Every security is priced off of Fed-set interest rates. The ultimate question is, are rates going higher or lower? The answer to that trickles through every other asset class, affects borrowing rates, corporate liquidity, profit margins and credit risks, stock valuations etc.
Bank rates have come down but, according to Martin Armstrong, the spread that banks are charging vs what they pay in deposits and what they charge in loans is near a record high. Individuals and corporations have been largely deleveraging. Less spending = slow economy. The same thing happens when you take more money in the form of higher taxes. Expected higher tax and higher regulation changes ones view on future expected return and shapes decisions on business expansion and risk taking.
The current Keynesian central planning approach is not the answer. The answer is in letting millions of individuals seek solutions, create new things, seeing opportunities, taking chances, filling needs, driven by their own self interest and the interest of their individual teams that when aggregated up creates a larger and healthier collective whole.
Armstrong says he has the largest economic database in the world. He believes that it has helped him better identify major trends and turning points. That has come in handy in combination with his Adam Smith approach of staying unbiased and letting the data speak instead of the Marx-Keynesian approach of trying to force the free markets to do as a few central planners think best.
“When we step back and try to just figure out how the economy works as did Smith, what emerges from the data is quite interesting. The business cycle has never peaked twice with the same level of interest rates. Just look at the call money rates from the NYSE from 1880 to 1932. Likewise, interest rates collapse with the business cycle not because you will stimulate demand, but because demand collapses. That demand will return only when the expectation of future gain reappears regardless of the level of interest rates. Consequently, the real formula is: Economy Turns Up = (Expectation of Gain > Rate of Interest)”, per Armstrong.
The EU last week lowered short term rates to a -0.15%. Lowering the rate of interest alone will not stimulate the economy. If you are raising taxes you are diminishing ones disposable income. With incomes flat for years and taxes moving higher, then you are creating more damage.
Rates alone won’t do it. During the TARP bailout, all the government did was hand the banks money and hope it would lead to lending – stimulating the economy. It stimulated the banks not the economy.
This too from Armstrong, “Right now, deposit rates collapse because that is controlled by the central bank, but they then do not regulate the lending rates – DAH! We have ended up with the historical high in the spread between what banks pay depositors and what they charge. Therefore, going negative will still not stimulate the economy, but it may at last force people to invest without borrowing shrinking the bank deposit base and ONLY then will banks start acting like banks.”
Government action has funded the banks. The money center banks are even more highly levered than in 2008 and trading to make profits. They are not lending. Too big to fail is a problem for all of us. Separate out the prop desks. Shrink the banks. They are acting more like hedge funds than banks.
I favor Adam Smith’s “invisible hand” – Each pursuing their own self interest vs. government central planning for the whole. – Steve Blumenthal