Negative Interest Rates Help Foster Economic Recovery Illusions

Negative Interest Rates Help Foster Economic Recovery Illusions

Editor: Vladimir Bajic | Tactical Investor

Negative Interest Rates and Economic Illusions

We thought based on your interests that you would find this article to be interesting before we got into the meat of the topic at hand.

Tactical Investor Dogs of the Dow Theory

The original idea was simple. After the stock market closes for the year, one should select 10 of the highest paying dividend stocks in the Dow Jones Industrials Average.  On the first trading day of the new year, one should then invest equal amounts of capital into these 10 stocks.  An investor should hold onto these stocks for the entire year and then repeat the process again.  However, we feel this process is flawed for just focusing on best-paying dividend stocks is not a great strategy in the era of hot money.  We have come up with the Tactical Investor Dogs of the Dow methodology.

The idea here is to invest equal amounts of capital only in the stocks that are trading in the extremely oversold ranges on the monthly charts. Note that monthly charts provide a very long term outlook of what is going and it takes a long time for a stock to move from the overbought ranges to the oversold ranges.  Dogs Of The Dow Jones Industrial Average

The effectiveness of central banks’ negative interest rate policies come primarily through signalling lower rates in the future, write Oliver de Groot and Alex Haas German banks have long grumbled about the squeeze to their net interest margins as a result of the European Central Bank’s (ECB’s) policy of paying a negative interest rates on reserves held at the ECB (banks that deposit at the ECB now pay 0.4 per cent on those deposits, rather than earn a positive interest rate as they would typically do in normal times). As a result, banks warn, their profitability will fall, likely curbing credit creation and hampering the economic recovery.

Yet, micro-empirical evidence suggests that bank profits and banks’ balance sheet health has improved since the implementation of negative interest rates and that lending rates have fallen. What explains the difference?

Are Negative Interest Rates model promising?

In our paper (mimeo), we build a model that is consistent with both the concerns of bank CEOs and the empirical evidence. The model is thus able to explain, in a causal sense, the channels through which negative interest rate policy works and the costs and benefits of such a policy.

The model we built is consistent with a squeeze on net interest margins. Empirical evidence shows that retail banks have been reluctant to pass on negative central bank interest rates to customers, choosing instead to leave households earning at least zero per cent on their deposits. Full Story


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