Stocks Bounce….Fed Going NIRP?

So it looks like we had to wait another week for the bounce in US equity prices to resume, which it did last week when the S&P500 climbed about 2.8%. But since volume was very light, we can infer that this bounce was more about short covering than about investors rushing back into the stock markets to buy new positions. But volatility did drop back, as one would expect during a week when prices rose.

As usual, most of the US economic news was poor last week. The Empire State manufacturing index came in badly negative, when it was expected to improve from the prior month’s reading. The housing market index missed expectations of a rise; instead it fell. Housing starts also missed. Producer prices were hotter than expected; this puts more pressure on the Fed not to halt its rate hikes. The Philly Fed business survey missed. Leading indicators only met expectations. And industrial production beat, but with industrial inventories piling up (relative to sales), productions is overdue for a severe cutback…..which is extremely bad news for future economic growth.

After last week’s stock market advance, the argument for a continuation of the bounce gets stronger. Given the severe damage suffered by the equity markets since the beginning of the year, there’s quite a lot of room for a bounce to blossom. In fact, the S&P could rise almost another full 100 points before the long-term downtrend would become threatened.

And given the severe damage to US equity markets (and even to those abroad), cries for help from Wall Street…..especially from the Fed…..have been growing louder. The idea that’s gaining the most momentum is one recently adopted by the Bank of Japan, which in turn borrowed the idea from several central banks in Europe—lower short-term interest rates below zero. In other words, adopt a negative interest rate policy (or NIRP) to theoretically force anyone or any entity holding cash to be more incline to spend it.

One problem with this is that cash holders will tend to want to pull their electronic deposits from banks and into paper currency in which case, there can be no interest charged by banks.  Sure enough, several influential mouthpieces for the establishment have already begun to argue for the elimination of large denomination notes (eg, the US $100 bill) which would make the withdrawal of large deposits more difficult to do.

But more importantly, the question should be—how have the NIRP policies in these other countries worked out for them. While some would argue that it’s too early to call, so far the results have been disappointing—in all cases, financial markets have not roared back to new highs and more importantly, the real economies in those countries have not started growing robustly; in fact many have tread water at best, and others have slid back down into recession.

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