How central banks have distorted the world

9 charts that give us a long-term view…

There’s such a surfeit of information nowadays that sometimes it can be hard to put current financial trends into perspective.

Yet taking a long-term view is vital when making investment decisions.

Thanks to BofAML’s Michael Hartnett, we can do just that – with some amazing charts, some of which go back fully 11,000 years!

I’ve picked nine of these to share with you today. So let’s get started…

First, global interest rates. You’re probably aware that these are well below the norm. But in fact they’re currently at 5,000-year lows!


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Why has this happened? It’s almost entirely due to central bank policies.

Cue the likes of Mark Carney at the Bank of England, along with his equivalents at the US Federal Reserve, the European Central Bank and the Bank of Japan.

Panicked by the great financial crisis of 2008-09, they’ve forced down long-term rates via debt monetisation, otherwise known as QE (quantitative easing).

This has involved buying up financial assets (mainly government bonds) which in turn has driven up bond prices and lowered yields. Those central bankers have also imposed ultra-low short-term interest rates.

As a result, the balance sheets of central banks – which carry the debt that those institutions ‘owe’ to the world – have mushroomed.

Here’s the expansion in the US Fed’s monetary base. That’s “the sum of currency held by the public and transaction deposits at depository institutions”, says the Fed’s website.

In other words, it’s cash that’s used by ordinary Americans. This next chart shows the growth in the monetary base brought about by the Fed’s three QE programmes.


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Scary or what? Inflation is often described as too much money chasing too few goods. Surely, you’d think, that sort of surge should guarantee higher prices.

But it hasn’t. Here’s the annual change in America’s consumer price index (CPI). For the moment, as you can see below, there’s hardly any change.


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So why hasn’t the Fed’s policy worked?

Answer: debt is already too high. As Hartnett notes on Zero Hedge, “debt levels remain high, as high as they have ever been in peacetime for the US government. Banks continue to deleverage. Savings [are] thus encouraged, borrowing discouraged, and ‘animal spirits’ of household & corporate sectors repressed.”


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That’s not the only reason, though. Technological developments have played their part in cutting prices.

How about this for a stunning chart of mankind’s progress:


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To be fair, that’s positive stuff.

But while it hasn’t caused consumer price inflation, QE has had a major effect on many asset values as surplus cash has leaked into financial markets.

Remember that bond buying by central banks? This has had a dramatic effect on what was already a big bull market in bonds that began in the early 1980s.


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Corporate bond owners – not just in the States – have never had it so good. And the flipside is that as prices have risen, yields have fallen. Companies can now borrow at rates they can’t have dreamed about 30 years ago.

QE has also boosted share prices. In fact it’s powered the second-longest-ever bull market in US stocks. That has rippled all around the world as well, pushing up global equity markets.


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But not every asset has joined the QE-inspired party.

If you’ve been ‘long’ – i.e. heavily invested in – commodities over the last seven years while being out of stock markets, you’ll not need reminding what a horrible time you’ve suffered. This, by the way, is another reason why CPI hasn’t taken off.


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There’s a very interesting perspective here for contrarian investors.

So what now?

I’d just like to put up one final chart.


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The message from this is very clear. While stocks and bonds (the Eq&Bond blend above) have soared, there have been some major long-term losers – those of us who are wage slaves!

In the States, the percentage of the economy that’s ended up in peoples’ pockets has dropped steadily. It’s one reason why share prices have gone up so much, as lower employment costs mean higher profits.

And there are lots of other factors in the mix such as technology and productivity. But this decline could soon reverse, in particular if consumer prices finally pick up and employees’ pay demands escalate.

History suggests that wouldn’t be a good omen for financial markets. So keep a close eye on how fast wages rise. They could be signalling the next bear market in both stocks and bonds.

Again, many thanks to BofAML’s Michael Hartnett for these charts.





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