Bridgewater Calculates How Much Time Central Banks Have Left

Tyler Durden's picture

One of the key themes that have emerged in the past year is that, having loaded up their balance sheets with tens of trillions in various assets, central banks are "running out of road." While it is a topic extensively discussed on these pages, going all the way back to 2014, a good summary of the practical limitations on central banks comes from the following series of charts from Deutsche Bank.

The first slide looks at the bond transmission mechanism, namely that central banks have become increasingly aware of the adverse impact of low bond yields on financial sector profitability; another aspect is that European pension liabilities as a % of market cap are at a 10-year high – and above the levels they reached in 2008, when the European market cap was at half the current level. This means that absent an independent rise in inflation expectations, central banks’ attempts to push up nominal bond yields (via less QE or faster hikes) risks leading to higher real bond yields as well; the implication is that equities tend to de-rate when real bond yields rise (i.e. the discount rate increases).

There is a limitation from the standpoint of markets as well: European 12-month forward P/E, at 14.9x, is around 20% above its 10-year average; DB notes that its P/E model suggests that this deviation is fully accounted for by the fact that real bond yields are 180bps below their 10-year average; more troubling is the admission that any removal of monetary accommodation would likely lead to a sharp rise in credit spreads to reflect the deterioration in fundamentals (with default rates now at 5.7%), while equity strategist note that accommodative monetary policy has driven aggregate bond and equity valuations to the highest level since 1800

In the third slide, DB points out that while equities would likely react positively to any rise in nominal bond yields driven by higher inflation expectations (rather than by higher real bond yields), underlying inflation is only likely to accelerate if growth accelerates to be clearly above potential (i.e. the output gap closes). Meanwhile, weakening growth momentum in the US points to downside risks for inflation, and that since the Chinese RMB is still around 10% overvalued – and any renewed devaluation is likely to weigh on DM inflation expectations.

* * *

Ok fine, central banks are "running out of road", however at the same time they are terrified to rip (or even peel) the band-aid off. This has put the system in an unstable equilibrium: on one hand, central bankers - as even they admit - need to hand over the growth impulse over to governments, yet on the other hand, they terrified of even the smallest change to the status quo as they know they may undo some 7 years of "wealth effect" creation overnight.

How much longer can this charade continue?

While many would be quick to answer "indefinitely" that is not true, because with every bond, ETF or stock, purchased by central bankers they come to the point where they either monetize the entire lot, or they increasingly impair the functioning of the capital markets (just ask the dozens of marquee hedge funds that have shuttered in recent years).

Luckily, in a recent analysis, Ray Dalio's Bridgewater asked precisely this question, and even better, provided the answer to how much time is left until both the ECB and BOJ hit the limits on their existing programs.

As the chart below shows, assuming no changes to existing programs, the ECB and the BOJ, the two central banks most actively monetizing debt currently, have 8 and 26 months respectively, if they do no changes to their programs.

However, if incremental easing is layered on, like expanding the scope of their bond buying programs or purchasing equities even more aggressively, the total rises substantially. The final answer: 68 months, or just above 5 and a half years,  in the case of the ECB, were it to steamroll all political opposition and monetize virtually every possible bond (and 20% of the equity market), and 48 months, or 4 years, in the case of the BOJ.

Which means for those market participants who have already torn most of their hair out from participating in a centrally planned "market" where nothing makes sense, get ready because, the insanity may last another 4 or 5 years longer...

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abyssinian's picture

Less than 3 months I hope... but I knwo they can drag this nightmare out for years. 

Rusty Shorts's picture

An intractable mathematical problem masked by clever accounting tricks.

gatorengineer's picture

please replace clever with criminal.

eforce's picture

The real question is how long does DB have left? I suspect it's less than 8 months.

Stuck on Zero's picture

Generally, people start jumping off of the train when they can see then end of the track in sight.

tc06rtw's picture

 …  They’re all just waitin’ for the wealth to come back.

The Once-ler's picture

 For a very long time, the populace has demanded to be told pleasant lies…  the political class has been pleased and eager to oblige.
 At some point, truth will become vitally important -- When the populace insists on hearing truths, the truth will be told.

Doña K's picture

The old pinball games had a word at the end if you shook them too much. TILT

Well! TILT is coming sooner than 2020 as per his projection.

When you see gold moving in 50-100 increments, sell all stocks and bonds

Dr. Spin's picture

Kalimera koritsi mu,

Have you seen this?

The question for all of you my friends here at ZH:  How will this move in the last weeks, days, hours before the final bell rings on this collapse?

Keep popping back.  I will share my thoughts after I see what kind of response I get.


Haus-Targaryen's picture

Given the system can only continue with AG and AU suppressed, I figure this is another 4 or 5 years of stacking.  

I can totally live with that. 

WordSmith2013's picture
The FED Is Dead


Reign Of TheAlmighty Dollar Is Over
Pinto Currency's picture

Bridgewater does not account for the fact that investors will start piling into real assets long before their timeline reaches an end.

Check sugar, gold, silver, oil - they've already started and time is much shorter.

nibiru's picture

Oh, it is going to be a beauty.


It's such a blunt irony, that most people on ZH wouldn't like to see a crisis hitting (as natural as it sounds) but seeing how bad and fake the recovery was you can feel this unanimous aura of "crisis, bro, just come over and reset all this, sincerely Society".


For us it is a choice between playing a rigged game and try to believe what they all trying to sell or keep stacking.

RockySpears's picture


  You have stocks?



f_symbols's picture
f_symbols (not verified) RockySpears Sep 28, 2016 8:50 AM

My last pay check was $9500 working 12 hours a week online. My sisters friend has been averaging 15k for months now and she works about 20 hours a week. I can't believe how easy it was once I tried it out. This is what I do...

SilverRhino's picture

This is a headfake.  

They know the crash is coming much faster but have to lull the sheep to sleep for just a bit longer while they make their ways to the exits. 


Chris Dakota's picture
Chris Dakota (not verified) Doña K Sep 28, 2016 9:49 AM

Astrology shows it's 2020.

When Uranus enters Taurus it is a whole new financial system globally.

Jacksons Ghost's picture

Up the Bull's Ass, priceless Chris!

Chris Dakota's picture
Chris Dakota (not verified) Jacksons Ghost Sep 28, 2016 11:50 AM

Uranus entered Taurus last time in 1934.

Gold Reserve Act of January 30, 1934

Most likely this time around it will be a global digital currency.

Actually Uranus enters Taurus May 2018, drifts back into Aries for a bit, that would be the backlash to this currency.

Then in 2020 it is back in Taurus and Saturn is conjunct Pluto, the dollar is scrapped.

Remember the Economist magazine that called for a global currency in 2018.


Jacksons Ghost's picture



Black Moon in Scorpio, this Sept 30th?  What gives there?  Scorpio is pretty intense.

Antifaschistische's picture

Kind of like the Jackass movie where they're playing killer bee teatherball and one of the guys asks

"how many bee stings does it take to kill someone?".  

The "expert" on site says it takes about 100 stings.

The guy's buddy offers a simple, and brilliant solution. "count to 99 stings and then run", xx months?  no problem, just put all the sell orders in for T-one week and you'll be good.

Erek's picture

"...terrified of even the smallest change to the status quo as they know they may undo some 7 years of "wealth effect" creation overnight."


Holy jumpin' fuck! The whiners are afraid of losing the created wealth that went straight into their pockets while we the people didn't get jack shit from any "wealth creation". What a bunch of assholes.

CPL's picture

Sooner, like the other 15 times they'll just double down and print more.  That's all they know how to do and the central banks are incredibly experienced with it.

RogerMud's picture

"Generally, people start jumping off of the train when they can see then end of the track in sight."

Sure, but on a train the only person who can see the end of the track is the engineer. Passengers are blissfully unaware, sipping on a gin-n-tonic.

gatorengineer's picture

The analysis is highly flawed, this is on the current programs only.  The real answer is as long as people will provide tanglibe goods in exchange for Fiat the charade will continue.  WHen the Japanese Pensioner, Greek Retiree, and Dindu, here in the US cant buy Rice and Fish Heads, Oozo, and crack and bitches, then and only then will the music stop.  10 years of ugly at least.

By the way, Some should tell the Japs and the ECB that Douche has a few T in derivatives for sale at a good price.

hxc's picture

That's the whole point of the paper. Once these programs run out of assets to buy, they're going to be forced to change policy by starting to buy different shit, stopping buying shit, or starting to sell shit.

The Ram's picture

Yes! This is a point that has been sorely missed. The fact is that the world has billions of slaves who are willing to work for 'basic' subsistence, so fiat will go a long way even though the real value is always declining.  I don't think we are any where close, however, this is not to say the standard of living will not continue to collapse.  The bottom line is that if you are employed in the US today, you will work harder and harder for less and less.  Also, when a billion or so Asian production workers say, 'fuck this, this is not worth my time,' then you are likely to see the beginning of the end.  Until then, enjoy the ride.

DanDaley's picture

Average Chinese wage: about $5,000/year

Average American wage: about $50,000/year


The twain shall meet.

buzzsaw99's picture

that's my number as well. as little as ten minutes, up to ten years.

gatorengineer's picture

10 years out I figure we will be around 40T national debt, and that assumes we will have basically zero interest payments.  I also assume the the Real  Economy will be about the ninety percent or less of the size it is today.

TheVillageIdiot's picture

Concur on the very short term, but I think as of this morning it is less than a week. Given the disjointed events of Deutsche, CommerZ, Monte Paschi - which will effectively amputate the ECB from liquidity capability. It will be achieved not from printing more money but selling balance sheet assets - meaning shares, USTs etc. Leaving only their useless EU bonds.


BOJ will try to lever their newfound position in AU reserves and newly established AU exchange - but again - will not have the flexibility to increase liquidity to counter deficit funding and M1-M2 critical needs.


I think, given the acceptance of the Renminbi as a component of the SDR on Saturday, that Monday morning will be end of EU, Wednesday for BOJ, and possibly US Fed next Friday.

nibiru's picture

You last lines. China is really onto this and who knows how it will ricochet on flooded with immigrants EU.

MFL5591's picture

They have all the time printed money can buy, they will take till November 9th!

adanata's picture


The one thing not mentioned is the pressure that will ensue when China/Russia/India et al start trading in gold. That will knock fiat flat on its back. They know it's coming therefore I expect your prediction is probably more accurate. Let's compromise and say they may be able to keep the wheels on for two years or so.

wisehiney's picture

Fag dalio thought he was a hero.

BeanusCountus's picture

Figuring even Ray is talking his book. If he says there's 5 yrs or so left its because he wants to sell you stuff gradually for the next 2. Or maybe less.

Freddie's picture

I loathe 99.8% of hedge fund managers but this guy is smart and his track record over the past 25 years (?) is pretty amazing plus he is not tribe.

sessinpo's picture

His wife is of the vanderbilt family, no?

Yen Cross's picture

  I can hear the' S.S. Fedtanic' deck chairs shifting.

Charming Anarchist's picture

No worries!  I will tell the string ensemble to play louder!

wisehiney's picture

Gold will tell the tale.

Very soon.

Nowhere for you to hide scumbags.


SenselessPanic's picture

i got a fistfull of oxy's ready to eat when this shit all goes down

Jack Buster's picture

If anyone is contemplating suicide, think of those you leave behind......kill someone evil.......then eat the codone.

August's picture

Assisting one of the Masters of Our Universe onward to his next existential plane may prove to be so deliciously satisfying, that you may decide to stay on, and do it again and again!

But remember... don't get all sticky.