With $12 Trillion of QE, What Have We Achieved?

We’ve tried everything—negative interest rates globally resulting in nearly $10 trillion in negative-yielding bonds, $12.3 trillion of money printed, and 654 interest rate cuts since 2008. 

All we have to show is economic growth that’s unlikely to pass 2 percent this year, little inflation, and debt that couldn’t be sustained except through the aforementioned interest rates. 

Is this the best we can do?

Investors Are Witnessing History Unfolding

Michael Hartnett, of Bank of America Merrill Lynch, put the previous statistics together, and he feels that investors are seeing history being made—and not in the right way. 

He has, in fact, coined the term quantitative failure, writing that after many years of financial depression and intervention by the central banks, all we have to show is poor economic growth, and investors increasingly becoming fed up and disillusioned with quantitative easing.

The following graph from 2014 illustrates the difference between growth on Wall Street and growth on Main Street in recent years:

Bank of America Merrill Lynch

There is almost no economic growth happening during the second-to-longest bull market for the stock market. 

Even as banks engage in extensive quantitative easing—backed by zero and negative-interest-rate policies—the economy is not recovering to nearly the degree that the average person might hope.

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Quantitative Easing Is Not Treating All the Symptoms, Let Alone Curing the Disease

Hartnett said that the dose of quantitative easing, zero-interest-rate policy, and negative-interest-rate policy had certainly stimulated Wall Street. 

Still, a huge number of positive outcomes have just not materialized. 

The bull market is weakening; there has been no Great Rotation from bonds into stocks; and rates, growth, and asset allocation have not normalized.

And that’s not even considering the lack of economic growth in spite of all these efforts on the Central Banks’ part.

The World Bank Has Revised its Expectations for GDP in a Downward Direction:

• Its 2016 global GDP estimate has reduced from 2.9% to 2.4%
• For advanced economies, the estimate has dropped from 2.2% to 1.7%
• For the United States, the estimate has dropped from 2.7% to 1.9%
• Growth in Japan, where there have been trillions in QE, is predicted to be 0.5%
• The Euro area—also practicing QE—is projected to be 1.6 percent

GDP Has Been Growing Very Slowly

CNBC

The above chart shows how exceedingly limited growth to GDPs around the world has been in the last few years.

These Growth Expectations Have Made Life Difficult for the Fed

Ideally, the Fed would like to bring rates back up to a more reasonable level. 

They’ve kept the rate near zero for more than seven years and only just started hiking in December of 2015. 

However, between a lackluster jobs report last month and the possibility of Great Britain leaving the European Union and thus wreaking havoc in the market, they are unlikely to go through with another hike at their next meeting.

How Will History View All of These Measures?

Apparently, the Central Bank cannot create growth using its current policies. 

What then, will history think of the Fed not aborting their attempts at emergency support sooner?  

Of the trillions of dollars’ worth of global quantitative easing, the Fed has been responsible for $3.7 trillion.

Jim Paulsen of Wells Capital Management predicts that history will notice how many times the Fed had the opportunity to give up and begin normalization, and wonder how things might have turned out differently had it done so. 

He thinks that continuing to hold a stance that is supposed to spur growth and yet isn’t doing so is probably doing more harm to confidence than good to the economy.

As for Market Volatility, Hartnett Blames Several Sources:

• Rate hikes from the Federal Reserve Bank and more quantitative easing in Japan and Europe
• A profits recession that has continued to be in decline for five quarters in a row
• Valuation issues

The Great Rotation Has Not Come to Pass

B of A Merrill Lynch and others once predicted that there would be a rotation of investors’ resources from bonds to stocks, but investors have not cooperated with this prediction. 

Apparently, investors avoid risk in spite of the fact that the stock market has been bullish for quite some time.  

More than $106 billion have been taken out of equity funds this year, while bond funds have gained $75.8 billion in new funds.

Debt Has Also Gotten Completely Out of Hand

Bill Gross of Janus Capital has compared the $9.9 trillion worth of negative-yield bonds to a supernova waiting to explode, and others are quoting him on it.

In Spite of Their Obvious Lack of Efficacy, the Accommodative Policies Are Expected to Continue.

According to the Chicago Mercantile Exchange’s FedWatch tracker, December alone this year has a greater than 50% chance of a rate hike:

Paulsen, Meanwhile, Thinks that Normalization is Just What the Doctor Ordered for the Economy

He says that a hike would essentially be the FOMC expressing confidence that the economy can take some tightening without going into a death spiral. 

He points out that we have never tried giving confidence a booster shot before, and that he’s not convinced we shouldn’t give it a try now. 

After all, the existing central bank policies are clearly not working to grow the economy.

Conclusion

There remains a significant discrepancy between Wall Street and Main Street, suggesting that quantitative easing and zero-to-negative interest rates aren’t having the desired effect on the economy. 

Whether it’s fair to call it a quantitative failure or not remains a matter of opinion, but there are some critical areas in which QE clearly has failed. 

Central banks are either powerless to fix the economy or have not yet stumbled across the correct methodology to do so.

Either way, one thing is for certain. 

The current situation cannot continue indefinitely, and we need to keep seeking new solutions to the deficits in the global economy.