No Love Island

As we try and understand the implications for ultra-low/negative rates of interest across the globe, we came across the a recent column in the FT addressing this very phenomenon. The article by John Dizard, discusses how the negative rates in Europe and low rates in the U.S. are fueling inefficiencies, bloated government budgets in the case of Europe and excess oil and gas production here in the U.S.. We would take this thesis even further to state that negative rates in Europe have led to stranded capital sitting on the balance sheets of insurance companies and pension funds( in the form of sovereign bonds) while low rates in the U.S. have led to excess capacity across almost the entire U.S. economy, the difference being only the transmission mechanism inherent in European vs. U.S. capital markets. Private equity, IPO activity and a deep credit and leveraged credit market would suggest that “excess” capital has found alternative methods of transmutation into the overall U.S. Economy. A weaker banking system, combined with a less robust private credit market, has generally driven much of the same excess capital into the Euro denominated sovereign bond markets. The end result of this dichotomy in transmission is simply where the stranded capital ends up: one as vapor in the form of negative rates and the other as actual vapor in the form of flared gas at the end of the permian producers pipeline.