Summers Floats Idea of Sustained Government Stock Purchases

 http://finance.yahoo.com/news/summers-floats-idea-sustained-government-120539206.html

 

September 30, 2016

 

Former U.S. Treasury Secretary Lawrence Summers floated the idea of continuous purchases of stocks as a potential ingredient in a recipe for the developed world to strengthen economies struggling with subdued growth and inflation.

Among the proposals that deserve “serious reflection” is the purchase of a “wider range of assets on a sustained and continuing basis," Summers said in a lecture at a Bank of Japan conference in Tokyo Friday. "I’m not prepared to make a policy recommendation at this point,” he told reporters later.

Summers, who also served as a top economic adviser to President Barack Obama, reiterated his concerns about “secular stagnation,” where trend economic growth rates have been reduced and neutral interest rates are lower than historic norms. To the extent that low neutral rates are in part the consequence of investors preferring fixed-income assets and steering clear of riskier options, policy makers can combat that by buying risk assets, he said.

Japan has “engaged in that type of transaction to much greater extent than other countries,” Summers said, pointing out among its initiatives the BOJ’s purchases of exchange-traded funds. “It is something that economic logic suggests should be considered in other places where the zero lower bound is a potentially important monetary policy issue,” he said, referring to the perceived lower limit for benchmark rates set by central banks.

Political Questions

“There are obviously important political and economic questions associated with government ownership of companies,” Summers noted. Some critics could term such a policy as “socialism,” he said, while others could highlight that governments already buy stocks in other ways, such as in the U.S. for federal employee pension funds.

The president emeritus of Harvard University also argued that the most important dynamic holding down long term inflation-adjusted interest rates is that technological advances mean that $1 of saving buys more effective capital than ever before. He noted that Google and Apple Inc. struggle to figure out what to do with their surfeit of cash.

Excess Cash

“In a world where cutting-edge technology companies are awash with excess cash, it can hardly be a surprise that there is substantial downwards pressure on the level of real interest rates,” Summers said. Low neutral rates will be around “for a long time to come,” requiring policy makers to think more dynamically, he said.

As for the measures taken by central banks so far, the economist said “we are fairly near the end of the rope.”

“Perhaps there is scope to reduce short-term interest rates a little bit more and to make them a little bit more negative,” he said. “But there is not much scope.”Summers reiterated his endorsement of central banks adopting a target for nominal gross domestic product , rather than inflation. That would offer greater flexibility to let price levels rise to compensate for years of sub-par performance, he said.

He urged greater monetary-fiscal coordination, and said the BOJ’s adoption of yield-curve targeting is potentially constructive. Successful targeting “operates in a positive way with respect to the government’s budget constraint, and therefore should enable more expansionary fiscal policies.”

The other key area for policy innovation lies in finding ways to boost the neutral interest rate. Summers listed three categories:

• Higher fiscal spending
• Reduced barriers to public investment
• Measures to promote consumer spending, such as enhanced public pension benefits that would reduce consumers’ need to save

He argued against structural reforms, such as concerted labor-market deregulation, saying that this would serve to promote saving, by generating less certainty for workers.

Blackstone’s Top Dealmaker Says Now Is The Most Difficult Period He's Ever Experienced

Blackstone’s Top Dealmaker Says Now Is The Most Difficult Period He's Ever Experienced http://www.bloomberg.com/news/articles/2016-09-27/blackstone-s-baratta-says-now-is-the-most-treacherous-time-ever


Joe Baratta, Blackstone Group LP’s top private equity dealmaker, can’t be too cautious right now.
“For any professional investor, this is the most difficult period we’ve ever experienced,” Baratta, Blackstone’s global head of private equity, said Tuesday, speaking at the WSJ Pro Private Equity Analyst Conference in New York. “You have historically high multiples of cash flows, low yields. I’ve never seen it in my career. It’s the most treacherous moment.”

Private equity managers have tussled with a difficult reality for several years. The same lofty valuations that created ideal conditions to sell holdings and pocket profits have made it exceedingly difficult to deploy money into new deals at attractive entry prices. Several executives, including Blackstone Chief Executive Officer Steve Schwarzman, have pinned those conditions squarely on the Federal Reserve’s near-zero interest rate policies.

Baratta, 45, said Blackstone isn’t finding value in large leveraged buyouts of publicly traded companies. Instead, the New York-based asset manager is targeting smaller companies with low leverage, he said.

‘Net Sellers’

The firm is still selling more assets than it’s buying, according to President Tony James.
“We’re net sellers on most things right now -- prices are high,” James said in a Bloomberg Television interview Tuesday. “Interest rates are so low and there’s so much capital sloshing around the world.”
Blackstone finished gathering $18 billion for its latest private equity fund last year. The firm also has an energy private equity vehicle, which finished raising $4.5 billion last year.

Blackstone is close to striking its first deal by a new private equity fund, called Blackstone Core Equity Partners, Baratta said. The vehicle will have a 20-year life span, double the length of a traditional private equity fund.

The core equity fund, which has gotten $5 billion so far, will deploy $1 billion to $3 billion per deal, said Baratta. The transaction the firm is working on is valued at about $5 billion including debt, he said, without elaborating.

Blackstone, founded by Schwarzman and Peter G. Peterson in 1985, managed $356 billion in private equity holdings, real estate, credit assets and hedge funds as of June 30.

“All that had changed was people’s opinion of the place”

The Commanding General is well aware the forecasts are no good.  However, he needs them for planning purposes.”

– Kenneth Arrow, Nobel Laureate Economist…recalling the response he and colleagues received during the Second World War when they demonstrated that the military’s long-term weather forecasts were useless. (via Future Babble)

Virtually every day there are pundits and gurus on the airwaves, internet, and print making predictions.  At the beginning of 2011 a few of these gurus made some pronouncements as to the future returns of the US stock market.   Laszlo Biryini contended that the S&P 500 (currently trading at 1300 as of this writing – sorry, wrote this about a week ago) would rise to 2854 by 2013, or a 120% gain from current levels.  Robert Prechter, on the other hand, said he thought the Dow would decline 90% by 2017, which would imply that the S&P 500 trades down to around 130.
So there you have it, opposing gurus who believe that stocks will either rise or decline by 30% annualized over the next number of years.  (To complicate the matter even further, you have Shiller estimating the S&P 500 to gain about 10% total by 2020 which splits the two gurus in half.)
Interestingly enough, if you combine the current S&P 500 level (1300, PE of 23) with the lowest (5) and highest historical values (45) for the Shiller cyclically adjusted price earnings ratio (CAPE) you get to values similar to the forecasts at both ends (300 and 2600).  I think the most interesting but unlikely forecast is all three being correct over various timeframes!

The only difference between the S&P500 at 300 (an 80% decline) and the S&P500 at 2600 (a near double) is opinion, namely, what you think those underlying stocks are worth.  Now, we could certainly go on and on making well-thought out arguments as to why either value is justified (low/high interest rates, profit margins, productivity, mean reversion, discounted cash flows, etc.), but at the end of the day it is simple human beliefs on the value of stocks that drive their short term price levels.  As the late, great Kurt Vonnegut opined in his book Galapagos, circa 1985:

“The thing was, though: When James Wait got there, a worldwide financial crisis, a sudden revision of human opinions as to the value of money and stocks and bonds and mortgages and so on, bits of paper, had ruined the tourist business not only in Ecuador, but practically everywhere…Ecuador, after all, like the Galapagos Islands, was mostly lava and ash, and so could not begin to feed its nine million people. It was bankhttp://mebfaber.com/2011/08/09/all-that-had-changed-was-people%E2%80%99s-opinion-of-the-place/rupt, and so could no longer buy food from countries with plenty of topsoil, so the seaport of Guayaquil was idle, and the people were beginning to starve to death…Neighboring Peru and Columbia were bankrupt, too…Mexico and Chile and Brazil and Argentina were likewise bankrupt – and Indonesia and the Philippines and Pakistan and India and Thailand and and Italy and Ireland and Belgium and Turkey. Whole nations were suddenly in the same situation as the San Mateo, unable to buy with their paper money and coins, or their written promises to pay later, even the barest essentials. ..They were suddenly saying to people with nothing but paper representations of wealth, “Wake up, you idiots! Whatever made you think paper was so valuable?”

The financial crisis was simply the latest in a series of murderous twentieth century catastrophes which had originated entirely in human brains. From the violence people were doing to themselves and each other, and to all other living things, for that matter, a visitor from another planet might have assumed that the environment had gone haywire, and that people were in such a frenzy because Nature was about to kill them all.

But the planet a million years ago was as moist and nourishing as it is today – and unique, in that respect, in the entire Milky Way. All that had changed was people’s opinion of the place.”

How does an investment manager reconcile all of the various prognostications he hears on a daily basis?

Simple – ignore them.

Now I am not recommending to completely ignore the basis behind the arguments, as many new approaches and research projects have been originated by ideas presented in print and on TV.  But in general, one should ignore the forecasts of so called experts as they are likely to be about as accurate as a monkey throwing darts against a wall or a coin flip.  There is enormous amount of research to back up the inability of experts to make solid predictions.

One such researcher on expert predictions is Philip Tetlock, a professor of management at the Wharton School at UPenn . He started tracking experts and their forecasts and predictions a quarter century ago, and he has compiled over 300 professionals and academics that have made over 80,000 forecasts. (Here is Tetlock’s home page as well as a sample book chapter. Daniel Drezner has two excellent posts on the book, here and here, and a review from The New Yorker.)

He examined both the outcomes of their predictions as well as their processes – i.e. how they reacted to being wrong and how they dealt with contrary evidence.  In general they offered no benefit over a random prediction, and ironically enough, the more famous the expert, the less accurate the predictions were.    The experts with the least confidence made the best predictions.

Tetlock states:

 “Isaiah Berlin borrowed from a Greek poet, “The fox knows many things, but the hedgehog knows one big thing”? The better forecasters were like Berlin’s foxes: self-critical, eclectic thinkers who were willing to update their beliefs when faced with contrary evidence, were doubtful of grand schemes and were rather modest about their predictive ability. The less successful forecasters were like hedgehogs: They tended to have one big, beautiful idea that they loved to stretch, sometimes to the breaking point. They tended to be articulate and very persuasive as to why their idea explained everything. The media often love hedgehogs. “

BECOMING A BETTER INVESTOR

The characteristics enabling one to appear on TV and become a famous pundit are not the same as the characteristics of being a successful trader or money manager.  Here is a passage from Future Babble on how to be a successful pundit, as illustrated by the charismatic overpopulation doomsdayer Paul Ehrlich:

“Be articulate, enthusiastic, and authoritative.  Be likable.  See things through a single analytical lens and craft an explanatory story that is simple, clear, conclusive, and compelling.  Do not doubt yourself.  Do not acknowledge mistakes.  And never, ever say, “I don’t know.”

People unsure about the future want to hear from confident experts who tell a good story, and Paul Ehrlich was among the very best.  The fact that his predictions were mostly wrong didn’t change that in the slightest.”

Now notice the difference in thinking with one of the greatest hedge fund managers ever, George Soros, “I think that my conceptual framework, which basically emphasizes the importance of misconceptions, makes me extremely critical of my own decisions.”  I know that I am bound to be wrong, and therefore more likely to correct my own mistakes.”

Most of the greatest traders and money managers I know think in terms of all sorts of possibilities and probabilities of various scenarios.

Likewise, this follows in line with the old Maynard Keynes expression, “When the facts change I change my mind.   What do you do sir?”

Indeed, the title of one of my favorite investment books is “Being Right or Making Money” by Ned Davis.  The title alone summarizes almost everything an investor needs to know about investing – do you care more about being correct, or do you care more about increasing your wealth?

http://www.telegraph.co.uk/business/2016/09/28/qe-is-here-forever-says-bank-of-england-deputy-governor/

QE is here forever, says Bank of England deputy governor

Minouche Shafik said interest rates will be permanently lower than in the pre-crisis years, and so QE will become a normal tool of central banks Credit: TOBY MELVILLE/REUTERS

• Tim Wallace

28 September 2016 • 11:28am

Quantitative easing is here to stay as a standard tool of central bankers, according to the Bank of England’s deputy governor Minouche Shafik.

Interest rates are likely to stay relatively low permanently, she said, because of structural and demographic changes in the world economy, and that means central banks have to use other means to ease monetary policy – including QE, whereby the Bank of England creates money and buys bonds. “Deep structural forces have combined to depress the level of interest rates at which the economy would be in equilibrium, obliging us to rely ever more on monetary policies that were once considered unconventional,” said Ms Shafik, speaking at a Bloomberg conference.

Highcharts

The deputy governor, who is leaving the Bank to head up the London School of Economics, said that interest rates have been at around 5pc for centuries, but she cannot see the base rate returning to that level any time soon.

The neutral rate of interest “is closer to zero than it used to be. You can see from charts that historically, interest rates have always been at around 5pc, going back hundreds of years… even in ancient Babylon,” she said.

“Something has changed in the last decade with big forces of demography, global savings and investment, and the neutral rate has fallen and is likely to stay low for a very long time.”
As interest rates are going to stay low, central banks need other tools to stimulate the economy, with QE foremost among those.

Ms Shafik said that she had initially expected to start unwinding QE once interest rates rose to around 2pc – but instead of hiking, the Bank of England cut its base rate to a new record low of 0.25pc last month.

Carney: Banks have 'no excuse' not to pass on interest rates cut Play! 00:32

 

She expects the next move will be another cut as the Bank tries to combat a Brexit-related economic slowdown.

“There is no doubt in my mind that the UK is experiencing a sizeable economic shock in the wake of the referendum. Any reduction in openness or need to reallocate resources will necessarily imply a slower rate of potential growth for the economy,” said Ms Shafik, noting a hit to business investment as well as flows of foreign funds into the country.

“It seems likely to me that further monetary stimulus will be required at some point in order to help ensure that a slowdown in economic activity doesn’t turn into something more pernicious.”
Any such change is less urgent than initially expected, however, as the economy is holding up surprisingly well following the vote.

“The welcome improvement in the forward-looking indicators suggests that the slowdown may not be as sharp or as sudden as we might have feared,” she said

The Professor Who Was Right About Index Funds All Along “Believe me, there are plenty of smart people behind the robots.”

http://www.bloomberg.com/news/articles/2016-09-22/the-professor-who-was-right-about-index-funds-all-along


Burton Malkiel has been saying the same thing about investing for more than 40 years. What’s new is that a big chunk of the financial industry now admits he was right all along.

In 1973, Malkiel, a Princeton professor, published the first version of his investment guide, A Random Walk Down Wall Street. He wrote that “a blindfolded monkey throwing darts at the stock listings could select a portfolio that would do just as well as one selected by the experts.” Since most investors can’t beat the market average over time, he argued, they’d be better off in some kind of low-fee fund that simply held all of the stocks on a widely followed index. Problem was, no such retail fund existed.

When a new fund company called Vanguard finally rolled out the first index mutual fund three years later, Ned Johnson, then the head of Fidelity Investments, spoke for most money managers when he told the Boston Globe, “I can’t believe that the great mass of investors are going to be satisfied with an ultimate goal of just achieving average returns.”

Things changed ... slowly, and then all at once. That first fund, the S&P 500-mimicking Vanguard 500 Index grew to a respectable $3 billion in assets in its first 20 years. But when it turned 40 years old on Aug. 31, it had more than $200 billion in assets, making it the third largest mutual fund, behind two other Vanguard index funds. From the end of 2007 through 2015—that is, since the financial crisis—domestic equity index funds saw a net inflow of investor money as active stockpickers grappled with outflows. About 34 percent of all fund assets are now in index trackers. Fidelity, though still a believer in the idea that managers can beat the markets, now advertises how inexpensive its own index funds are.

“This was an idea that was thought of as heresy or utter stupidity and now many realize it was the right way to go,” says Malkiel, in an interview at Princeton, where he is now a professor emeritus of economics. Weak performance has made life hard for managers who still actively pick stocks: According to the latest data from S&P Global, fewer than 15 percent of active large-cap stock funds beat the market index over the past 10 years. Index funds reliably deliver the market’s return minus yearly fees that may be 0.10 percent of assets or less, compared with stock funds’ average of 1.3 percent.

Malkiel, 84, is now chief investment officer at Wealthfront, a Silicon Valley startup that’s become one of the leading robo-advisers—firms that use index funds to build automated investment plans for a fraction of the fees charged by traditional advisers. Just as index funds brought down the cost of investing, robo-advisers will bring down the cost of advice, says Malkiel, who spent 27 years on the Vanguard board. “The one thing I know is that the less I pay the purveyor, the more there will be left for me,” he said.

Malkiel grew up without money in the Roxbury neighborhood of Boston during the Depression, and went to Wall Street after stints at Harvard and the Harvard Business School. He rejected a career in academia, at first, because he was tired of being poor.

On Wall Street, he noticed that if you followed the recommendations of the bright, talented stockpickers he worked with, you rarely made money. He also saw that brokers recommended to customers the funds they were paid the most to promote. Malkiel left Wall Street for Princeton in 1960 but never left the business world behind. He estimates he has served on the boards of 30 different organizations over the years, including two biotech companies where he still holds a seat.
Jack Bogle, founder of Vanguard, says Malkiel “was the best director we have ever had.” Robert Arnott, co-founder of California investment strategist Research Affiliates, recruited Malkiel to serve on his advisory panel. “We wanted someone who is a critic of our ideas, who was willing to be blunt-spoken,” says Arnott. He got his wish. Arnott is a proponent of so-called smart beta—a variation on indexing that Arnott and others think will lead to better performance. Malkiel calls smart beta “smart marketing.”

Adam Nash, chief executive officer of Wealthfront, says Malkiel played a critical role in creating one of the firm’s most successful products, a system for maximizing the tax losses investors can claim in a given year. Malkiel says computers can do that job better than humans.

Automated advice is still a relatively tiny business, but Malkiel thinks that, as with indexing, the services will win over the skeptics. “You hear people say, ‘Do you want a robot managing your money?’ ” he says. “Believe me, there are plenty of smart people behind the robots.”

Vanguard Founder Jack Bogle on Mutual Funds, Common Sense Investing and the Stock Market

https://www.youtube.com/watch?v=nWI64TKU64o

What are the possible consequences of the current lack of investment in oil projects

Low oil prices have squeezed capital investment hard. Last year the IEA saw a 24% drop in global capex, and this year we expect a further decline of 17%: the first back-to-back annual declines since 1986. And it could get worse as companies continually review their spending plans. The cutbacks are mainly concentrated in high-cost projects in countries such as Canada, Brazil and Russia. However, the cuts are not limited to capital expenditure, or capex: operating expenditure is being cut even in lower-cost areas such as the Middle East. Such are the budgetary pressures affecting their economies that oil industry cutbacks are necessary to fund politically important social expenditure.

This retrenchment will lead to slower oil supply growth around the world. In the meantime, in our 2016 Medium-Term Oil Market Report we anticipate global oil demand growing by an average of 1.2 million barrels per day (mb/d) to 2021.  To satisfy this growing appetite, investment must be made both to sustain existing oil production and to provide the necessary new capacity. If the investment cutbacks continue for even longer than we currently anticipate, there is a risk that oil prices will spike, threatening economic growth.

If the investment cutbacks continue for even longer than we currently anticipate, there is a risk that oil prices will spike, threatening economic growth.

How have new technologies and processes improved extraction? What are some of the most successful technologies/projects?

Let’s look first at one sector’s laser-like focus on procedure and cost. The drop in oil prices has slammed the brakes on US light tight oil (LTO), with production slipping below the year-earlier level for the first time this past December. This freezes five amazing years of development, with the average 4.3 mb/d output of last year roughly ten times that of 2010. That unprecedented surge required enormous effort, including the drilling of more than 55 000 new wells, with more than 1 500 drilling rigs running concurrently at the peak, compared with an average of 103 in Saudi Arabia.

By early this year, the number of US drilling rigs was down to just 440, but oil production has not fallen nearly as quickly as the rig count would suggest. Instead, the LTO industry drew on its experience during the rush to improve well performance, with initial production rates up to 23% higher than in 2015. Best practices, more efficient rigs and a severe squeeze on service and material spending have continued to reduce well costs, with companies reporting savings of 25% to 30%. While we expect a 50% reduction in LTO oil well completions this year from last, the flexibility and cost-consciousness of operators leaves the industry ready to shift back into high gear relatively soon when higher prices allow.

But only fundamental changes in technology can lower unit costs for good. Despite continued technological improvements, our World Energy Outlook’s New Policies Scenario sees production costs rising in real terms to 2040 as oil producers develop ever more technically challenging (and generally smaller) reservoirs. But when prices do recover, producers might see a more certain return on investment, and sooner, if they focus on additional recovery from existing fields or smaller-scale modular development of new discoveries, rather than pursuing vast, expensive megaprojects.

What do you think might be the impact of a move to renewable energy sources, in the wake of the COP21 agreement, on investment in oil projects and/or new technologies?

One of the key messages the IEA brought to COP21 was the critical need to accelerate energy technology innovation to make decarbonisation cheaper and easier. Specifically, as the World Energy Outlook Special Report on Energy and Climate Change urged ahead of COP21, investment in renewable energy technologies in the power sector must increase from the USD 270 billion of 2014 to USD 400 billion in 2030.

So the IEA warmly welcomed Paris Agreement to limit global temperature change to well below 2°C. But we know that the transformation inherent in the commitment agreed at COP21 represents a profound challenge to a fossil-fuel-dominated energy system. For one, our World Energy Outlook’s 450 Scenario, which posits policies for limiting greenhouse gas emissions, shows that oil prices in all probability will be lower. Upstream megaprojects very likely will face considerably higher risks, while the sector will find it harder to attract new skilled professionals.

But a secure and least-cost shift to a low-carbon future via a demand and emissions trajectory like the 450 Scenario’s still requires continued large-scale investment in oil and gas. That’s because even if demand for oil declines sharply and that for gas increases only moderately during the transition, we need investment to compensate for the two-thirds decline in output from current fields, a far more rapid decline that anything seen (or foreseeable) on the demand side.

A particular hazard for oil and gas companies may lie in inconsistent climate-change policies, which would lead to substantially more market disruption, price volatility and a higher risk of stranded investments.

Fed policy is gutting basic financial infrastructure, Richard Fisher says

Fed policy is gutting basic financial infrastructure, Richard Fisher sayshttp://www.cnbc.com/2016/09/19/fed-policy-is-gutting-basic-financial-infrastructure-richard-fisher-says.html

German Savers Lose Faith in Banks,

German Savers Lose Faith in Banks, Stash Cash at Home

Low interest rates and the prospect of fees on bank deposits are helping drive a boom in home-safe sales http://www.wsj.com/articles/german-savers-lose-faith-in-banks-stash-cash-at-home-1472485225

 

 

HAMBURG—German savers are leaving the security of savings banks for what many now consider an even safer place to park their cash: home safes.
For years, Germans kept socking money away in savings accounts despite plunging interest rates. Savers deemed the accounts secure, and they still offered easy cash access. But recently, many have lost faith.
“It doesn’t pay to keep money in the bank, and on top of that you’re being taxed on it,” said Uwe Wiese, an 82-year-old pensioner who recently bought a home safe to stash roughly €53,000 ($59,344), including part of his company pension that he took as a payout.

Interest rates’ plunge into negative territory is now accelerating demand for impregnable metal boxes.

Burg-Waechter KG, Germany’s biggest safe manufacturer, posted a 25% jump in sales of home safes in the first half of this year compared with the year earlier, said sales chief Dietmar Schake, citing “significantly higher demand for safes by private individuals, mainly in Germany.”

ENLARGE

Rivals Format Tresorbau GmbH and Hartmann Tresore AG also report double-digit-percentage German sales increases.
“Safe manufacturers are operating near their limits,” said Thies Hartmann, managing director of Hamburger Stahltresor GmbH, a family-owned safe retailer in Hamburg, which he says has grown 25% since 2014. He said deliveries take longer from safe makers, some of which are running three production shifts.
Germans point to the European Central Bank, which since 2014 has tried to reignite eurozone inflation by pushing interest rates below zero. Savers now face the prospect of being charged fees on their deposits. Some companies and large private depositors already incur charges.
The latest such sign that penalty rates are creeping in comes from a small cooperative bank in the Bavarian town of Gmund on the Tegernsee lake. As of Sept. 1, the bank, Raiffeisenbank Gmund, will charge its customers 0.4% on deposits above €100,000. Some 140 customers with total deposits worth €40 million are affected, said management board member Josef Paul.
In a country where few people buy stocks, the possibility of having to pay fees on deposits has turned savers’ world—and their piggy banks—upside down.

Related

• Bank Watchdog Questions Free-Service Model
• Are Negative Rates Backfiring? Here’s Some Early Evidence (Aug. 8)
• Germany Says Bank Risks Must Be Cut Before Saver Deposit Scheme Agreed (June 17)
• Germany’s Cautious Savers Find New Taste for Risk (Jan. 25)

“The moment the bank tells me I have to pay interest on my deposit I’ll take my €50,000 or whatever it is and put it under my pillow, or buy a safe and stick the money inside,” said Dagmar Metzger, a 53-year-old entrepreneur in Munich.
Ms. Metzger, a game hunter, said she would also consider squirreling cash away in her gun cabinet, which has solid locks.
Paying to save is “preposterous,” said Marlene Marek, 58, owner of a Frankfurt bistro. “I would rather withdraw my money and stash it at home, or keep it in a safe-deposit box at a bank.”
Many Germans have a similar idea, creating waiting lists for safe-deposit boxes in some big cities. So a growing number of Germans prefer self-sufficiency.
“When you put money in a safe-deposit box, everyone notices, and you’re paying fees,” said Mr. Wiese, the Hamburg retiree, who said his new safe is roughly twice the size of a hotel safe.

‘The moment the bank tells me I have to pay interest on my deposit I’ll take my €50,000 or whatever it is and put it under my pillow, or buy a safe and stick the money inside.’
—Dagmar Metzger, an entrepreneur in Munich

Banks and other financial institutions themselves are also keeping more cash. Reinsurance giant Munich Re AG said earlier this year it would cache over €20 million in cash in a safe, alongside gold bars the company stockpiled two years ago.
“We are testing that and are happy that this works without any glitches and at reasonable costs,” said Chief Financial Officer Jörg Schneider. The reinsurer said it would consider augmenting its cash stash.
Part of the motivation is a dearth of alternatives. Dwindling returns on life-insurance policies and rising real-estate prices—traditional German retirement investments—mean people are letting their money languish.
Germans are particularly focused on safes because they prefer cash to plastic. “Only cash is real,” goes an old saying.
Roughly 80% of German retail transactions are in cash, almost double the 46% rate of cash use in the U.S., according to a 2014 Bundesbank survey. Germans also keep more cash in their wallets and visit ATMs more often, withdrawing on average $256 at a time, the study found. Americans withdraw $103 on average.
Germany’s love of cash is driven largely by its anonymity. One legacy of the Nazis and East Germany’s Stasi secret police is a fear of government snooping, and many Germans are spooked by proposals of banning cash transactions that exceed €5,000. Many Germans think the ECB’s plan to phase out the €500 bill is only the beginning of getting rid of cash altogether.
Ms. Metzger is a member of an activist group demanding the existence of cash be guaranteed in Germany’s constitution.
“I don’t want to become completely transparent,” she says.” I don’t want everyone to know whether I buy chocolate, strawberries or mangoes at the store.”
Write to Ulrike Dauer at ulrike.dauer@wsj.com
Corrections & Amplifications:
Dagmar Metzger, an entrepreneur in Munich said: “The moment the bank tells me I have to pay interest on my deposit I’ll take my €50,000 or whatever it is and put it under my pillow, or buy a safe and stick the money inside.” An earlier version of this article incorrectly attributed the highlighted quote to another person. (Aug. 30)

Credit bubbles and their consequences

Interesting paper from the San Francisco Fed by Oscar Jorda, VP Economic Research at the Fed, Moritz Schularick, professor of economics at the University of Bonn, and Alan M. Taylor, professor of economics and finance at the University of California, Davis. They discuss the difficulty in identifying asset bubbles and the relationship of asset bubbles to credit.

A defining feature of advanced economies in the post-World War II era is the rise of credit documented in Jorda, Schularick, and Taylor (2016). This is visible in Figure 1, which displays the cross-country average ratio to GDP of unsecured and mortgage lending since 1870. Following a period of relative stability, both lending ratios grew rapidly after the war, with mortgages taking off in the mid-1980s....

Most buyers use mortgages to buy homes, but few savers use borrowed funds to invest in the stock market. Thus, one might expect equity price busts to be less dangerous than collapses in house prices: A crash in the price of assets financed with external (rather than internal) funds is likely to have deeper effects on the economy. As collateral values evaporate, some agents will delever to reduce their debt burden, in turn causing a further collapse in asset prices and in aggregate demand. The more widespread this type of leverage is, the more extensive the damage to the economy. Integrating the role of credit into the analysis of asset price bubbles is therefore critical.

Anna Schwartz spoke on the issue in a 2008 interview with the Wall St Journal. Then 92 years old, the co-author with Milton Friedman of A Monetary History of the United States (1963) nailed the cause of asset bubbles:

If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset. The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates .....

The problem is not asset bubbles, whether they be in stocks, housing or Dutch tulips. That is merely a symptom of a deeper malaise: too easy monetary policy. The real threat is the underlying credit expansion that caused the problem in the first place.
And while asset bubbles may be difficult to measure, credit bubbles are easy to identify. If credit grows at a faster rate than GDP, that is a credit expansion. The ratio of credit to GDP should be maintained in a narrow, horizontal band.
Easy to monitor and easy to correct, if you are looking in the right place. But central banks are good at looking elsewhere — and closing the gate long after the horse has bolted. A similar problem is evident in Australia.
Even worse if we look at household credit to disposable income (on the left below).
Unfortunately the horse has bolted and attempting to contract the level of debt would cause a deflationary spiral with devastating consequences. The only way to restore sanity is to hold debt steady at current (nominal) levels and allow growth and inflation to gradually reduce the GDP ratio to more stable levels.

The Great Depression was not some Act of God or the result of some deep-rooted contradictions of capitalism, but the direct result of a series of misjudgements by economic policy makers, some made back in the 1920s, others after the first crises set in — by any measure the most dramatic sequence of collective blunders ever made by financial officials. More than anything else, therefore, the Great Depression was caused by a failure of intellectual will, a lack of understanding about how the economy operated.
~ Lords of Finance by Liaquat Ahamed