By now everyone, even CNBC, admits that the only reason stocks are where they are is due to the G-7 central banks. What many may not know, however, is how we got here, and where we will be at the end of this year. The answer, as provided by JPM Asset Management CIO Michael Cembalest in the chart below, is at the dot in the top right. This will represent the addition of $10 trillion in liquidity, or alternatively the conversion of the "planetary nebula" of central bank balance sheet expansion, in the past seven years. And considering that, as we explained yesterday [7], there is another $10-11 trillion in scarce "quality collateral" that has to be injected into the financial markets via central banks collateral transformations, the number in yet another 7 years will be at $20 trillion if not exponentially higher, or higher than where US GDP will be.
[8]
Cembalest's take:
The planetary nebula of central bank balance sheet expansion (last chart), which we expect to hit $10 trillion later this year, is still the most important factor underpinning an uneven global recovery. It makes sense to have some patience right now. Global equities are up 8%-9% year to date, which is a pretty good return for a time when the profits expansion is slowing, global growth is closer to 3% than 5%, Chinese growth continues to cool down despite rapid increases in the use of credit, and when it is practically impossible to disentangle how much central banks are affecting asset prices. I read a research report that showed that returns on consumer staples stocks are now correlated 75% with the returns on Treasury bonds, by far the highest level since 1929. Usually, the correlation is close to zero.... Note to Fed: uh, congratulations?
Luckily, nothing bad happened in 1929.
The difference this time, as is now very obvious, is that in the event the central banks fail at preserving the perpetual growth of what may truly be the final bubble (yes, a preposterous assumption), the central banks are already all in, unlike all previous credit, risk-asset, and housing bubbles. So who becomes the "bad bank" to the central banks when confidence in the "lender of last resort" finally gives way?
Full note here [9]