... And Nothing Else Matters

While the headline-chasers will allocate cause to effect for every twitch and ditch in asset prices, JPMorgan's Michael Cembalest appears to agree with us that nothing else matters but central bank balance sheet expansion. As we discussed earlier in the week, major central banks have injected nearly $7tn into world markets since 2007 and while the obscene rise in gas prices should somewhat self-limit the print-fest, it appears not before another bubble has burst as central bankers feel safe on this path given their microscopic focus on their own inflation-measures. Whether it be asset-reflation, boosting bank capital, pulling forward consumer demand, or government-reacharound financing, Cembalest sums up: super-easy monetary policy supports markets right now, prompting his question: "Who knew that unlimited money printing would be such a clean and simple solution to the world’s problems? I would love to read a book called “Reliable Central Bank Exit Strategies”, but I don’t think it has been written yet. Enjoy the ride."


Michael Cembalest, JPMorgan: Nothing Else Matters

As far as markets are concerned, I don’t think anything has mattered this year other than the 2 charts below. The first shows the rise in select central bank balance sheets and the second shows why central bankers feel safe doing it: low inflation. The goals: generate positive inflation in regions beset by deflation (Japan); boost bank capital and avoid insolvency by unlimited lending against a liberal definition of collateral (Europe); provide a lifeline to households, and pull forward future demand for consumer durables (US, UK); finance governments so markets don’t have to do as much (everywhere); encourage investor risk-taking by devaluing cash savings (also everywhere); then wait for private sector to recover. The caveat: stop if there are signs of inflation.

As shown in the second chart, inflation looks pretty tame, although like the disclaimer says, “past performance is not indicative of future results”. On commodity prices, central bankers see them as mean-reverting, and generally disavow connections between monetary stimulus and demand-based commodity price increases.



We have only one question: "If a 20% rise in global stocks required a $2 trillion expansion in aggregate assets, which also took EUR-Brent to all-time record highs and WTI to over $107 $108, where will the next 20% come from, and how will the economy fare with $150 WTI?"