Monthly Economic Perspective: Did That Really Happen?

By Dmitriy Katsnelson, Director, Investment Research

It was November 2008 when Fed Chairman Ben Bernanke announced the first stage of Quantitative Easing (QE) to combat the Global Financial Crisis (GFC), setting up an avalanche of central bank support to stabilize global capital markets. As the unwinding process begins domestically (and soon, abroad) we thought it would be interesting to highlight some of the oddest manifestations of all this central bank intervention.

United States: Everyone knows about QE, but one often forgotten piece is how excess interest gets remitted to the Treasury. As rates fall, it takes less money to roll into new issues, resulting in pretty noticeable gain for the Treasury.

Europe: The case of the negative Danish mortgage. Denmark, like several countries in Europe, entered negative interest rate territory several years after the GFC. A perverse result is that some mortgage rates went negative (i.e., homeowners were being paid to borrow). This was not isolated: at least 700 families were/are paid to borrow money. By the way, a family highlighted by many news sources subsequently got together with a few others and bought 10 more properties (by borrowing). What a lovely way to operate an economy.

Japan: You own what? While the Fed has actively bought Treasuries and Mortgage Backed Securities in the US, Japan’s central bank has gone a step further. Starting in 2010, Japan began purchasing Japanese-listed ETFs (today it is at almost 6 trillion yen per year, which equates to just over $50 billion). The bank now owns an estimated 70% of Japanese-listed ETFs (around $135 billion USD). That number translates to the central bank owning around 2.5% of all Japanese publicly traded stocks (the number may grow to 5% within a few years). This means that the BOJ is now the top shareholder of 55 of the Nikkei’s 225 stocks.

One day we will look back at this experiment where nearly 30% of global sovereign bonds yielded negative rates and marvel at how unpredictable reality truly is. In retrospect, we can be a little jealous of the Danes that were paid to borrow. On the whole, however, we will likely look back at this as a punitive period for savers in need of safe income.

Bronfman E.L. Rothschild is a registered investment advisor (dba Bronfman Rothschild). Securities, when offered, are offered through an affiliate, Bronfman E.L. Rothschild Capital, LLC (dba BELR Capital, LLC), member FINRA/SIPC.
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