Central Banks in Cahoots

Posted By Darren Winters on Jun 27, 2020


Central Banks in Cahoots

With the central banks in cahoots with pursuing a policy of staggering global stimulus, a risk-recovery rally could now be in play.

The market has got its fix with over $18 trillion in global stimulus snorted up the nostrils of global markets, the central banks in cahoots with their asset purchases (QE) to infinity, has ensured a melt-up in risk assets, while the fundamental meltdown

In the age of Zombies and bankrupt companies with billion-dollar market capitalizations, where logic and fundamentals don’t matter because all that counts is when the next QE shot is coming, then all eyes are on the central banks’ balance sheet.

The latest data regarding the balance sheet of the G-6 central banks confirms that the central banks are in cahoots to keep the QE dependent bull market stimulated

Central Banks in Cahoots

Here is the real reason why the S&P 500 rallied 12.7 percent in April, the best month in more than three decades, and why stock rallied around the world:

It is due to the ballooning balance sheet of the G-6 central banks. In other words, the central banks in cahoots with their asset purchase policy are expanding their balance sheet, thereby keeping global risk assets prices propped up.

The central banks in cahoots mean that over $18 trillion in global stimulus in 2020, which amounts to 21 percent of global GDP, has been pumped into the global markets to keep multiple asset bubbles inflated

Exhibit one shows the G6 central banks in cahoots with expanding their already ballooning balance sheet as a percentage of GDP. Notice how 2020 projections show a continuing policy of balance sheet expansion. Source BofA Global Research. 

Download the BofA Fiscal & Monetary policy tracker.

So without the pandemic 2020 great lock down of the global economy unprecedented expansionary fiscal, and massive monetary easing, over just three months, would not have been possible. 

According to B of A calculations the amount of total global stimulus, both fiscal and monetary, is now a “staggering” $18.4 trillion in 2020 consisting of $10.4 trillion in fiscal stimulus and $7.9tn in monetary stimulus, for a total of 20.8% of global GDP, injected in just the past 3 months. 

From a traders/investors stance massive fiscal spending supported by the central in cahoots with QE infinity means that risk assets have a floor, albeit for the short term

BTFD is back in vogue with caution.

Back in February 11, in a piece entitled, the Coronabubble, just a few weeks before the stock market crash of 2020 in late February and March I wrote: “Central banks are responding, in the only way they know how with more liquidity, blowing even more air into a bubble, the Coronabubble”.

I also noted in another piece entitled, Lesser-Risk-Asset, posted on February 1 that stocks were overvalued by whatever matrix.

“The price-to-earnings (P/E) ratio, a popular measure, shows the stock price at their highest level in recent history with the S&P 500 index SPX, -0.40% trading at 18.6 times forward earnings. That is well above the average P/E ratio of 16.7 during the past five years and 14.9 over the past ten, according to FactSet data.

So the S&P 500 index is now even more overvalued than ever, well above its dotcom bubble peak.  

Market price to sales ratio, another matrix to value stock prices, is now higher than the dotcom bubble. Moreover, the price-to-earnings (P/E) ratio, a popular measure,” I wrote back on February 1.

“The number of bonds carrying negative yields increased to an all-time peak of $13.2 trillion in August 2019 in the wake of a dramatic rally in bond markets around the world.

Even Junk bonds, high-risk debt is overbought in a market drunk on liquidity and disconnected from risk. Moreover, sovereign debt is not the lesser risk asset of fixed income assets. 

Jamie Dimon says financial markets’ only bubble is in sovereign debt.

But from the above information, I disagree with Jamie Dimon. The corporate bond bubble, particularly in the energy sector is the mother of a bubble. 

The only part of Jamie Dimon’s statement made at the World Economic Forum in Davos, Switzerland that makes sense follows,” I wrote on February 1 before the great global lockdown.

Now fast forward to today, with the central banks in cahoots with more unprecedented easing and the fundamentals point to a another depression, spurred on by a global lockdown of the economy, the matrix I used to correctly forecast the 2020 stock market crash has deteriorated even further

The coming corporate earnings are going to be the worst on record. The V-shaped recovery narrative looks like wishful thinking. Millions of people unemployed, and inventory glut and lingering pandemic, the second wave means that recovery is nowhere to be seen. 

So the Central banks’ massive money printing to purchase assets, QE to infinity, has prevented risk assets from a meltdown. But QE to infinity has also a distorted risk which has made spotting the asset with the lesser risk even more tricky.

Think about it how long can the central banks keep risk assets price in the land of stupidity without seriously damaging their credibility.

Zombie companies don’t have billion-dollar market valuations, their true valuation is zero. 

With central banks in cahoots, perhaps we will see a policy shift away from supporting asset prices to stimulating consumption

If so tapering could come next and that would leave risk asset investors nursing some heavy losses as the stock bubble deflates.

Another February type sell-off could be in the pipeline.

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