The Myth of the Infallible Central Bank

Published on
August 20th, 2019
18 minutes

The Myth of the Infallible Central Bank

Trade Ideas ·
Featuring David Levine

Published on: August 20th, 2019 • Duration: 18 minutes

David Levine, founder of Odin River, returns to Real Vision to discuss the absurdity of negative interest rates and the way in which they've led to the mispricing of systemic risk across the world. In this interview with Alex Rosenberg, Levine highlights the recent spike in equity and treasury market volatility, argues that central banks are reaching their limitations, and suggests ways for investors to position themselves for the months ahead. Filmed on August 19, 2019.



  • RR
    Robert R.
    25 August 2019 @ 04:27
    What index would you use to measure the underlying volatility of corporate spreads? Assume just use the absolute % change in the Generic 5Y CDX IG?
  • pa
    pascal a.
    23 August 2019 @ 17:53
    PS: Great Interview!
  • pa
    pascal a.
    23 August 2019 @ 17:52
    Yup. The massive global unpricing of risk is creating the potential for a worldwide disaster. It's too bad the Central banks aren't able to listen to this guy.
  • SP
    Steve P.
    23 August 2019 @ 00:12
    Could someone clarify why “TYVIX” is just as important as “VIX” as a volatility measure ? I’ve heard investors mention it in here before .
  • RG
    Roberto G.
    20 August 2019 @ 11:25
    The risk free rate is not a compensation for systemic risk.. it’s not a compensation for any risk at all.. otherwise it wouldn’t be called “risk free”.
    • JW
      Joel W.
      20 August 2019 @ 19:17
      Roberto, that’s a fair comment. However, I agree with Mr. Levine that the risk free rate is only so within the context of the current financial system paradigm. If our current system is undermined (‘systemic risk’), then suddenly the rate is not risk free. Maybe someone smarter than me can chime in....
    • DR
      David R.
      21 August 2019 @ 01:59
      Gold is risk-free insofar as it's the only major asset with no counterparty. It's rising at more than 25% risk. And that's just paper gold; real physical gold is rising a lot more in reality. THAT is the risk-free rate and it underscores just how extreme the risk really is in any paper or financial market, where you have a high probability - the highest by far in hundreds of years - of losing virually everything that's in paper or financial assets.
    • MK
      Michael K.
      21 August 2019 @ 17:02
      How is physical gold rising a lot more “in reality”? Is the premium over spot of eagles and kilos rising?
    • CW
      C W.
      22 August 2019 @ 16:14
      My own idea of the risk free rate, which is itself very much a pure academic construct, is compensation for: 1. the likelihood of a default by the issuer of the currency (zero or near-zero in MMT world) 2. opportunity costs of having your money locked up till maturity or else having to sell at a loss due to rising market yields. So I agree with Mt Levine sorta.
  • PA
    Peter A.
    21 August 2019 @ 13:38
    Will someone please explain jut who bought all of the issued negative interest rate debt that currently exists? The logical absurdity of such a purchase belies its existence, correct? Yet it exists in rather an enormous issuance. Who is holding the gun to the buyer's head(s) to effect these purchases? And whose money is actually being invested?
    • AR
      Anthony R.
      21 August 2019 @ 22:55
      Unlike the US, there are markets (Europe, for one) where they are required to buy assets whose duration matches or exceeds the duration of the obligation being invested for. As such, there folks that HAVE TO buy these durations of securities. If I'm mistaken on this, please, someone, pipe up, but that's my understanding. Clearly the central banks are abusing this rule if I have it correct.
    • CW
      C W.
      22 August 2019 @ 15:54
      Buying negative yielding debt may look absurd, but could be absolutely reasonable to many buyers. In addition to what Anthony R. has mentioned, which are mainly pension funds, insurance companies and the like I can think of 3 other groups of buyers 1. Central banks. 'nuff said 2. Banks, for which owning sovereigns still confer advantages in terms of satisfying capital and liquidity requirements. 3. Market players like hedge funds who thinks they can offload to the next guy at an even higher price/lower yield, probably because of expected central bank easing.
  • gg
    georgy g.
    22 August 2019 @ 12:58
    Good piece. Kinda explains why Buffett was adding to money center banks recently. Would be excellent if not gloom and doom at the end
  • SW
    Scott W.
    21 August 2019 @ 19:27
    I will either A. need to unlearn everything vis-a-vis "basic" finance and economics, and to master curve steepeners and flatteners or B. retire on proceeds from long-dated OOTM calls on gold miners.
  • BA
    Blair A.
    21 August 2019 @ 04:33
    Great interview and good job by the interviewer. Central banks are hoping to save the day with printed money. We will see
  • DS
    David S.
    20 August 2019 @ 07:29
    Good interview. I completely agree that the financial markets could tank at any moment. Let's give the devil his due, however. Sovereigns have sold 16 $trillion of negative yielding instruments. It is a direct tax on all the buyers. I wonder how much it generates in revenues per year? It also generates a wonderful carry trade. In addition, when Italy plays by Draghi's rules the interest rates on its debt is below the free market rate - kicking the can. Good advice to put safe money in FDIC insured instruments for now. They will at least print more money to pay you. DLS
    • DR
      David R.
      21 August 2019 @ 02:03
      Negative interest rates, nominal or real, are a confiscatory tax on savers. Corporate treasurers are acquiescing anyway because they know that "money in the bank" can go to zero without warning via bail-in. Thus better to suffer negative yields in a bond (or I'd say even better to keep savings in gold but that's a different argument).
  • PC
    Phillip C.
    20 August 2019 @ 22:59
    14:00 - "If there is a Central Bank put..." "That's a great way of putting it..." LOL. No pun intended. Great discussion. Deserving of multiple plays.
  • RR
    Rex R.
    20 August 2019 @ 20:48
    Great interviewee and Great Interviewer!
  • PB
    Pieter B.
    20 August 2019 @ 17:50
    Great conversation David & Alex! Thanks a lot!
  • MN
    Maverick N.
    20 August 2019 @ 15:50
    Great stuff! I like how he begins his explanation from the basic concept up to the trade idea. We need to bring David back on for a longer form interview with Ed or Grant.
  • SS
    Shanthi S.
    20 August 2019 @ 08:37
    Great interview. Could have been longer. Always enjoy Alex’s interviews! He could be my fave RV’er.
  • EA
    Emma A.
    20 August 2019 @ 07:43
    "I'm long this conversation." That's awesome.
  • DS
    David S.
    20 August 2019 @ 06:49
    No one believes the Fed or CBs are infallible, including the Fed. Investor have been constantly rewarded for knee jerk reactions to Fed news good or bad. The market will play this and tweets until they no longer work. Correct prediction of any tweet is money in the bank. Paraphsing Oscar Wild - great fortunes are made from insider information. DLS