First Deutsche Bank, then Citi, and now Bank of America.
Following Wednesday’s disastrous FOMC statement and Janet Yellen press conference, we predicted that it is only a matter of time before we get a return of the “Policy Failure” narrative.
Sure enough, here is BofA’s Michael Hartnett not only validating this forecast just days later, but also laying out the framework for a disturbing new outlook, one which looks at a world in which central banks have lost the “war against deflation”, and what will happen once Quantitative Failure spreads from Europe and Japan to the US.
From BofA’s Michael Harnett
From an absolute return perspective, as opposed to a relative return perspective, US equity & global credit prices have been stronger than the above fundamentals imply. This is due to the Mountain of Cash (i.e. bearish sentiment) & the fact that every interest rate in the world has been plunging toward zero. Global government bonds are annualizing 23% YTD total returns, the highest in 30 years (Chart 5). And currently, $9.7tn of global bonds are yielding <0%.
As stated before the inability of bank stocks and bond yields to rise is due to the failure of monetary policy to engender sustained economic growth. Despite unprecedented central bank policies of QE, ZIRP & NIRP, 655 rate cuts since the Lehman bankruptcy, $12.3tn of central bank financial asset purchases, prospect of a “one & done” Fed, central banks have lost the “War against Deflation”. They have failed to stimulate animal spirits depressed by the 4D’s of excess Debt, financial Deleveraging, aging Demographics and technological Disruption.
This changes if Quantitative Failure spreads from Europe & Japan to the US. A rise in US bank CDS and/or a dive in assets related to consumer & housing credit would be very negative for global asset prices in our view. Note the new whispers of a peak in the US consumer credit cycle which, if true, at a time of zero rates in an $18 trillion, consumer-led economy would be concerning.
