First ZIRP, Now NIRP!
Gordon Long | Feb 24, 2015 01:18AM ET
What is the significance of the dramatic shift from ZIRP (Zero Interest Rate Policy) to NIRP (Negative Interest Rate Policy)?
This is a startling development that changes the investment landscape, strategies and business models of many traditional industries. We have watched rapid developments in Europe unfold with:
NIRP from the Central Banks of:
- ECB,
- Switzerland,
- Denmark
- Sweden.
We have NIR Bonds from :
- Germany's BMW,
- France's LVMH,
- Britain's BP,
- Swiss Nestle
When money becomes less than free and you get paid interest to borrow all sorts of distortions begin to happen.
STOCK BUYBACKS Negative interest rates are inviting companies to be "PAID TO BORROW MONEY" and then use the proceeds to buyback their shares, boost eranings per share and reduce dividend payments. It has fostered an explosion in stock buybacks
FRACTURED BUSINESS MODELS
The question on the table that few can answer is: How do these industries survive with negative rates?
- Pension Plans,
- Insurance Plans,
- Money Funds,
- Retirement Plans
Industries which have been considered to be the safest places to place money are now being forced into becoming quasi hedge funds to achieve yield. This is a towering change in the world. If because of this, any one of the participants in any one these industries were to 'blow up' it would add greatly to the already skeptical mistrust of investors. It is highly likely to trigger a' risk-off' shift 'in a heart beat which would impact credit flows and liquidity! The same thing that happened in 2008.
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WITH LOW INTEREST RATES NOT WORKING - DID THE CENTRAL BANKS FINALLY LOSE CONTROL?
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