(March 19): Denmark’s central bank will switch from operating one negative interest rate to three by the end of this week, joining several other peers that have overhauled frameworks in a bid to fine-tune their policy levers.

The Copenhagen-based Nationalbank, whose subzero monetary stance since 2012 is the longest-lasting such experiment, is bringing into effect changes to its regime that it announced to investors last Thursday. Its overnight deposit rate and its key deposit rate will now both be at -0.5%, while its lending rate will be at -0.35%.

The measures are designed to help fulfil the central bank’s mandate of protecting the krone’s peg to the euro, responding to fluctuations in money-market rates that flowed from the wide spread in its rates. The revamp is just one of many tweaks by counterparts in recent years aimed at enhancing control of monetary policy using multiple levers.

In Denmark, the spread between the central bank’s key lending and deposits rates has been gaping for more than half a decade, leading to market vacillations that hindered the defense of the peg, according to Daniel Brodsgaard, a fixed income analyst at Danske Bank A/S. The changes are a shift in approach that more broadly applies subzero policy.

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The Fed-dy Bears’ Picnic

“If you go down in the bonds today; You’re sure of a big surprise

If you go down in the bonds today; You’d better go in disguise!

For every bear that ever there was will gather there for certain

Because today’s the day the Fed-dy Bears have their picnic

Picnic time for Fed-dy Bears; The little Fed-dy Bears are having a lovely time today

Watch them, catch them unawares; And see them picnic on their holiday

See them gaily gad about; They love to play and shout; They never have any cares

At 6 o’clock this trading fad-dy; Will put its books to bed; Because they’re tired little Fed-dy Bears

Every Fed-dy Bear who’s been good is sure of a treat today

There’s lots of marvellous things to tweet and wonderful games to play

Beneath the trees where *everyone* sees; They’ll hide and seek as long as they please

‘Cause that’s the way the Fed-dy Bears have their picnic”

We have a long wait ahead of us for a critical Fed meeting and one has to kill the time as productively as one can: I apologize for nothing. Yes, we can focus on weak US retail sales and industrial production data yesterday, which is bond bullish; we can focus on the risk-off North Korea leader’s sister stating “We take this opportunity to warn the new US administration trying hard to give off gun powder smell in our land” (which was not about flatulence); or the latest suggestion that US officials will bring up Hong Kong and Taiwan when they meet Chinese officials in Alaska tomorrow, which is hardly risk on. You can even mention that Germany seems to have the same negotiating tactic with the US over Nordstream2 as North Korea does with its nukes: just keep building and expect the Americans to eventually live with it.

But the long and the short of it is that it’s all about the Fed, and if they display any sign at all of shifting the dot plot towards rate hikes from as early as 2023. That’s especially true given the possibility this will be a period following not just the USD1.9 trillion stimulus package, but a USD2.0-2.5 trillion infrastructure bill too – in which case one would suppose the underlying pressure for higher rates would be strong…if things still work the way the textbook says they are supposed to re: liquidity > investment > wages > inflation. Which they clearly don’t right now.

One of the big headlines is that following a UK court loss, Uber are reclassifying their 70,000 British drivers as workers rather than self-employed capitalists en route to global transport domination. This entitles them to benefits, which would be a pay rise in kind. Is this the harbinger of labour winning vs. capital? Consider that Uber are claiming this only covers time spent driving, so waiting around for a fare doesn’t count towards pay: does that sound like a strongly-unionised working environment? As the grandson of a cabbie, it sounds like being a taxi-driver. (Uber will potentially have issues with VAT payments due to the government: but that’s another story.)

Back to the Fed. As I’ve already noted recently, it would be odd if they tried to flag inflation concerns given the Treasury are arguing these are “small” and “manageable”: surely they won’t want to show any policy disconnect? As such, and like the RBA just did, the risks appear that most members still won’t flag rate hikes by 2023 despite the recent upturn on overall data, on the US vaccination effort, in commodity prices, and in fiscal stimulus.

In which case, while short end bond yields would of course stay low, the risks are also that long yields react further to all this “running hot”. So, yes, it could be picnic time for Fed-dy bears. Could this look like the 2013 Taper Tantrum, where US 10s jumped 136bp (to 3.06%)? Could it even look like the 1994 Bond Massacre, where US 10s leaped 245bp trough to peak (to 8.05%)? However, before one gets ‘Uber-excited’, the fact that one peak was 8.05% and another was 3.06% shows you just what happened to the US structurally in the two decades in-between. It’s going to take a lot of US infrastructural changes, in many senses of the term, to get us back towards anything close to 2013 US yield levels, let alone 1994.

Nonetheless, in the meantime the rest of the world has followed that general yield collapse and new-normal path, and hence even a moderate move higher in yields could be painful – and not just to bonds. Yes, there are US stocks to worry about. But also note the headline ‘China braces for “turmoil in financial markets” following new US stimulus’. Of course, it’s not the only one. Key EM are now having to actively think about raising rates despite still being in the throes of the Covid epidemic. The higher US bond yields go, the more capital could flow back to the US and USD. That’s one form of turmoil – and very 2013.

Yet even if the Fed does not provide a picnic for bond bears today, via some form of curve action to match the dot plot, we still get turmoil anyway. How well are EM (and DM) set up for a much weaker USD (and yet higher commodity prices), for example?

It was to be expected, if deeply ironic, that Chinese officials oppose a US fiscal deficit of over 15% of GDP; the promise of massive infrastructure spending; all backed by a pliant central bank; with aims of social stability; and suggestions of protectionism to lock this liquidity in; and hopes the currency moves lower. Takes one to know one? But rather than accept the expected flood of hot capital inflows –pushing up CNY, blowing bubbles, and seeing jobs exported along with manufacturing– suggestions are they will encourage more capital to flow straight back out again. In which case, it’s more of a Fed-dy bulls picnic globally. But somebody is going to end up with an over-valued currency, hitting exports, and assets, hitting financial stability.

There are many other ways this can play out too, depending in large part on how the US reacts – but all of them suggest the risk of significant market and geopolitical volatility, to which today could well be a key milestone.

But that’s enough for now. I am a tired little Fed-dy bear, and today will likely be no picnic.

For those who suspect the status quo is unsustainable but aren’t quite sure why, I’ve prepared a simple chart that explains the financial precariousness many sense. The chart depicts the two core elements of a debt-based, consumerist economy: disposable earnings, defined as the earnings left after paying for essentials which can then be used to service debt and debt.

In other words, if all the household earnings are spent on non-discretionary expenses (rent or mortgage, taxes, food, utilities, healthcare, etc.) then there is no money left to pay the interest and principal on a loan. Lenders consider this household uncreditworthy for the simple reason that their earnings cannot support the monthly nut of debt service (interest and principal).

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