A common misconception among market participants who have mistaken the effects of central bank largesse for their own investing acumen is that QE has somehow stopped. Or, put differently, that recent gains in risk assets cannot be attributed to policymaker “puts” and liquidity tsunamis.
It’s odd that anyone should fail to recognize the role that central banks still play in propping up risk assets and suppressing vol. After all, when you see the word “taper” in a headline, it necessarily means that something is being tapered. That something is asset purchases.
To the extent I’m constructing a straw man here (that is, to the extent most people who know anything at all about what they’re talking about do in fact understand that central banks are still buying billions upon billions in assets on a monthly basis), it’s entirely fair to say that not everyone is on the same page in terms of appreciating the extent to which this flood of freshly-printed money is behind buoyant asset prices.
So when will everyone wake up? Well, hopefully never. Because the idea here is that all of that liquidity has set the stage for the global economy to “grow into” inflated asset prices. If that happens, then everyone can persist in the fantasy that there was something “real” in the prices they paid for things like stocks.
But if the global economy doesn’t in fact “grow into” the market that QE has created, well then the “come to Jesus” moment will be when central bank asset purchases turn negative. And D-Day for that is 2019 according to BofAML. Here’s more:
As expected, Mario Draghi took a knife to the ECB’s quantitative easing programme yesterday. From January 2018, monthly asset purchases will decline from €60bn to €30bn, and continue for another 9m (and remain open ended). The ECB now joins an array of central banks across the globe that are either shrinking their balance sheets or heavily scaling back bond buying.
Chart 1 shows year-over-year changes in global asset purchases by central banks (we also include China FX reserves here). Given this year’s slowdown in ECB and BoJ QE (the latter, in particular, is striking in USD terms), we are well past the peak in global asset buying by central banks. But with the Fed now embarking on balance sheet shrinkage, the start of 2019 should mark the point where year-over-year asset purchases finally turn negative – a trend change that will come after four straight years of expansion.
So that’s D-Day.. errr.. D-“year.” Plan accordingly.