Back in late 2016, we showed the unprecedented domination of capital markets by central banks using a chart from Citi, which had put together a fascinating slideshow asking simply “Where is the utility in marginal QE” and specifically pointing out that the longer unconventional monetary policy such as QE continues, the bigger its marginal cost, until eventually QE becomes a detriment.
A broad criticism of monetary policy, the presentation carried an amusing footnote: “This presentation does not change any of Citi’s existing, published views on the actual future path of monetary policy. It is merely intended as a contribution to the ongoing debate about the efficacy of available policy tools” -after all, the last thing the market wanted is the realization that even banks no longer have faith in the central planners.
Incidentally, Citi’s broad critique of global QE took place when central banks owned just over $18 trillion in assets.
Fast forward to today when in its latest update of central bank holdings, Citi shows that as of this moment not only has the total increased by another $3 trillion to a grand total of $21 trillion and rising, but that the big six central banks now own over 40% of global GDP, more than double the 17% they held before the financial crisis less than a decade ago.
Which is remarkable in a world where there is still some confusion about what is behind the “global coordinated recovery”, and where there are deluded people who claim that central banks are now out of the picture.
It is also remarkable because now that central banks are gradually phasing out QE, it is the central bankers themselves who are terrified of what happens when the market starts selling; terrified that they have lost control. Recall that following stunning admission from Citi’s Hans Lorenzen last November:
In the context of a self-reinforcing, herding market, the pivot point where the marginal investor is indifferent between putting more money back into risk assets and holding cash instead is fluid. But when the herd suddenly changes direction, the result is a sharp non-linear shift in asset prices. That is a problem not only for ustrying to call the market, but also for central bankers trying to remove policy accommodation at the right pace without setting off a chain reaction – especially because the longer current market dynamics run, the more energy will eventually be released.
That seems to be a growing fear among a number of central bankers that we have spoken to recently. In our experience, they too are somewhat baffled by the lack of volatility and concerned about the lack of response to negative headlines…. Our guess is that sooner or later in the process of retrenchment they will end up going too far – though that will only be obvious with hindsight.