Between 2008 and 2015, central banks pretended that they had fixed the economy.

In 2016, they’re starting to admit that they haven’t fixed much of anything.

The current head of the Bank of England (Mark Carney) said last week:

The global economy risks becoming trapped in a low growth, low inflation, low interest rate equilibrium.  For the past seven years, growth has serially disappointed—sometimes spectacularly, as in the depths of the global financial and euro crises; more often than not grindingly as past debts weigh on activity ….

This underperformance is principally the product of weaker potential supply growth in virtually all G20 economies.  It is a reminder that demand stimulus on its own can do little to counteract longer-term forces of demographic change [background] and productivity growth.

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In most advanced economies, difficult structural reforms have been deferred  [true, indeed]. In parallel, in a number of emerging market economies, the post-crisis period was marked by credit booms reinforced by foreign capital inflows[including from central banks themselves], which are now brutally reversing….

Since 2007, global nominal GDP growth (in dollars) has been cut in half from over 8% to 4% last year, thereby compounding the challenges of private and public deleveraging ….

Renewed appreciation of the weak global outlook appears to have been the underlying cause of recent market turbulence.  The latest freefall in commodity prices – though largely the product of actual and potential supply increases – has reinforced concerns about the sluggishness of global demand.

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Necessary changes in the stance of monetary policy removed the complacent assumption that “all bad news is good news” (because it brought renewed stimulus) that many felt underpinned markets [Zero Hedge nailed this].

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As a consequence of these developments, investors are now re-considering whether the past seven years have been well spent.  Has exceptional monetary policy merely bridged two low-growth equilibria?  Or, even worse, has it been a pier, leaving the global economy facing a global liquidity trap?  Can more time be purchased?  If so, at what cost and, most importantly, how would that time be best spent?

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Despite a recent recovery, equity markets are still down materially since the start of the year.  Volatility has spilled over into corporate bond markets with US high-yield spreads at levels last seen during the euro-area crisis.  The default rate implied by the US high-yield CDX index is more than double its long-run average [background here and here].  And sterling and US dollar investment grade corporate bond spreads are more than 75bp higher over the past year.