An interesting report yesterday from Bank of America Corp looks into who has been the big beneficiary from the easing of interest rates over the last several years and the Quantitative Easing (QE) put in place by central banks. The report says that there have been 606 interest rate cuts globally since the collapse of Lehman Brothers Holdings Inc. and over USD 12.4tn of asset purchases since the rescue of Bear Stearns Cos.
The strategists go on to establish that the big winner from QE and low interest rates has been Wall Street with the loser being Main Street. The report mentions that for every job created in the US this decade companies spent $296,000 buying back their own stock. This results in a big win from investing in stocks. Broadly, $100 invested in a portfolio of stocks when the Federal Reserve began their QE would now be worth $205 while a wage of $100 over the same period is now only worth $114. This goes some way to show the struggle the Fed have on their hands to reach their 2% inflation target; wage growth is barely breathing.
The report also looks into property markets and calculates that US prime commercial real estate gained 168 percent over the period while US residential property gained just 16 percent, again not helping build “Joe public's” ability to consume.
“Zero rates and asset purchases of central banks have, thus far, proved much more favourable to Wall Street, capitalists, shadow banks, unicorns, and so on than it has for Main Street, workers savers, banks and the job market” the BofA team wrote.
With further central bank QE expected from the ECB and the Bank of Japan the impact could be a stronger US dollar and weaker commodity markets as QE does little to add to demand they argue. “Wall Street boom, Main Street bust is one central banks should try to avoid during 2016, the markets have not priced in a quantitative failure.” they added.
The report comes as the ECB announced its bond buying for October which shows they bought more than the targeted EUR 60bn per month with purchases of EUR 63.7bn. Holdings of sovereign and agency debt rose EUR 52.2bn, holdings of covered bonds was up just under EUR 10bn, and ABS was up a further EUR 1.6bn. On October 22nd ECB President Mario Draghi said staff had been ordered to craft proposals to add to the purchase programme, possibly to be agreed at the next monetary policy meeting on December 3rd.
Wonder if Mario has read the Bank of America report.