Steen Jakobsen: The End Of The Debt Cycle

As we’ve been watching closely, something is wrong with the big banks. Their shares have lost 25-33% of their market value since the beginning of the year. What’s going on?

The turmoil seems greatest in Europe, where bank shares have fallen the hardest, and negative interest rates have appeared with increasingly frequency across member countries.

To make sense of it all, we’ve invited back  Chief Investment Officer of Saxo Bank Steen Jakobsen, who can provide an eyes-on-the-ground perspective on the European banking system from his location in Copenhagen: 

Clearly what we’ve seen over the course of the first quarter this year is that the ability of central banks to do their magic in terms of talking to the market with the rhetoric of “low for longer” and the likes is running on empty now.

If we look back in chronological order of what happened this year, first we had, of course, the Fed with Yellen and Fischer backing down slightly from the three to four hikes they promised in December. That was followed very quickly by, of course, Draghi promising to do ‘Whatever it takes!’ yet again in March this year. Then the BOJ went negative on interest rates and a number of European central banks followed suit. So much so that actually right now if you look at the G7 governments, about 50 percent of all G7 government is now trading at a negative yield, which seems to be the new solution from central banks.

I think the market is seeing right through that because, of course, at the center of all of this at all times will be the banking system, a banking system that is getting penalized for the negative interest rate. Coming from a country which has some experience with negative interest rates, what is really happening to the banking sector here is that, as a depositor, I get paid 0% to have my money in the bank. I should, in reality, be paying 30-, 40-, 50-basis points, but so far I’ve been cushioned by the banks. That cushion is costing the banks money.

Likewise, that is reason why negative interest rates are not having any bearing in terms of growth. Very dramatically last week I made the headline that, to some extent, in a monetary-policy history perspective, this could be the Berlin Wall coming down because we’ve had the Greenspan put, then the Bernanke put. But there doesn’t exist a Yellen put for a number of reasons. Not because of her, but just because time has run out. So I think that explains the volatility.

The real question for an investor, in my opinion, is to ask yourself: Is this merely the latest “extend and pretend” maneuver, which is about to happen again with Draghi coming full online in March and the BOJ doing another desperate action and the Fed backing down. Or is it the end of the debt cycle? That is the trillion-dollar question right now.