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The World’s Central Banks are Desperately Seeking to Spur Spending Over Saving.

Several years ago many were pontificating that yields will never go negative and banks would never charge for deposits.  I viewed these declarations in the same manner of GM would never go bankrupt and the Federal Reserve would never bail out noninsured institutions.

The monetary guardians of the euro area, Switzerland, Sweden and Denmark are now imposing negative interest rates on bank deposits or on funding mechanisms that feed through to the real economy.  In fact Commonwealth Bank of Australia states that almost a quarter of worldwide central bank reserves now carry a negative yield.

The world’s central banks are desperately seeking to spur spending over saving.

These negative interest rates are now being passed onto the consumer.  Several large money center banks are now charging their largest depositors a fee for warehousing their monies.

What will be the unintended consequences?  Will depositors soon take money out of the bank and store in a vault?  Will fees on other financial products increase exponentially?  Will the effort to spur spending backfire and corporations spend less?

I will vehemently argue what is needed is regulatory reform.  Banks, et al. are paralyzed by regulatory and compliance concerns.  Global monetary policy is attempting to push all further out on the proverbial risk curve but the heavy hand of government is prohibiting such risk taking.

Perhaps today’s environment is the proverbial “paradox of thrift” phenomena on steroids.  I will also argue that today’s “riskless securities” are perhaps the most risky asset class given any increase in interest rates will absolutely decimate values.

How will today’s monetary environment end?  Will inflationary pressures suddenly accelerate as the monetary system is utterly flooded with liquidity?  To the best of my knowledge there is only one time in the last hundred years where pseudo QE occurred and that era ended horrifically.

Speaking of the unexpected perhaps occurring, it has been widely reported that Russia was considering suspending gas shipments to the Ukraine on Sunday because lack of payment.  A payment has been made and the Ukraine will have gas supplies until Tuesday.

As noted last week Russia lent Ukraine money, a loan that Russia may or may not be rolled over when it matures in the coming days.  The IMF has offered to pay off this loan but IMF lending may not occur until around March 11.

The Administration has threatened to shut one of more Russian banks out of the world financial system if rebels backed by Russia continue to violate the ceasefire. If the Administration takes this action the Kremlin has strongly inferred that “it may disrupt gas shipments to the rest of Europe.”

Wow!  This is taking the Ukrainian crisis to another significant level.

Some have stated Russia would “never” suspend gas shipments as gas is the country’s primary source of revenue.

I will cynically write did most declaratively state interest rates will never go negative and banks would never charge for deposits?

Earlier I commented about the Weimer Republic and its quasi QE program to repay reparations and how this policy had a horrific conclusion.

Starting in 1937, the US began curtailing oil exports to Japan out of protest to its expansionist polices.  Most historians will acknowledge this policy, which ultimately ended in a total embargo in early 1941, was a major reason for December 7, 1941.

If gas shipments are suspended to Europe, how will such action impact inflationary pressures?

Recent inflation data is suggesting that inflation in the US is in a “transitionary mode,” a view accentuated by last week’s Congressional testimony by FRB Chair Yellen.

Returning to the here and now, markets were relatively quiet closing nominally lower on interest rate concerns and profit taking.  This week the averages will be faced with a multitude of data including various manufacturing surveys, employment reports, trade report and the release of the Beige Book or the compilation of statistics utilized at the upcoming FOMC meeting.

Last night the foreign markets were mixed.  London was down 0.23%, Paris down 0.81% and Frankfurt down 0.20%.  Japan was up 0.15%and Hang Sang up 0.26%.

The Dow should open little changed ahead of a big data week.  The 10-year is off 5/32 to yield 2.01%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.