Out of the Box: *Money for Nothing*

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Now look at them yo-yos, that’s the way you do it
You click a keystroke 1-2-3
That ain’t workin’ that’s the way you do it
Money for nothin’ and your checks for free
Now that ain’t workin’ that’s the way you do it
Lemme tell ya them guys ain’t dumb
Maybe get a blister on your little finger
Maybe get a blister on your thumb

-Apologies to Dire Straits

This is exactly, and precisely, what is going on in the European Union, Switzerland and Japan. These folks are making money from nothing, buying bonds, forcing their interest rates to almost Zero, Zero, less than Zero, as we exceeded $16 trillion in negatively yielding debt yesterday. The road is long and winding and we are headed for $25 trillion in Sub-Zero debt soon. Just watch.

Further, do not fool yourselves, it is NOT the central banks that are instigating all of this. The ECB, the Bank of Japan, and the SNB, are nothing more than “fronts” for their governments. None of these central banks are “Independent,” like the Fed. These central banks, 100%, act at the beck and call of their governments. They are doing the countries’ bidding as the budgets and social programs, of these various nations, cannot be afforded except by creating money from nothing, and then spending it, as directed by their governments. This whole situation can be blamed on Berlin and Brussels, though they will never, ever, accept responsibility. It is the Alchemists’ dream come true, of the last several thousand years.

“Money for Nothing,” I point out, does have its costs. First, and to be considered, when it comes to governments, things play out for much longer than expected. They have all kinds of tools to keep things going, way longer than corporations. So, don’t expect any major changes anytime soon, as the encroaching $25 trillion in negatively yielding debt may just be the start of it.

The pain, therefore, is going to become quite real for savers, retirees, seniors, pension funds, insurance companies, money managers, banks and Wall Street firms, for a wide variety of reasons. In the first instance it will force all of these people, and institutions, who rely upon yield and cash flows to meet their obligations, into riskier and riskier bets. Many will not work out and there will be Hell to pay, in the end. That is my observation.

“This is another fine mess you have gotten us into.”

-Oliver and Hardy

I expect, in fact, a number of state and corporate pension funds to go bust, as they cannot obtain their funding expectations and then trouble will follow. Also, as bonds yield nothing, or less than nothing, money managers will be forced to cut fees as they are producing nothing or less than nothing, for their clients. Then as rates head toward Zero there will be almost no room in bid/ask spreads, which will dim the balance sheets of many Wall Street investment banks. You can expect more retirees and savers to also hit the skids which will turn into a howl and cry as the government’s help is asked for, and then demanded.

Insurance companies, whose investments get treated one way for equities and another way for bonds will also get seriously impacted, in my view. How some of the annuities out there get funded now is anyone’s guess. The pain will be long and lingering. Downgrades, by the ratings agencies, in this space, are likely on the horizon.

For banks, the issue is how do you make any spread? It will become increasingly difficult as nothing, or less than nothing yields, permeate the landscape. UBS, in Switzerland, is now charging their wealthier clients to hold their money. Don’t think that it can’t happen here. The United States is being forced in that direction as foreign money rolls in and buys bonds as America is practically the only major country with any yield left. This will play out, over time, but don’t think this is some black swan, unexpected event.

The name of the “Money for Nothing” band is quite applicable. We are in “Dire Straits,” in my view, and I am not expecting anything but years, if not decades, of pain, as we have plunged down the rabbit hole where the bottles labeled “Poison,” are clearly in sight. It is not “Poor Alice” but “Poor us,” before all is said and done.

When logic and proportion
Have fallen sloppy dead
And the White Knight is talking backwards
And the Red Queen’s off with her head
Remember what the dormouse said
Feed your head
Feed your head

-Jefferson Airplane

Mark J. Grant
Chief Global Strategist, Fixed Income
Managing Director
B. Riley FBR Inc.
[email protected]
U.S. 954-468-2366

Information herein is for general use; is not unbiased/impartial; is current at publication date, subject to change; may be from third parties; and may not be accurate or complete. Opinions are the Author’s, not B. Riley FBR, Inc., or their respective affiliates or subsidiaries. This is not a research report or solicitation or recommendation to buy/sell the subject securities. Investment factors are not fully addressed herein. B. Riley FBR Inc. and their affiliates may have a proprietary position in the subject securities. Redistribution/reproduction of this material is prohibited. See additional disclosures at: http://brileyfbr.com/legal/legal_disclosures

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