$12 trillion of QE and the lowest rates in 5,000 years … for this?

The numbers are daunting if not shocking: $12.3 trillion of money printing, nearly $10 trillion in negative-yielding global bonds, 654 interest rate cuts since Lehman Brothers collapsed in 2008.

Those actions have resulted in global growth in advanced economies that likely won’t eclipse 2 percent this year, inflation levels that remain well below targets and a burgeoning global debt problem that remains unresolved, withstood only through the lowest interest rates the world has seen in 5,000 years.

Put together, it all amounts to the “astonishing history investors are living through today,” said Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch who compiled the aforementioned statistics.

It’s a history of anemic economic growth during the second-longest bull market for stocks. While banks have aggressively pushed quantitative easing along with zero and negative interest rate policies, the results have been uneven.

“The cocktail of QE, ZIRP and NIRP has been a potent one for Wall Street and the price of financial assets in the past eight years,” Hartnett said in a report for clients, later adding, “And yet the bull market has waned in the past 18 months, there has been no ‘normalization’ of growth, rates and asset allocation, no ‘Great Rotation,’ and bonds and stocks have been trapped in a Twilight Zone of volatile trading.”

That has come amid little growth despite all the accommodation.

The World Bank recently slashed its expectations for gross domestic product, cutting its 2016 global estimate to 2.4 percent from 2.9 percent, from 2.2 percent to 1.7 percent for advanced economies and from 2.7 percent all the way down to 1.9 percent for the United States. Growth in Japan, despite trillions of QE, is projected at just 0.5 percent, and the euro area, which also has been actively easing, is put at 1.6 percent.

Declining growth expectations have put the U.S. Federal Reserve in a precarious position.

Central bank officials want to return U.S. rates to a normal level after going more than nine years without a hike and more than seven years of keeping the rate anchored near zero, before hiking in December 2015. After a weak jobs report for May and fears that a British exit from the European Union could spark global and market turmoil, the Fed is unlikely to raise rates at its meeting later this week.

History, though, may wonder at all the fuss. With central bank policies ineffective at driving growth — the Fed’s own economists have acknowledged as much — there’s reason to wonder why the Fed didn’t end the emergency measures sooner. The U.S. central bank has been responsible for about $3.7 trillion of the global QE post-Lehman Brothers, taking its balance sheet to $4.5 trillion.

“One of the things that will get a lot of attention is they had the opportunity at various times to start the normalization, and how different the outcome might have been,” said Jim Paulsen, chief market strategist at Wells Capital Management. “There’s a good argument that could be made that there’s more damage being done to confidence than there is positive to fundamentals by maintaining the stance.”

Hartnett attributed the market volatility to policy mistakes, including a potential rate hike or two this year from the Fed and “quantitative failure” from central banks in Japan and Europe; a profits recession that has seen five consecutive quarters of negative growth, including a drop of 4.9 percent in the second quarter; and valuation issues.

The “rotation” of investor cash from bonds to stocks — forecast by Bank of America Merrill Lynch and others — has not materialized, as investors remain wary of risk assets despite outsized returns over the past seven years. Equity funds, in fact, have seen more than $106 billion in outflows this year, compared with $75.8 billion that has come into bond funds.

Debt has exploded as well, with $9.9 trillion in negative-yield bonds representing a “supernova” ready to “explode,” in the words of bond guru Bill Gross at Janus Capital.

Investors expect the Fed and other central banks to hold fast to accommodative policies, despite their waning effectiveness.

The Federal Open Market Committee meets Tuesday and Wednesday with the market expecting just a 2 percent chance of a hike. No month until December has better than a 50 percent chance, according to the CME’s FedWatch tracker.

Paulsen thinks the Fed needs to move ahead with normalization despite some recent hiccups, as it would send a positive message that the FOMC believes the economy has stabilized enough to withstand some modest tightening.

“We’ve never tried to treat confidence, and I don’t know that we shouldn’t at least give it a stab,” he said.

Jeff Cox
June 15, 2016
CNBC