The $2 Trillion Hole: “In 2019, Central Bank Liquidity Finally Turns Negative”
In all the euphoria over yesterday’s “dovish taper” by the ECB, markets appear to have forgotten one thing: the great Central Bank liquidity tide, which generated over $2 trillion in central bank purchasing power in 2017 alone – which as Bank of America said last month is the only reason why stocks are at record highs, is now on its way out.
This was a point first made by Deutsche Bank’s Alan Ruskin two weeks ago, who looked at the collapse in global vol, and concluded that “as we look at what could shake the panoply of low vol forces, it is the thaw in Central Bank policy as they retreat from emergency measures that is potentially most intriguing/worrying. We are likely to be nearing a low point for major market bond and equity vol, and if the catalyst is policy it will likely come from positive volatility QE ‘flow effect’ being more powerful than the vol depressant ‘stock effect’. To twist a phrase from another well know Chicago economist: Vol may not always and everywhere be a monetary phenomena – but this is the first place to look for economic catalysts over the coming year.”
He showed this great receding tide of liquidity in the following chart projecting central bank “flows” over the next two years, and which showed that “by the end of next year, the combined expansion of all the major Central Bank balance sheets will have collapsed from a 12 month growth rate of $2 trillion per annum to zero.”
Shortly after, Fasanara Capital’s Francesco Filia used this core observation in his own bearish forecast, when he wrote that “the undoing of loose monetary policies (NIRP, ZIRP), and the transitioning from ‘Peak Quantitative Easing’ to Quantitative Tightening, will create a liquidity withdrawal of over $1 trillion in 2018 alone. The reaction of the passive community will determine the speed of the adjustment in the pricing for both safe and risk assets.”
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