2016 is shaping up to be the year that everyone finally comes to terms with the fact that the monetary emperors truly have no clothes.
To be sure, it’s been a long time coming. For nearly 8 years, market participants and economists convinced themselves that the answer was always “more Keynes.” Global trade still stagnant? Cut rates. Economic growth still stuck in neutral? Buy more assets.
It was almost as if everyone lost sight of the fact that if printing fiat scrip and tinkering with the cost of money were the answers, there would never be any problems. That is, policy makers can always hit ctrl+P and/or move rates around. But in order to resuscitate anemic aggregate demand and revive inflation, you need to tackle the core problems facing the global economy - not paper over them (and we mean “paper over them” in the most literal sense of the term).
Well late last month, central banks officially lost control of the narrative. Kuroda’s move into negative territory reeked of desperation and given the surging JPY and tumbling Japanese stocks, it’s pretty clear that the half-life on central bank easing has fallen dramatically.
And so, as the market wakes up from the punchbowl party with a massive hangover, everyone is suddenly left to contemplate “quantitative failure.” Below, courtesy of BofA's Michael Hartnett is a bullet point summary of 8 years spent chasing the dragon... and a list of the disappointing results.
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Whether the recent tipping point was the Fed hike, negative rates in Europe & Japan, or simply the growing market dislocations and macro misallocation of resources and wealth, the deflationary theme of “Quantitative Failure” is stalking the financial markets. A multi-year period of major policy intervention & “financial repression” is ending with weak economic growth & investors rebelling against QE.
In short, monetary policies of...
- 637 rate cuts since Bear Stearns
- $12.3tn of asset purchases by global central banks in the past 8 years
- $8.3tn of global government debt currently yielding 0% or less
- 489 million people currently living in countries with official negative rates policies (i.e. Japan, Eurozone, Switzerland, Sweden, Denmark)
- -0.92%, the most negative yield in the world (2-year Swiss government bond)
...have in 2016 led to a macro environment symbolized by...
- BofAML’s Chief US Economist Ethan Harris cutting potential trend real GDP growth in the US to 1.75%
- inflation expectations in both the US & Europe dropping below 2008 levels & a global profits recession
- one of the most deflationary recoveries of all-time: in the past 26 quarters the nominal GDP of advanced economies has grown 11%
and a significant impact on Wall Street...
- a bear market in equities (median stock in ACWI is down 28% from its highs; 45% of global stocks (1123) are down >30% from highs)
- bear market in commodities (10-year rolling return from commodities is currently -5.1%, the worst since 1938) & credit markets
- $686bn of market cap loss for global banks since Dec 15th – the day before the Fed hiked - and worsening global liquidity conditions, which in-turn will likely cause bank lending standards to tighten further
- and, most conspicuously, falling bank stocks and falling bond yields suggesting that 6 years of QE has failed to arrest deflation.
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What comes next is anyone's guess but with China's credit bubble about to burst in spectacular fashion, we wonder how central banks plan to combat the ensuing hit to the global economy. After all, their counter-cyclical policy room is not only exhausted, they've now taken the easing bias so far into the monetary twilight zone that in Japan's case, things are starting to backfire and are becoming self referential (see the recently canceled JGB auction).
Throw in the fact that $12.3 trillion in asset purchases has impaired liquidity across markets and you have the conditions for what could turn into a truly harrowing year not only for Wall Street, but for Main Street as well. The same Main Street that was allegedly saved by a "courageous" Ben Bernanke who started us all down this road 8 long years ago.