Central Banks Have Purchased $2 Trillion In Assets In 2017

In his latest "flow report", BofA's Michael Hartnett looks at the "Disconnect Myth" between rising stocks and bonds and summarizes succinctly that there is "no disconnect between stocks & bonds."

Why? The best, and simplest, explanation for low yields & high stocks is simple: so far in 2017 there has been $1.96 trillion of central bank purchases of financial assets in 2017 alone, as central bank balance sheets have grown by $11.26 trillion since Lehman to $15.6 trillion. Hartnett concedes that the second best explanation is bonds pricing in low CPI (increasingly a new structurally low level of inflation due to tech disruption of labor force) while equities price in high EPS (with little on horizon to meaningfully reverse trend), although there is no reason why the second can't flow from the first.

The result is an era of lower yields & higher stocks, or as the chart below shows, an era in which the alligator jaws of death are just waiting for their moment to shine. Here are the three phases:

  • 1981-2009 (disinflation/Fed put), 10-year Treasury yields down from 15.8% to 3.9% = 10.7% annualized S&P 500 returns;
  • 2009-2016 (Fed QE/global ZIRP) yields down from 3.9% to 2.4% = 14.9% SPX ann. return;
  • 2017 YTD (ECB/BoJ QE) yield down to 2%, SPX annualizing 17.5%.

BofA then gives a list of how to time the endgame, or when bonds become bad for stocks:

  1. yield curve inverts,
  2. lower yields lead to higher credit spreads (particularly high yield & EM bond spreads...watch tech spreads in coming months),
  3. The deflation bonds discounting starts to negatively impact EPS,
  4. flip side is never good sign to see rising yields coincide with falling bank & housing stocks;

The good news is that none of these 4 conditions are being met, for now.

Some other observations from BofA, which points out this week's ZIRPy Flows:

  • markets now see Sep'18 as earliest FOMC with >50% chance of Fed hike;
  • 2-10-year UST yield curve at 78bps (3bps from 9-year lows);
  • US IG & HY bonds at highs;
  • 4 straight weeks of outflows from floating-rate bank loan funds (after 31 straight weeks of inflows post-Trump);
  • IG on pace for record year of inflows ($179bn YTD);
  • biggest inflows to Treasury funds in 61 weeks (most since Brexit).

Putting these together, signal that consensus is once again discounting the "Japanification" of Wall Street.

Speaking of flows this week, $6.6bn went into bonds, $3.7bn into equities, and $1.3bn into gold. Speaking of the latter, this was the biggest inflows in 30 weeks as XAU pushing gold to the highest in 1 year, and the USD to the lowest since Jan'15.

One thing still hasn't changed though: BTD, or investors still buying each and every risk dip. Tuesday saw largest daily inflow to equities ($5.1bn - mostly US & Japan) in 6 weeks on day SPX down 0.8% on North Korea/Irma. One day, Buy-The-Dip will spectacularly stop working, but until then...


GUS100CORRINA Jim in MN Fri, 09/08/2017 - 16:49 Permalink

Central Banks Have Purchased $2 Trillion In Assets In 2017My response: Yes indeed we once again see the CB PUT in action. The order has some down: UNDER NO CIRCUMSTANCES CAN THE MARKET BE ALLOWED TO FALL BECAUSE IT WOULD USHER IN FINANCIAL ARMAGEDDON.It looks like BUY, BUY, BUY all the way.Even President TRUMP has suggested getting rid of the DEBT CEILING and the DEMOCRATS agree.Welcome to the NEXT HYPER BULL market. DOW 30,000 or 40,000 may not be out of the question.

In reply to by Jim in MN

TheSilentMajority Fri, 09/08/2017 - 16:31 Permalink

Seems like that BofA guy is another consciously incompetant "inflation denier".

Everybody who has a pulse knows that the real CPI has been averaging at between 7%-12% for most of the last 20+ years.

Global NIRP is a huge catastrophe in the works.

cherry picker Fri, 09/08/2017 - 16:37 Permalink

Hyper inflation coming soon.Printing coin is a dangerous fools game.They should have learned to live within their means decades ago.  USA and Canada are broke.  Pockets are empty.

Al Tinfoil Quivering Lip Fri, 09/08/2017 - 21:08 Permalink

Exactly.  Sadly, few see how it is.  The "Thirteen Families" that control the Central Banking of the World (led by the Rothschilds) are consolidating their ownership and control of us Debt Serfs by buying up everything in sight with currency that they invent out of thin air.  The Thirteen Families are the new Feudal Royalty of the Western World.  Nations under their system are the Feudal Lords who serve their Feudal Royalty masters.  We the citizens and taxpayers are mere Debt Serfs.  Greece is a prime example of their end game.  

In reply to by Quivering Lip

Money Mantra (not verified) Fri, 09/08/2017 - 16:57 Permalink

This is one reason why Zerohedg keeps getting it wrong. The only analysts I know who get short term market calls right I'd Shepwave.

shutterbug Fri, 09/08/2017 - 17:54 Permalink

With 2 trillion Central Bank spending in 2017 alone ....ANYBODY who thinks we are in recovery and the economic situation is normal... is a certified crazy person.

Phillpots Fri, 09/08/2017 - 17:59 Permalink

We need to take over our governments - PERIOD. To do this we need to come together and take them down. Not true then you are part of the problem,

pitz Fri, 09/08/2017 - 18:02 Permalink

How the h*ll do they get away with even calling most of that trash "assets"?   Central banks should only be buying and selling precious metals.

illuminatus (not verified) Fri, 09/08/2017 - 18:03 Permalink

Kind of llike communism, I call it banksterism. Instead of the state owning everything, it's the banks.

Pernicious Gol… Fri, 09/08/2017 - 18:06 Permalink

In this instant the only strategy that seems to work is being 100% in stocks, and selling a few here and there when spending money is needed. Did central banks do this deliberately? Is it a welcome or unwelcome by-product they may or may not have forseen of another strategy they cooked up?

Let it Go Fri, 09/08/2017 - 19:27 Permalink

One indication of just how messed up and flawed the global markets have become is reflected in the way central banks across the world are now buying stocks. This has become a part of their response to correcting the forces of past excesses.One thing is clear, the central bank's large foray into stock ownership represents more than just a moral hazard and in many ways, it paves the path for a liquidity crisis in our future. More on this subject in the article below.http://brucewilds.blogspot.com/2017/04/central-banks-massive-incursion-into.html

GodHelpAmerica (not verified) Fri, 09/08/2017 - 19:41 Permalink

Central banks divesting fx reserves. This isn't going to end--the currencies will just accelerate in their decline of real purchasing power.