September 9, 2019
The expectation is that the ECB will restart QE.
Remember, last month we talked about the correlation of the death spiral in global bnod yields, with the peak in the aggregate balance sheet of the big three central banks in the world (the Fed, the ECB and the BOJ).
Interpretation: The global bond market has sent a very clear message that the central banks made a mistake trying to normalize policy too soon, in a world still on the mend from the global economic crisis.
With that, the Fed has since stopped its quantitative tightening strategy. And the ECB is set to turn the liquidity spigot back on.
Let's take a look at how the balance sheets of these three major central banks look, from the failure of Lehman (late 2008)-to-date.
Here's the Fed…
As you can see, through multiple rounds of QE, the Fed expanded it's balance sheet 5x. And beginning in 2018, they attempted to start "normalizing" the balance sheet, sucking close to three-quarters of a trillion-dollars out of the economy. Things seemed to be going okay, so long as massive fiscal stimulus was being executed in the U.S., AND so long as the ECB and BOJ were offsetting the Fed's balance sheet reduction with QE.
But then the European Central Bank quit QE last December. And that was the tipping point for markets …
The lone shock absorber has been the Bank of Japan, but it has been clear that they can't do it alone.
With that, until the rest of the world (namely Europe) follows the lead of the U.S. with aggressive fiscal stimulus, stability in the global economy is still dependent upon ultra-low rates and a nearly $15 trillion balance sheet of the big three central banks.
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