If 2017 has had a surreal feel to it, it is because it has so far been a “perfect encapsulation of 8-year QE-led bull market” according to BofA’s chief investment strategist Michael Hartnett, a “bull market” which has turned financial logic and fundamental economic relationships on their head, and replaced everything with copious money creation as the only marginal price setter.
– Tyler Durden
What are the characteristics of this “bull market”: Hartnett describes them as i) Lower-than-expected rates, ii) higher-than-expected EPS, iii) non-existent inflation = big cyclical returns for asset prices (e.g., EAFE equities & industrial metals); but thematic leadership of “scarce growth” (e.g., tech stocks) & “scarce yield” (high yield and EM debt) which remains the heart of the bull.
In order to spawn and rear this artificial bull market, central banks have unleashed an unprecedented degree of extraordinary monetary easing in recent years, revealed by lowest interest rates in 5,000 years. As BofA further calculates, we have seen 698 global interest rate cuts since Lehman bankruptcy, as well as $11.1 trillion purchases of financial assets by central banks since Lehman.
However, if it was central bankers’ intention to boost Main Street at the expense of Wall Street, they failed – as we warned would happen in 2009 – and as everyone now realizes. They did succeed, however, in created the biggest Wall Street boom in history: since the Global Financial Crisis ended in 2009, US equity market cap has risen $17.8tn…far, far outpacing the $2.6tn gain in US real personal income
However, like every other artifical, man-made thing, this “bull market” too, will come to an end. Here, the structural reasons are three, and all go contrary to what the inflation that the Fed is desperate to spawn: these are Debt, Demographics, and Disruption, and combined result in Deflation.
According to Hartnett, who first coined the equality, the 3 “Deflationary D’s” (excess Debt, aging Demographics, tech Disruption) cap inflation: “the slowdown in the growth of the working population is deflationary, as are new biotechnologies that may extend human life”. …