BAML’s Chief Investment Strategist Michael Hartnett’s presentation from Grant’s Conference 2015 titled, “The Longest Pictures.”
A Picture Guide To Financial Markets Since 1800
The Longest Pictures illustrate long-run trends in the return, volatility, valuation and ownership of financial assets, interest rates and bond yields, economic growth, inflation and debt, as well as many other market and macro variables for the US, UK, Europe, Japan and Emerging Markets. For our 2015 edition, we have added a section to highlight BofAML’s “Transforming World” themes.
Today’s big secular investment trends are writ large across our more than 100 pictures: aging populations, rapid technological innovation, slow economy growth, excess debt, the threat of deflation, exorbitant central bank liquidity (Chart 1) and zero interest rates, record equity and bond prices, dormant financial market volatility, and rising geopolitical instability. We believe the asset-bullish effects of technology and central banks are the most dominant for investors in 2015.
This year’s Longest Pictures reveal the highest US equity prices since 1824, US stocks at 60-year highs versus Europe, bank stocks near 75-year relative lows, the lowest UK base rate since 1705, the lowest French bond yield since 1746, record peacetime debt-to-GDP levels, the infancy of today’s US dollar bull & commodity bear markets, the second strongest decade ever of small cap returns, and one of the largest spreads between European dividend and bond yields since 1925.
As Keynes said, “In the long run we are all dead”. Meanwhile, investors seeking big contrarian secular ideas should explore long positions in inflation assets, cash, volatility, Europe, utilities and banks, and short positions in bonds, small cap stocks, the US, Switzerland, and sectors related to the consumer (Table 1).
The Big Secular Trends in 2015
Sluggish global growth…
Nominal growth in the global economy is extremely low by historic standards. The US economy may be relatively “strong” in 2014/15, but US nominal GDP growth has averaged just 3.5% per annum in the past 7 years, well below its 6.6% average since WW2 (chart).
Inflation is extremely low by historic standards: the trend of US inflation is the lowest since the early-1960s (chart). Low inflation rates across the globe in 2015 reflect the ongoing struggle with the deflationary drags of excess Debt, Deleveraging, Default risks, technological Disruption and Demographics.
In Europe & Japan the genuine threat of deflation (Swiss inflation has averaged zero in the past 7 years – chart) has in recent years caused an unprecedented easing of monetary policy.
The War on Deflation has tuned global. A massive monetary policy response aimed at averting deflation in underway.
The Fed’s monetary base now totals over $4 trillion (chart). BoJ & ECB QE have pushed global central bank assets over $22.5 trillion, a sum larger than the combined GDP of the US and Japan.
Zero interest rates…
Since Lehman, global central banks have cut rates 550 times (that’s a rate cut once every 3 trading days).
In many economies the level of rates & bond yields is unprecedented. In 300 years of history, the Bank of England’s base rate has never been lower than the current 0.5% (chart).
Zero Interest Rate Policies across the globe now support 83% of the world’s equity market capitalization.
$4.1 trillion of global debt is now negatively yielding (0% or less).
And the explicit central bank policy of excess liquidity, and the absence of recession or inflation, has in recent years sedated financial market volatility (chart).
Wall Street boom…
Excess liquidity and weak, but crucially still positive, rates of economic activity have been a boon for Wall Street. With low demand for liquidity & credit on Main Street, asset prices have been the main beneficiary of QE & ZIRP (chart).
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