A Problem Emerges: Central Banks Injected A Record $1 Trillion In 2017... It's Not Enough

Tyler Durden's picture

Two weeks ago Bank of America caused a stir when it calculated that central banks (mostly the ECB & BoJ) have bought $1 trillion of financial assets just in the first four months of 2017, which amounts to $3.6 trillion annualized, "the largest CB buying on record." 


BofA's Michael Hartnett noted that supersized central bank intervention which he dubbed a "liquidity supernova" is "the best explanation why global stocks & bonds both annualizing double-digit gains YTD despite Trump, Le Pen, China, macro..."

To be sure, Hartnett's "discovery" did not come as a surprise to regular readers: back in October 2014, Citi's Matt King calculated that it costs central banks $200 billion per quarter to avoid a market crash, or as he put it:

For over a year now, central banks have quietly being reducing their support. As Figure 7 shows, much of this is down to the Fed, but the contraction in the ECB’s balance sheet has also been significant. Seen from this perspective, a negative reaction in markets was long overdue: very roughly, the charts suggest that zero stimulus would be consistent with 50bp widening in investment grade, or a little over a ten percent quarterly drop in equities. Put differently, it takes around $200bn per quarter just to keep markets from selling off.

Today we showed just what central bank buying looks like in practical terms when we demonstrated that the Swiss national Bank had purchased a record $17 billion in US equities in just the first quarter, bringing its total US equity long holdings to an all time high above $80 billion...

... in the process soaking up nearly 4 million AAPL shares in the first 3 months of the year.


On the surface, these sums appear vast; however in the latest weekly report by Deutsche's Dominic Konstam, the credit strategist finds something even more troubling: $1 trillion in central bank liquidity YTD - or roughly $250 billion per month -  is not enough.

The reason is two-fold: on one hand there is the stock of existing central bank assets that keeps growing at an exponential pace, which implies that central banks have to monetize ever more assets just to keep the system from becoming unstable, or "running to stand still" as Citi recently framed the growing problem; on the other hand, offsetting the "organic" expansion of central bank balance sheets is the decline in FX reserves among liquidity managers, the most famous recent episode of which is China's $1+ trillion drop in reserves which started in mid-2014 and has yet to conclude. Recall that global liquidity is defined in dollar terms "as the sum of all FX reserves, the fed’s balance sheet and the central bank balance sheets of the Eurozone, Japan, UK, China, India, Russia, Saudi, South Africa and Brazil."

So what happens when in addition to central bank liquidity one adds various other global liquidity components? Here is Konstam's troubling discovery:

Having accelerated for four straight quarters from 2015q4 to a local peak of +5.0 percent in 20167q4, q1 saw the first slowing to a year over year growth rate of just 2.23 percent. In absolute terms it was $29.5 trillion, almost unchanged from 2016q3. The main culprit (again) was FX reserves that sharply dropped by almost 1 percent versus a year ago, based on February data.

Worse, the Deutsche Banker forecasts that "the weak patch for global liquidity growth is likely to extend through to 2017q4 where even based on flat FX reserves ahead of ECB or Fed balance sheet changes, the current rate of ex Fed central bank liquidity growth should lift liquidity growth back to slightly over 5 percent year over year."

This is a problem because "5 percent is not a lot at a global level. It doesn’t accommodate faster nominal growth. And as the chart below indicates is consistent with relatively subdued bond yields. In 5y5y US Treasury terms a 3 percent rate seems a little elevated as is and is pretty much discounting liquidity growth closer to 10 percent, a level last seen in 2013."

But the biggest disconnect between liquidity and implied "fair value" is once again to be found in stocks:

Global equities tell a similar story but even more starkly; they appear to be discounting liquidity growth over 10 percent. This is another example of how the equity market seems to be discounting something very different from the bond market.

Why did Konstam make this analysis? Because, as he writes in his intro, "more than ever before in this tightening cycle we would suggest that the Fed faces the most delicate of balancing acts. There seems to be an almost automatic convergence on a June tightening with September also a possibility and then some kind of balance sheet adjustment. The ECB is widely viewed to be not far behind in terms of another taper and the possibility of an eventual depo rate increase (we think 15 bps priced by August 2018) as a quid pro quo for QE extension."

In other words, just like Hans Lorenzen from Citi warning one week ago, the market is blissfully ignorant of the threat that imminent global central bank tightening poses on risk assets, a risk neither ETFs, nor algos, nor CTA have considered.

Konstam's conclusion is that there are two outcomes: either asset prices drops, or central banks will ultimately be forced to inject even more liquidity. Here is his take on the former:

There are a couple of ways in which these disconnects can be resolved. But until they are, global central banks need to tread warily. One resolution is of course equities retreat and yields decline, recognizing the dearth of liquidity. Recently we have used broader liquidity indicators in the context of nominal output for the US, Europe, China and OECD in general to demonstrate that there is falling “excess” liquidity that always implies some kind of loss in real output momentum with a lag. This doesn’t necessarily mean outright declines in output growth but it would, for example, be consistent with weaker PMIs and typically puts a ceiling of where longer term yields can rise to. Specifically we find that yield momentum tends to decline implying, specifically for the US that 10s might be capped around the 2 ½ percent level with downside potential closer to 2 percent on a moderate loss of upward yield momentum.

And then the latter, which can be resolved by either QE4 (or more) or a sharp drop in the USD.

Another way we could see resolution would be an accelerated move higher in liquidity. This seems unlikely in terms of positive new accommodation by central banks, absent deterioration in observed growth or inflation. However it is possible if the dollar were to weaken which would reflate the dollar value of existing liquidity but also probably contribute to a faster recovery in FX reserves. The problem is that dollar rate correlation has remained stubbornly tight although as we have argued since Trump’s election, one senses that that correlation is less assured.... Recent weakness in the likes of iron ore, copper and oil are concerning. The weakness that we have seen in DXY, especially reflecting the European currencies, seems more to do with better growth expectations in Europe and relief around France politics. This will help global liquidity at the margin but Europe can ill afford a very strong euro and we think of this as more an idiosyncratic adjustment to the dollar rather than a US policy induced regime shift that sustains higher inflation."

The bottom line, however, boils down to the following chart first shown by Citi last September, demonstrating that the marginal cost of central bank liquidity injection is now negative...

... and is located in the lower right quadrant, something both markets and policy makers realize.

Which means that when stocks realize just how insufficient the record $1 trillion in central bank liquidity has become, central banks - which have stepped into every single market correction over the past 7 years with some "liquidity supernova" - will, for the first time since the financial crisis - be out of tools... something Janet Yellen appears to have realized some time ago.

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Yen Cross's picture

  Thanks for the charts Tyler. The ECB makes the Fed look like pikers.  Sell the euro<

max2205's picture

Seems like they are really serious about proping up the markets...

Arnold's picture

A Trillion here, a Trillion there,
Pretty soon it adds up to real money.

--Ole Skool

Stuck on Zero's picture

You think this is propping up markets. It could also be considered a movement toward government ownership of the means of production. Communism.

Mr 9x19's picture

how long siiiiiir ???

- shut up and keep paddling


Sudden Debt's picture

They need inflation and inflation is killing Europe right now.

I can't imagine how people with a basic salary can survive these days.


ArgentoFisico's picture

If they really wanted inflation they would give the QEs money to the people and not the banks

Chupacabra-322's picture

Is now when they come for the 401k haircut part two?

9Ball's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://bit.ly/2jdTzrM

yogibear's picture

Print faster and faster. If $1 trillion doesn't keep double until something happens . Keep doubing the QE.

RightEdge's picture

Gonna need to double it. Then it will work.

2_legs_bahhhhhd's picture

Look at those pathetic fucks fawning all over that leather bag bail out queen from the International Mother Fuckers while Janet gets no love at all.....lol

peddling-fiction's picture

She must have more going for her than her numerology skills.

harrybrown's picture

Christopher Legard is a zionist jew... thats what she has going for her/him

Us mere goyim... well we'll see.

Death to the Money Changers!

booboo's picture

Buying paper with fairy farts

bugs_'s picture

the main problem is they never "inject" the money where it will do any good

FIAT CON's picture

The real problem is they are injecting paper and ink, there is no real Money anymore, except gold and silver

GRDguy's picture

In the world's Madoff ponzi economy, NO one can be allowed to default,

or everything comes to a halt. One domino can not be allowed to fall.

Watch how they make sure no one loses on Puerto Rico's bonds.

Endless rise in paper promise creation, until it ends.

RawPawg's picture

Monday Close...Green

just more of the same old,same old

jamesmmu's picture

Is This The Beginning Of A Nightmare That Will Rob Us Blind?  Healthcare Company Empties Bank Accounts.


cossack55's picture

Well that sucks.  I am sure it can never happen to BitCoin

Turin Turambar's picture

Triple the number of keystrokes.  No problem. Worst case scenario, a few people at the cb's will get disability pay for carpel tunnel syndrome.  :-O

OCnStiggs's picture

The Elites try to tell us that Socialism works, we just need to "do it smarter." Riiiight.

I guess in an attempt to prop up this elaborate Elite Ponzi scheme House of Cards and Scam-o-rama, they'll stop at nothing. Including paying their MasterCard bill with their Visa Card. What could possibly go wrong?


red1chief's picture

Rich elite: Socialism for me, capitalism for you!

Phillpots's picture

Really really bored of this crap. Are you not?

CHX13's picture

Indeed it's getting old. Only question is how much longer and huch much moarer till it all blows up in their faces ?

Yen Cross's picture

  It looks like the SNB is going to have to sell alot more chocolate, and watches to get that GDP higher.

  Japan is a yuge car producer and car sales are tanking.

Swamp Yankee's picture

Long on cheap booze and cigs.

Miffed Microbiologist's picture

We were at our friends house wine tasting. He's been a vintner for 10 years, his boutique winery is family owned and operated. Finally after the wine had flowed sufficiently he just lost it. You two have it all. Good jobs, a 401k and a future retirement awaiting! All I have is this damn penny ante winery and 50 barrels of wine. Fuck, I'm such an idiot!

Mr and I looked at each other an nearly blew wine out our noses laughing.


CHX13's picture


Arnold's picture

Well, they haven't yet worn out the Philosopher's Stone that turns air into fiat.

It still tickles me in thinking,
now that you fuckers own it all, what are you going to do with it?

CHX13's picture

The Philosopher's Stone can turn any substance into gold, don't you know...? They must have some of it over at the CONeX/LBMA, to save their $orry a$$e$... Silver however...

MK13's picture

Man, you got it all wrong, it's banker's stone you're talking about.

blueberry100's picture

Yea, if you own Everything... W do u do. I say have a Garage sale.. then start over.

red1chief's picture

Why do I keep seeing articles that the central banks are out of tools? They can create as much liquidity as they want out of thin air. $1 trillion? $100 trillion? Whatever it takes until there is massive goods inflation they will do.

Arnold's picture

Well, in reality somebody is servicing that debt.
Currently it is me and you, soon to be just you.

red1chief's picture

The central banks are both creating and servicing, which they will do until the above-mentioned goods inflation.

RagaMuffin's picture

The conclusion that when the CB's dial back buying things implode is not unreasoned, but what if equities accelerate?

Arnold's picture

Then it will be time to unwind the Balance sheets and cool things off.

chubbar's picture

Why is there an implication that the CB's have to stop printing? Where is the proof of that concept? If anything, they appear to be accelerating stock purchases and backstopping bonds, et al. Perhaps I missed something a little too subtle for me to pick up on?

VWAndy's picture

Yep just add more 0s.

ptoemmes's picture

Anyone else remember when you could only buy stocks with money you earned?
Well before margin accounts.

I think it was called investing.

Cordeezy's picture

At what point will people realize all the money is fake and stop honoring this system?


Duc888's picture



We already do in a lot of places, it's called barter. 

metachron's picture

I'm seriously disturbed by the obvious CB conspiracy to globally coordinate asset purchases to prop up the blue pill illusion of business as usual. Business as usual failed with a spectacular ending of the financial system 9 years ago. We all witnessed the crash, with the same eyes we witnessed WTC 7 come down. Media and politicians expect us to just go on as if nothing ever happened. As citizens, investors, human beings we have no say in any of the mechanisms of sociocultural survival anymore. Only a revolution would restore our rights and freedoms. And i live in Canada, where I thought I might escape the madness in the US 10 years ago. I escaped, but its all the same here, the UK,. France, Europe, the Commonwealth. The once "civilized world" is all war and corrupt finance, all NATO, all globalization now, is it not? Why would anyone pay attention to any corporate media. I used to work for one of the world's largest media aggregator search engines. Now its only "Prop or Not" sites and Twitter for me. We can make up our own minds as to what's true, the facts are traceable, the bullshit is bald faced obvious. They don't care if its sloppy any longer as people cling to their belief systems in hope.

There are solutions but we have not tried them. One I'd like to run by my ZH colleagues is that we should just make the Fed illegal by constitutional law. File a "Citizen's United" type court case and declare it unconstitutional. Then cut it a deal. Rather than imprisoning every living Fed Governor and GS revolving door traitors. Buy them out. Zero their balance sheet and send them off, while we restore a Treasury-based American currency - not a petro-dollar but part of the IMF basket for SDRs of course. The change could be done in a week. 

We would hit hyperinflation immediately of course, as we’d pay off the Fed pennies on the dollar but real accounts would have to be maintained at relative parity. In other words, everyone EXCEPT the bankers would be made whole. If we did this, the banks would still do fine, eventually. But the people would survive. This could be handled during the bank holiday by extraordinary measures. The balance could be paid off by fiat, just as the balance sheet was expanded and corrupted by private fiat. But a national currency and re-domiciled bond accounts could actually be financed and managed by the Executive branch, with extraordinary wartime tax and finance measures.  What we have today is a monstrous hybrid and will always enslave the citizens.

There are many details I've glossed over, but I'm posting this suggestion to see if anyone in the community would take it seriously. I think there’s a way to do this, and its simpler than we think.

Jack Oliver's picture

Nice plan - Abe Lincoln tried it 150 years ago !

China, especially, are tired of being paid in newly created US dollars !
China HAS to print - just to keep up !

China knows this will not end well - so they have an alternative - GOLD !

Duc888's picture


"There are solutions but we have not tried them. One I'd like to run by my ZH colleagues is that we should just make the Fed illegal by constitutional law. File a "Citizen's United" type court case and declare it unconstitutional. Then cut it a deal. Rather than imprisoning every living Fed Governor and GS revolving door traitors. Buy them out. Zero their balance sheet and send them off, while we restore a Treasury-based American currency - not a petro-dollar but part of the IMF basket for SDRs of course. The change could be done in a week. "


Sooooooooooooooooooo much silliness.  Try this.  Sit home for three weeks.  Get 20% of the "producers" in USA to sit the fuck home for three weeks.  This will crash Wall Street and crash the eCONomy.  No bullets fired, no civil war....


You will get what ever it is that you want.


Three weeks is all it will take.

Troy Ounce's picture


Remember 99,9% of the population wants this life to continue and do not mind the death penalty for you for your silly ideas that will destroy their life in the Matrix.

Because God, they do not know.

MK13's picture

Yes, just remember - they willpick the timing of those 3 weeks for you. How good of you to know the process.

SickDollar's picture

 "Make the Fed illegal by constitutional law. File a "Citizen's United" type court case and declare it unconstitutional."

what the fuck are you smoking ,my friend the entire system is corrupt and the deep state has way too many weapons and tools  to destroy you or your ideas.

you need to understand the only way is it to have a very very bloody Revolution not hijacked by the elites(not easy)