Five years after the global financial crisis began it’s remarkable “just how abnormal economies and financial markets remain”, says Deutsche Bank. Deutsche’s annual Long-term Asset Return Study is a stark reminder that “in many cases there are no historical precedents for what we are currently experiencing”.
Ten-year bond yields in the Netherlands have hit their lowest level since 1517 (the Dutch data go back furthest). The most important global benchmark for ten-year yields, the US Treasury rate, recently hit a record low. Meanwhile, “base rates have never been so low, for so long, for so many”.
The longest data series available on this front is the Bank of England’s. At 0.5%, the base rate is the lowest since the Bank’s inception in 1694 and below levels reached in wartime and during the Great Depression. On top of that, “the breadth of countries printing money is surely unique through economic history”. As a result of quantitative easing, there are now assets worth 25% of GDP sitting on the Bank of England’s balance sheet.
So interest rates and central-bank balance sheets remain at emergency levels. And scant progress has been made in cleaning up the mess caused by the credit bubble and crisis. For all the talk about working off our debt, “we’ve basically seen minimal to no growth and no deleveraging” in the developed world in the past five years.
A rise in government debt has more than offset some private-sector deleveraging. As a result, overall debt (public and private) as a proportion of GDP has only declined in Australia and America since the end of 2007, and only barely. In the latter case, the debt load has eased from 348% of GDP to 345%, having peaked in 2009 at 366%.
With debt levels and money-printing activity at unparalleled highs and many financial indicators at multi-century highs or lows, “we really are embarking on a journey into the unknown”, as the report puts it. Nobody knows if all this will end in an era of high inflation – perhaps hyperinflation for some – or deflationary defaults and debt restructurings, or just Japanese-style stagnation.
Given the uncertainty, investors should snap up high-quality ‘real’ assets on dips. So higher-dividend, quality equities remain Deutsche’s “asset class of choice”. Long-term investors should be eyeing up Europe, which looks “cheap to very cheap” relative to history and to America.