Highlighting the astonishing history investors are living through today, a Bank of America Merrill Lynch report states that interest rates are at their lowest level in 5,000 years. Michael Hartnett and team point out in their June 7 research piece titled “The Longest Pictures” that on April 28, the bull market in U.S. stocks became the second-longest of all time.

Interest rates: debt and deleveraging thwart war on deflation

Hartnett and colleagues provide a pictorial guide to the financial markets since 1800. The report highlights that the Fed’s December rate hike signified the first hike in almost a decade, ending the longest run of unchanged policy since the Fed was founded in 1913. The “Longest Pictures” report illustrates how unprecedented monetary stimulus in recent years has failed to deliver recovery, how the global “War on Deflation” has been retarded by excess debt, aging demographics, and technological disruption, and why the current Fed hiking cycle could be “one & done.”

The BAML analysts point out that since the Global Financial Crisis, the “War on Deflation” has been fought exclusively with monetary policy encompassing 654 rate cuts since the Lehman bankruptcy and $12.3 trillion in purchases of financial assets by global central banks:

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The report highlights that technological disruption thwarts the War on Deflation. For instance, the analysts argue that the increase in life expectancy via biotech and genomics puts upward pressure on saving for a longer retirement and increases health care costs.

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The BAML analysts point out that in the past four years, bond yields have remained stubbornly low in the U.S., while government bond yields in Japan, the Eurozone and Switzerland have, in the past year, all dropped into negative territory for the first time ever:

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The BAML report notes that the global “deflationary expansion” has been very positive for U.S. assets relative to RoW. The report highlights that U.S. stocks are at 60-year highs Vs Europe:

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Wall Street boom; Main Street bust

Hartnett and team argue that monetary policy has failed to deliver the knockout blow to deflation. They point out that while Wall Street has boomed, Main Street has not, with wages continuing to drop as a percentage of GDP. The BAML report argues that income inequality is unlikely to be solved through a further sustained rise in asset prices. The analysts believe investors must start to discount a “War on Inequality” through other means such as regressive taxation, trade protectionism and helicopter money.

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With “Longevity” as a key BofAML Transforming World investment theme, the report states that the world will experience “peak youth” in 2020 for the first time in human history, with the number of persons aged 65+ expected to outnumber children under age 5. The report points out that the aging global population has thwarted the War on Deflation in recent years. The BAML analysts note that aging populations will increase the need to save for a longer retirement and lead to higher health care costs:

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