Typography

Here's a conundrum. Many commentators have been trying to puzzle out why stocks have been continually hitting new highs at the same time that bond yields have been hitting new lows. See here , here , here , and here . On the surface, equity markets and bond markets seem to be saying two different things about the future. Stronger equities indicate a bright future while rising bond prices (and falling yields) portend a bleak one. Since these two predictions can't both be right, either the bond market or the stock market is terribly wrong. It's the I'm with stupid theory of the bond and equity bull markets. I hope to show in this post that investor stupidity isn't the only way to explain today's concurrent bull market pattern. Improvements in financial market liquidity and declining expectations surrounding the pace of consumer price inflation can both account for why stocks and equities are moving higher together. More on these two factors later. 1. I'm with

Central bankers are usually classified as either hawks or doves. This post is devoted to a third and rare breed; today's monetary policy canaries. Having taken their respective deposit rates to -0.75%, deeper into negative territory than any other bank in history (save the Swedes), the Swiss National Bank and Denmark's Nationalbank are the canaries of the central banking world, plumbing depths that everyone assumes to be dangerous. Other central bankers, in particular the ECB's Mario Draghi, will no doubt be watching the Swiss and Danes quite closely. The information these two nations generate as they go deep into the bowels of negative rate territory will give a good indication of the level to which the others can safely reduce their own rates before hitting their respective effective lower bounds. That there is an effective lower bound to rates stems from the fact that at some negative nominal interest rate, everyone will choose to convert deposits into cash, preferring

Here's an interesting fact. Remember all those worthless Zimbabwe paper banknotes? The Reserve Bank of Zimbabwe (RBZ), Zimbabwe's central bank, is officially buying them back for cancellation. According to its recent monetary policy statement , the RBZ will be demonetizing old banknotes at the "United Nations rate," that is, at a rate of Z$35 quadrillion to US$1. Stranded Zimbabwe dollar-denominated bank deposits will also be repurchased. As a reminder, Zimbabwe endured a hyperinflation that met its demise in late 2008 when Zimbabweans spontaneously stopped using the Zimbabwe dollar as either a unit of account or medium of exchange, U.S. dollars and South African rand being substituted in their place. Along the way, the RBZ was used by corrupt authorities to subsidize all sorts of crazy schemes , including farm mechanization programs and tourism development facilities. Upon hearing about the RBZ's buyback, entrepreneurial readers may be thinking about an arbitrage

Paul Krugman has two posts discussing the effective lower bound to interest rates. The first I agree with, albeit with a caveat, and the other I don't. In his first post Krugman takes Evan Soltas to task for including not only storage costs in his calculation of the effective lower bound, but also the extra convenience yield provided by deposits. Krugman's point is that once people are "saturated" with liquidity, as they seem to be now, then forgoing the liquidity of a short term marketable debt instrument (like a deposit) costs them nothing. If so, then the lower bound to nominal interest rates is solely a function of storage costs. I agree with Krugman on this count. Take the 2 1/8% Nestle bond maturing May 29, which may be one of the first corporate bonds in history to trade at negative rates: If it costs 0.50%/year to store and handle Swiss paper currency, then the rate on a Nestle bond can't fall below -0.50%. If it trades at -0.55%, an arbitrageur will c

If you've been reading Bill Gross's last few letters, you'll know that he's been a bit grumpy of late. It's that dang new trend that has hit bond markets, negative interest rates . Gross has been using words like incredible, surreal , and inconceivable to describe their arrival.Negative nominal bond rates certainly seem odd. Just look at the chart below, which illustrates what could very well be the two lowest-yielding bonds in the world, maybe all of history: the 3.75% Swiss government maturing in July 10, 2015 and the 4% Danish government bond maturing November 15, 2015. But is the idea of a negative rates really so strange? Gross blames negative rates on central bankers who "continue to go too far in their misguided efforts to support future economic growth," in doing so " distorting " capitalism's rules. He's not alone; plenty of people claim that without autocratic price fixers like the SNB's Tommy Jordan and the Danmarks Natio