Deflation remains the enemy thanks to debt, deleveraging, demographics, tech disruption & default risks. US aggregate debt is today a staggering $58.0 trillion (327% of GDP); the number of people unemployed in the European Union is 23.6 million; Greece has spent 90 of the past 192 years in default or debt restructuring. 7 years on from the GFC... The massive policy response continues. Central bank victory means that lower rates, currencies, oil successfully boosts global GDP & PMI’s in Q2/Q3, allowing Fed hikes in Q4. Bond yields would soar in H1 on this outcome. Defeat, no recovery, and currency wars, debt default and deficit financing become macro realities.
The Moment Of Truth Looms...
The massive policy response continues: since Lehman global rate cuts total 542 (that’s a rate cut once every three trading days – Chart 1); and global central bank assets total $22.5 trillion, a sum larger than US & Japanese GDP.
But monetary ammo is now close to exhaustion, volatility is fighting back, and assets are becoming tougher to reflate (the price of both global stocks & high yield bonds are down in the past 8 months).
Years after the Great Financial Crisis, the nominal growth of the US & the global economy remains extremely low by historic standards. US nominal GDP growth has averaged 3.5% in the past 7 years, well below its 6.6% average since WW2 (Chart 2). Global nominal GDP grew just 5.4% in 2014, well below its 50-year average of 8.0%.
Labor markets remain weak. The current number of unemployed men & women in the European Union is 23,605,000. Spain’s unemployment rate is currently 23.7% (Chart 3), marginally down from a 40 year high. Even in an improving US labor market, wage pressures are minimal as unemployment is compounded by both technological disruption & demographics.
Minimal deleveraging since the Great Financial Crisis and a large debt overhang remain impediments to growth. US total credit market debt owed is $57,982,000,000 or 327% of GDP (Chart 4). Meanwhile global debt as a % of GDP has surged from 162% in 2001 to 211% in 2013, an all-time high.
Debt default risks thus remain high. Greek default risks are once rising dramatically. Note the number of Greek sovereign debt defaults in the past two centuries is 6 (Chart 5). Indeed, Greece has spent 90 of the past 192 years in either default or debt restructuring.
Inflation rates in 2015 symbolize the ongoing struggle with the secular Deflationary forces of excess Debt, Deleveraging, Default risks, technological Disruption and Demographics. Swiss inflation has averaged zero in the past 7 years (Chart 6); the CPI of the Euro-area is currently deflating 0.6% YoY; and BofAML’s forecast for US inflation in 2015 is…0%.
A massive monetary policy response aimed at averting Deflation continues. The Fed’s monetary base now totals over $4 trillion (Chart 7); its balance sheet represents 23% of GDP. Global central bank assets now total $22.5 trillion, a sum larger than the combined GDP of the US and Japan.
Recent cuts by Australia, India, Canada, Brazil take the running total of global rate cuts since Lehman to 542 (that’s a rate cut once every three trading days). In 300 years of history, the Bank of England's base rate has never been lower than the 0.5% in the past 5 years (Chart 8). Zero Interest Rate Policies across the globe now support 83% of the world’s equity market capitalization.
Government bond yields have fallen to record lows. 52% of all government bonds in the world currently yield 1% or less. There is now $7.3 trillion of negatively-yielding government debt in the Eurozone, Switzerland & Japan. Spain’s government bond yield has never been lower in the past 200 years (Chart 9). It’s the same for the US, UK, Germany, France, Japan…and many more.
An era of maximum liquidity has also caused record high levels of equity prices (Chart 10). The current US stock bull market is the fourth longest and the fifth largest on record.
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Finally 2015 could see a bear market rally in gold (Chart 19), as investors look to hedge debt default, inflation/deflation risks.
More ominous would be a renewed bull market in gold reflecting a loss of faith in central banks.