krogias

The zero interest rate policy (ZIRP) will kill the banks. Falling interest rates help banks by increasing the value of their bond and loan portfolios. This is the well understood inverse relationship between discount rate and present value of a future sum. But you see keeping interest rates at zero does virtually nothing for the banks as rates cannot fall further. There is a short window where ZIRP is a positive but an "extended period" (in Fedspeak) is just slow death for the banks. During that short period, the banks are still collecting on portfolios constructed when rates were higher but as those higher-yielding assets mature, there is nothing comparable to replace them. We hear constantly how banks can just borrow at zero and invest in Treasuries - pocketing the difference. That would be fine if yields on Treasury debt were not low and falling along with everything else. The other problem is that this simplistic formula assumes that banks' operating expenses are negl...

In the past few days we have received confirmation that our thesis regarding Asia is playing out rapidly. The data come from Japan and Korea - both heavily industrialized exporters and relatively open societies. While we have been very bearish on Asian economies here at Financial Jenga, the rapid pace of the implosion even surprises us. Japan will soon report 4th quarter GDP and the estimates are moving fast - an in a really frightening manner. Bloomberg reports that Barclays now is estimating that Japan's economy contracted at over 12% annualized in Q4. This would be the worst result since the Arab oil embargo of 1974. Korea reported a similarly disastrous result for November industrial production. The YoY decline of 14.1% was the worst on record - with data going back to 1970. Understand that the textbook definition of depression is a 10% fall in GDP - and both Japan and Korea are already on pace to do so in a year or less. We do not yet have any numbers this bad from China bu...