Wednesday, March 4, 2015

Another rate cut overnight -- what do Central banks know?

Conventional wisdom says that the global economy is on the mends -- some will point out that even Greece is doing better, and so the big riddle remains; If the world is doing so well why are interest rates falling?  Last night another central bank cut interest rates (Israel in this case).

The total so far for 2015 is 20!  Over 20 central banks have cut interest rates.  Yes inflation is flat (almost everywhere), but its not in the gutters yet.

There is virtually no discussions about this anywhere in the financial press.  What is concentrating the market is the number of central banks (and high rated banks in Europe) that have begun charging interest on deposits.  We now have a world that charges for deposits and pays for loans.  There is something fundamentally broken in the system.  The more I think about it, the more I am convinced that the bond guys have got it right, Zero is not the lower bound for interest rates.  There's still some juice left in that game -- the smart money is in medium duration bonds -- taking further advantage of the tax discrepancy between cap gain and income.

The implication of this has to be that central banks (and their governments) are extremely concerned with the global economy and are not seeing fundamental growth.  So what's going on?  One bet could be the quality of job creation -- either at minimum wages or close to, and jobs that require little or no skills.  As an example, 20 years ago, when buying a stereo (higher end unit) you went to a store and spoke to a guy who knew his stuff.  Today you don't, the best computer/stereo store in the world J&R Computing closed its doors in NYC last year.  They could no longer compete with the buying guides available on the internet.

Another clue; this morning's announcement that RBS was firing 3/4 of its investment bankers (yep, 14,000 out of 18,000) are being let go.  What was interesting is that a large part of these cuts will come out of back office -- that will be automated...

The amazing thing is that this has not happened yet.  I've seen the tools available to F/X and Interest Rate clients for nearly a decade.  A treasurer is able to fully automate his cash flow's F/X positioning using tools available from several banks to make sure there are no errors, and then getting the best bid -- in effect the treasurer has become his own trader, because these trades are actually automated (so that back office is also automated).

The impact, in one bank, 90% of traders were let go, as was 95% of the back office (this was done over time, quietly) -- what was left were complex trades that require both a trader and a back office to understand the trade -- this is profitable for the bank, and very cheap for the treasurer.  Now, RBS made a splash out of this natural decision (any news to detract from the bank's horrible performance), but it remains that the City of London's back office will be decimated over the next two or three years, the same for Wall Street -- we are looking at hundreds of thousands of high paying jobs that will disappear -- never to be replaced.

These facts are starting to scare central banks, for while CB's didn't care unduly about manufacturing job (I'm exaggerating here) white collar jobs is another issue entirely.  They are much higher paying (a good back office manager will earn STG 55,000 to STG 90,000 per annum) and these jobs are not being displaced elsewhere they are disappearing.  Traders too are being replaced by 24/7 intelligente trading machines (think High frequency traders), that don't need much pay and don't bitch either.

Now if we could just find a good software to replace the CEOs... the world could be perfect!  No workers no jobs, all the profits to the shareholders.  Piketty's vision would be complete 100% of the benefits of economic growth would go to capital.






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