to make trade-offs in economics all the time, and the idea is, the lower the interest rate the better it is for investors.

That’s about as clear as it gets. The Fed has no interest in helping savers earn a decent return on their bank deposits or money market funds. Dr. Fischer thinks “decent equity prices” are wonderful and lower interest rates are good for investors. They are willing to trade off your returns on fixed-income for a rising stock market….

…By lowering rates to the zero bound, the Fed has stacked the deck in favor of a relatively small number of people who own the vast majority of financial assets. In so doing, it has created the conditions for moribund economic growth, persistent unemployment and underemployment of working-class citizens, and impoverishment of savers.

You can get the full PDF here.

He concludes on this note:

yes, the economy is rigged. But it is rigged by an economic priesthood that is in the seat of power at central banks around the world, and particularly at the Fed. Wall Street (and, admittedly, small-scale stock market investors) are simply the beneficiaries of the policy. Of course the big boys on the Street do hire former Fed economists and governors as consultants, so the entire setup is incestuous.

I had originally labelled the post, ‘Stan Fischer’ let ’em eat cake moment’. Little did I realise then that Bill Gross had used the same analogy in his October missive. You can find it here. Note that this is for October. Next month, it would become part of the archives. You have to look for this newsletter in the Archives.

He does not think ‘it’ would end well either:

At PIMCO Christmas parties past, I used to praise my fellow employees for their part in the ongoing process of capital allocation. Yes, we were prosperous, I admitted, but we were helping the global economy and over 8 billion people to prosper as well — eliminating the deadwood, fostering new growth, and anticipating future headwinds. That can no longer be true — at PIMCO, Janus, or any other financial institution. Central bankers have fostered a casino like atmosphere where savers/investors are presented with a Hobson’s Choice, or perhaps a more damaging Sophie’s Choice of participating (or not) in markets previously beyond prior imagination. Investors/savers are now scrappin’ like mongrel dogs for tidbits of return at the zero bound. This cannot end well.


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