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If Central Banks Fail, Here’s What One Bank’s Clients Will Be Buying

What do you buy if "quantitative failure" comes calling?

“Plunging yields, the monetary race to the bottom and fears of competitive, deliberate currency debasement have pushed gold to six-year highs”, we wrote on Saturday morning.

Apparently, nobody cares about the absence of an underlying rate of return on an objectively useless piece of inert metal when you’re getting taxed to park your money in safe haven government bonds and, increasingly, corporate credit. (In Europe, some €865 billion of corporate bonds are now negative-yielding.)

Call it a “chart crime” if you like, but slapping the Bloomberg Barclays negative-yielding debt index atop a simple chart of spot gold produces a compelling visual.

Read more: The Simple Reason Why The S&P Is Just 3.5% From Record Highs (And Why Gold Is Surging)

In a world where policy rates are still uncomfortably (in some cases laughably) low, and where central bank balance sheets are bloated, one of the biggest worries is “policy impotence” or “quantitative failure”, as it were.

Indeed, “QF” tops the “top worry” list in BofA’s latest European credit investor survey.

“Investors are fretting that after 700+ rate cuts and more than $10 trillion of asset purchases in the wake of Lehman, central banks’ monetary store cupboard is running bare”, the bank’s Barnaby Martin wrote last week.

What happens in the event central banks are simply unable to squeeze any additional blood from the proverbial stone? What happens if cutting rates further proves to be an exercise in futility at best, and outright injurious at worst?

Well, the knee-jerk reaction from 38% of the bank, insurance, pension fund, hedge fund and asset manager high grade clients who responded to the same BofA European credit survey would be to buy more gold.

“European IG credit investors expect gold to be the asset most sought after upon ‘Quantitative Failure’ followed by US Treasurys”, the bank’s Martin notes.


Asked to choose which asset pricing is most concerning at the moment, more than a quarter of high grade investors pointed to the explosion in the global stock of negative-yielding debt.

(The $12 trillion figure comes from BofAML’s indices as of August 5 – as noted earlier, Bloomberg/ Barclays puts the figure at more than $15 trillion)

Amusingly, six of the choices reflect the same concern (e.g., record low bund yields, etc.). Nobody across the pond was worried about 10-year USTs at 2%, and while the survey was conducted prior the largest five-day plunge in benchmark US yields since the debt ceiling crisis, one imagines the same investors are still unconcerned, relatively speaking, considering German yields dove to 60bps this week.

(Despite the “concern” visualized in the second chart, high yield investors in Europe overwhelming favor duration in a quantitative failure scenario.)

But really, do we need all of this belabored analysis? And if not, must we just resign ourselves to owning the “barbarous relic” in the event monetary policy fails us? Isn’t the “safest” asset for the coming era of competitive easing, rampant currency debasement and, finally, quantitative failure, “obvious”?




11 comments on “If Central Banks Fail, Here’s What One Bank’s Clients Will Be Buying

  1. If “Central Banks” can’t or don’t provide a solution one may find Bitcoin gains relevance. Sarcasm? Just sayin.

    • Cryptos are tantamount to pyramid schemes. there’s no “value” or “relevance” to be had. this is what proponents just refuse to understand, and I gave up trying to explain it a long time ago because people just lumped me into the crypto hater category, which wasn’t an accurate description of my position. if there were any merit to them, i would have been happily all aboard the bandwagon years ago, but the unfortunate fact of the matter is that they are, by and large, a valueless scam. and they will, eventually, all go to zero. as ever, i say that with absolutely no malice towards anyone and i wish holders nothing but the best and god knows Bitcoin has minted a lot of millionaires. but if you want to take enormous risks with your capital, there are a ton of ways to do that which don’t involve valueless digital tokens.

      • Tequila Mockingbird

        I ask this question completely earnestly: do you not see any value in a gamified economic incentive for people to build and maintain a decentralized ledger? and relatedly do you see any value in a decentralized ledger in the first place?

        • I think that’s really the question. I fully understand the immense risk of investing in crypto but also the concept of a decentralized ledger system just seems like an incredibly valuable layer of code to operate on the internet especially if the internet does not splinter into national intranets. What the tokens are worth would be nothing but a projection of their utility onto the related money supply. If they have some utility then their value cannot be zero anymore than Facebook’s ad space value can be zero even though anyone can build a new ad driven social network.

      • Like trading real net worth for candy crush tokens. Will be seen as the pet rocks of this era.

  2. Let me amend that to be simply that you should have placed the question mark with your sarcasm notation.

  3. What really going to cook everyone’s noodle is when USTs do an about face next month. An interesting time to be alive(investing)!

    • yeah, an abrupt U-turn that sends yields surging would be hilarious to watch

      • Be cool if we could break the yard first on Euro Corp Bonds – I guess we came closer on Friday when the fx ticked up to 1.122 (i.e. Eur~890Mn = $ 1 bio)
        Is anyone watching out fir this meaningless, momentous event??

      • Upcoming tariffs on consumer goods, as we’ve seen, are significantly showing up as consumer inflation. I suspect production shifts out of China will net out to higher trending PPI as well. The former, at least, will be very visible in 2020 and may put a higher floor under inflation expectations, show up in TIPS, and could shift the narrative back to “how long till the fed has to respond”. Kind of ironic if Trump single-handedly shifts the Fed back to tightening, in his bumblestumble way.

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