The above graph, which I nicked from Bloomberg, is actually only a few months old… and as such out of date.
How out of date can it actually be, you might ask? Heck, it’s less than a month old.
Well, that’s true but since these numbers are changing by the minute. When I sat down this afternoon to write this and I look at my Eikon terminal, the Bank of Japan (BOJ), for example, is already over 504.8 trillion yen.
These numbers should boggle the mind. They’re tough to get your head around.
Combined, these three central banks account for roughly 14 trillion dollars of balance sheets.
What I want to point out today, however, is that the BOJ is actually accelerating this trend… quintupling its size in under a decade.
Today, the BOJ is much like Mr Creosote – their balance sheet being larger… yes, larger than the entire country’s GDP. Now, isn’t that some achievement?
Of all the three musketeers the FED actually looks relatively benign. Crazy when you think about the numbers but true nonetheless.
This is what happens when even though you’re gorging yourself at the buffet your two mates are shovelling sausages down the hatch without even chewing them and thus ingesting more than you are. You’re all going to suffer massive indigestion and quite possibly death but they’re probably going to get them sooner.
In terms of numbers the European Central Bank (ECB) balance sheet is roughly 43% of the euro zone’s GDP, though with Draghi’s ongoing asset purchase programme this will blow out further.
The Fed, on the other hand, are sitting at just 25% of US GDP and now actively discussing reducing the balance sheet. Whether they can actually do this or not without all sorts of market disruptions remains to be seen, of course.
What we have, however, is a massive divergence in monetary policies going forward… something I’ve been beating the drum on here. There are a number of factors that will cause a fracturing of the unprecedented coordination between global central banks, which the world has come to accept as standard.
At the tail end of this insanity sits the BOJ who shortly will own the majority of the Japanese bond market as well as a healthy slice of the equity market. Unwinding those positions will bring true chaos.
The yen will slice through the last recent lows of 120, heading rapidly for 150 and there will be all sorts of fun to be had for those positioned.
The question to ask yourself is this: “How far can the Fed push this divergence between central bank policies without causing a disruption (in bonds) to the overall market?”
As you ponder this question, let me remind you of what that last wafer thin mint did to Mr Creosote.
“Nature gave us pain as a messaging device to tell us that we are approaching, or that we have exceeded, our limits in some way.” — Ray Dalio