The Consequences of Negative Rates: Part II

Published on: August 21st, 2019

As Central Banks wrestle with stubborn problems that monetary policy alone cannot solve, Plan A remains trying more of the same failed approach. The prospect of more negative rates around the world and the Fed joining the party is filled with potentially dangerous unintended consequences.


  • KA
    Kelly A.
    2 September 2019 @ 17:27
    Julian, I just reread for 3rd time. Still loving it, and also your responses to readers. Thank you so much!
  • HK
    Hendrik K.
    1 September 2019 @ 15:51
    Thanks for the Research not and Trade recommendation - one questions: if you only start now from here with Trades what would you recommend today (rather sell/reduce position, if you don't have any)? Thanks
  • RM
    R M.
    21 August 2019 @ 14:12
    Julian: This is an excellent piece of analysis. As a retired boomer seeking real returns to live off of, it also jives with the psychology of reasonably well off boomers. Money will flow to physical assets, including real estate. If and when the $ does break, there will be a flood of paper money to EEM seeking returns. The big question in my mind is timing. Do we get a flush first via $ spike or softer than expected growth, trade war continuation? Or will the money start piling in these sectors without much further downside? Also I think letting some long duration treasuries ride with a stop is still a reasonable bet on rates reaching near zero.
    • JK
      James K.
      22 August 2019 @ 04:41
      From one who works in real estate and owns real SF area ....the demographics are a problem ....imo Btw anyone know when was the sell some gdx posted ..? Thx
    • RM
      R M.
      22 August 2019 @ 15:25
      Good point on demographics and real estate, prefer to be at the lower price points, I live in Austin, you can (still) buy a house for what a garage costs in SF or NYC. Re GDX, I believe Julian's original target was 30, said to take a piece off and let the rest ride with a higher stop.....25.50.
    • JB
      Julian B. | Contributor
      30 August 2019 @ 23:04
      Hi RM..long run, zero is a given as real rates have trended lower for 500 years! But my hope is that the Fed manages to avoid it this time around by weakening the $, which is very inflationary., good for precious metals, EM etc. With MI2 clients we have suggested selling long dated treasuries here because they are massively overbought. But this trade war threat is real so that's an aggressive trade for pros only. If you want to play a race to zero (not my base case but a risk) take a look at the piece Flash Update we sent on the banks.
  • MC
    Mathieu C.
    21 August 2019 @ 22:48
    Thanks for the paper, it is quite good to read some analysis and thoughts without price actions. Despite economics theory it appeals to me in watching SNB that negative rate attracts speculative capital which are pushing domestic currencies up, probably due to the fact the bond market is liquid and large amount are being involved. This is particularly unwanted as those with negative rates are the weakest one and are begging for devaluating their currencies. Central banks are selling their currency to maintain levels. Correlations are high and volatility low on the whole FX market as everything is being locked up. I don’t think the FX market is that much of a show, if not a huge risks for the dollar if central banks are being pushed close to the point of capitulation. Bonds speculators are working hard, speculating rutheless on the undiscovered and unbounded territory of negative rates. (No offence Raoul! ). Monetary policy has become somewhat disconnected and incapable to contain that flow. Everybody is talking about inverting curve and recession, but isn’t it just speculation following each of Trump’s tweets. The problem is, this isn’t some kind of crazy tech stocks that are largely overvalued that Mr John bought on his way to becoming rich quickly. This is the pension of countless number of people who worked numerous years and for the most of them have no knowledge of financial markets; this is quite a serious ethic topic isn’t it. Who knows when this madness is going to end but buying 30Y bund @ -0.5% (-15% immediate loss) with 2% inflation (-60% cost) will never make sense and the current buyer has certainly no plan to keep that paper long enough in his book. So the question is who is going to be left with it ; someone will certainly have too.
    • JB
      Julian B. | Contributor
      30 August 2019 @ 22:58
      Mathieu I agree the retribution that will come when realise their pensions are insolvent (god help us in European bonds ever sell-off because the loses will be MIND BLOWING). However, I'm not sure that I agree the CHF is attracting speculative capital. I think it is strong in part because its perceived as less of a risk that the Euro (not sure I agree). Also it tends to strengthen in risk off periods because like EURO and the Yen it is used to fund risk. ..
  • MG
    Miguel G.
    23 August 2019 @ 11:13
    BRAVO Julian I read this piece 3 times and printed it out to note take in my journal. Your experience in big picture macro is in full display in this piece of work and I absolutely loved it as it has my wheels turning. You're points are heard loud and clear as you back it up with empirical data. IMO your article not only debunks the usefulness of negative rates, but it also creates an extremely strong argument of why fiscal spending isn't a matter of if but when it will be implemented as monetary policy has reached its limits.
    • JB
      Julian B. | Contributor
      30 August 2019 @ 22:53
      Many thanks
  • MG
    Miguel G.
    23 August 2019 @ 11:54
    One question Julian, a few months back you made the case that if our fed cut rates asap and relaunched QE that they could save this cycle from turning and stretch it out further. Is there a case to be made here in the US as to a possible sell the news event on more monetary policy since we have hard data that supports monetary policy reaching its limits in the EU and Japan? I understand we aren't in negative territory but were also not that far from it either and wondering what benefits if any are left before we reach negative bound if we do at all. Maybe the real pivot to go bullish equities will be once fiscal policy is launched as that should accelerate economic growth.
    • JB
      Julian B. | Contributor
      30 August 2019 @ 22:53
      Miguel another excellent point and its a risk. However, I don't believe we are there yet in the US. One of the main reasons is structural. In Europe and to some extent in Japan pension funds, insurance cos are legally mandated to match asset with liabilities i.e. they were forced to direct QE towards bonds on a relative basis not stocks. In the US there is no such restriction. Hence in Europe QE = lower bond yields. Yes stocks bounce to some extent but far less than in the US and overall performance is undermined by the collapse of the banks, which hate the lower yields and are a big part of European indexes. Add in that Europeans don't own as many stocks as Americans and the whole effect is far less reflationary. Finally, yes the answer is fiscal and we people are slowly to that conclusion …..I just hope we can get to through the election before we hit negative rates.
  • MG
    Miguel G.
    23 August 2019 @ 12:01
    To the point I’m trying to make the consensus thought process from here more QE = higher stock prices as has been the case since 2009. Question becomes after reading your article is has this become a dangerous assumption to make from where rates are today?
    • JB
      Julian B. | Contributor
      30 August 2019 @ 22:33
      Hi Miguel. Sorry I'm not 100% sure what you asking but let me take a stab anyway. I agree that QE = higher stocks, higher bond yields (if it works it reflationary) and if we are lucky a weaker $. To my mind if the Fed is faced with the choice of negative rates and or more QE, they should expand the balance sheet any day of the week. Unfortunately, QE as an option has lost internal support, because they are concerned that it has added to social inequality by making the rich richer (NO S***). Hence my fear that their first choice with be further rate cuts raising the risk of negative yields.

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Morgan Creek Capital Management was founded in 2004 and currently manages close to $2 billion in discretionary and non-discretionary assets. Prior to founding Morgan Creek, Mr. Yusko was CIO and Founder of UNC Management Company (UNCMC), the Endowment investment office for the University of North Carolina at Chapel Hill. Before that, he was Senior Investment Director for the University of Notre Dame Investment Office. Mr. Yusko has been at the forefront of institutional investing throughout his career. An early investor in alternative asset classes at Notre Dame, he brought the Endowment Model of investing to UNC, which contributed to significant performance gains for the Endowment. The Endowment Model is the cornerstone philosophy of Morgan Creek, as is the mandate to Invest in Innovation.

Mr. Yusko is again at the forefront of investing through Morgan Creek Digital Assets, which was formed in 2018. Morgan Creek Digital is an early stage investor in blockchain technology, digital currency and digital assets through the firm’s Venture Capital and Digital Asset Index Fund.

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SkyBridge Capital, Founder & Co-Managing Partner

Prior to founding SkyBridge in 2005, Scaramucci co-founded investment partnership Oscar Capital Management, which was sold to Neuberger Berman, LLC in 2001. Earlier, he was a vice president in Private Wealth Management at Goldman Sachs & Co. In 2016, Scaramucci was ranked #85 in Worth Magazine’sPower 100: The 100 Most Powerful People in Global Finance. In 2011, he received Ernst & Young’s “Entrepreneur of the Year –New York” Award in the Financial Services category. Anthony is amember of the Council on Foreign Relations (CFR), vice chair of the Kennedy Center Corporate Fund Board, a board member of both The Brain Tumor Foundation and Business Executives for National Security (BENS), and a Trustee of the United States Olympic & Paralympic Foundation. He was a member of the New York City Financial Services Advisory Committee from 2007 to 2012. In November 2016, he was named to President-Elect Trump’s 16-person Presidential Transition Team Executive Committee. In June 2017, he wasnamed the Chief Strategy Officer of the EXIM Bank. He served as the White House Communications Director for a period in July 2017. Scaramucci, a native of Long Island, New York, holds a Bachelor of Arts degree in Economics from Tufts University and a Juris Doctor from Harvard Law School.

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Alex Saunders is the founder and CEO of Nugget’s News, a digital media company focused on all things crypto. Alex has been captivated by cryptocurrency since 2012 and in 2017 he began educating globally on the benefits of cryptocurrency and how to safely acquireit. Nugget’s News has been listed as a top-20 podcast by Business Insider, ShapeShift and Lifehacker and has over 120k YouTube subscribers with 9 million total views.Alex is also heavily focused on his cryptocurrency education platform Collective Shift which currently serves over 4,500 members. provides his unique perspectives by utilising his expertise in fundamental analysis, technical analysis and market sentiment. He is working towards his mission of making it easier for everyone to understand the financial world.

James Putra

TradeStation Crypto, Inc., Sr. Director of Product Strategy

James helped launch TradeStation Crypto’s offering which utilizes a true online brokerage model that self-directed investors and traders have come to expect for equities, futures, and foreign currency markets. He is a reputed crypto asset specialist and blockchain thought leader focused on helping people find innovative ways to participate in this space. He is active in the blockchain community with speaking engagements, TV appearances and mentoring. James has over 15 years of experience in the Fintech industry.

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Real Vision, Co-Founder & CEO

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Real Vision members also have access to Real Vision Crypto, a cryptocurrency and digital assets video channel watched by over 80,000 people. In addition, Raoul has been publishing Global Macro Investor since January 2005 to provide original, high quality, quantifiable and easily readable research for the global macro investment community hedge funds, family offices, pension funds and sovereign wealth funds. It draws on his considerable 31 years of experience in advising hedge funds and managing a global macro hedge fund. Global Macro Investor has one of the very best, proven track records of any newsletter in the industry, producing extremely positive returns in eight out of the last twelve years.

He retired from managing client money at the age of 36 in 2004 and now lives in the tiny Caribbean island of Little Cayman in the Cayman Islands. Previously he co-managed the GLG Global Macro Fund in London for GLG Partners, one of the largest hedge fund groups in the world. Raoul moved to GLG from Goldman Sachs where he co-managed the hedge fund sales business in Equities and Equity Derivatives in Europe. In this role, Raoul established strong relationships with many of the world’s pre-eminent hedge funds, learning from their styles and experiences.

Other stop-off points on the way were NatWest Markets and HSBC, although he began his career by training traders in technical analysis.

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What Bitcoin Did, Journalist

Peter McCormack is a full time journalist/podcaster covering topics such as Freedom, Human Rights, Censorship and Bitcoin. Peter created and hosts the What Bitcoin Did Podcast, a twice-weekly Bitcoin podcast where he interviews experts in the world of Bitcoin development, privacy, investment and adoption. Launched in November of 2017, the podcast has grown to over 100 episodes with a guest list that is a testament to the diversity of knowledge and opinions that represent the broader Bitcoin community. Expanding his growing list of human interest recordings, documentaries and films Peter has recently launched the Defiance podcast and DefianceTV.

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Avanti Financial Group, Founder & CEO

22-year Wall Street veteran who has been active in bitcoin and blockchain since 2012. In 2018-20 she led the charge to make her native state of Wyoming an oasis for blockchain companies in the US, where she helped Wyoming enact 20 blockchain-enabling laws. From 2016-18 she jointly spearheaded a blockchain project for delivering market index data to Vanguard as chairman and president of Symbiont, an enterprise blockchain start-up. Caitlin ran Morgan Stanley’s pension solutions business (2007-2016), heldsenior roles at Credit Suisse (1997-2007) and began her career at Salomon Brothers (1994-1997). She is a graduate of Harvard Law School (JD, 1994), the Kennedy School of Government (MPP, 1994) and the University of Wyoming (BA, 1990).

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Bitwise Asset Management, CEO

Hunter Horsley is Chief Executive Officer of Bitwise Asset Management. Prior to Bitwise, he was a product manager at Facebook, working on advertiser products including the multibillion-dollar sponsored content ecosystem and ad breaks in videos. Before Facebook, Horlsey was a product manager at Instagram, responsible for multiple advertising products generating several hundred million dollars of revenue. He is a graduate of the Wharton School at the University of Pennsylvania, with a B.S. in economics. Recently, Horsley was named a member of Forbes’ 2019 “30 Under 30” list.

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Luke Gromen has 25 years of experience in equity research, equity research sales, and as a macro/thematic analyst. He is the founder and president of macro/thematic research firm FFTT, LLC, which he founded in early 2014 to address and leverage the opportunity he saw created by applying what clients and former colleagues consistently described as a “unique ability to connect the dots” during a time when he saw an increasing “silo-ing” of perspectives occurring on Wall Street and in corporate America.

FFTT caters to institutions and sophisticated individuals by aggregating a wide variety of macroeconomic, thematic and sector trends in an unconventional manner to identify investable developing economic bottlenecks for his clients. Prior to founding FFTT, Luke was a founding partner of Cleveland Research Company, where he worked from 2006-14. At CRC, Luke worked in sales and edited CRC’s flagship weekly thematic research summary piece (“Straight from the Source”) for the firm’s clients. Prior to that, Luke was a partner at Midwest Research, where he worked in equity research and sales from 1996-2006. While in sales, Luke was a founding editor of Midwest’s widely-read weekly thematic summary (“Heard in the Midwest”) for the firm’s clients, in which he aggregated and combined proprietary research from Midwest with inputs from other sources.

Luke Gromen holds a BBA in Finance and Accounting from the University of Cincinnati and received his MBA from Case Western Reserve University. He earned the CFA designation in 2003.

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CoinShares, Chief Strategy Officer

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Previously, she was part of the founding team of Digital Currency Group. As a veteran investor in the digital currency space, she has invested in over 250 companies in the ecosystem.

Meltem is passionate about education and advocacy, and teaches the Oxford Blockchain Strategy Programme and co-chairs the WEF Cryptocurrency Council.