The crowning glory of this effort has been QE or quantitative easing. Essentially quantitative easing is a form of monetary policy whereby the Central Bank creates new money to buy financial assets such as government bonds but expanding in most instances to also support other asset classes.
The goal of this process is to directly increase private sector spending and to combat deflation by increasing inflation.
So, where has this taken us.
- In 2015 there have been 26 rate cuts by global central banks. Since the fall of Lehman Brothers there have been a total of 569 cuts.
- There are now $5.3 trillion of government bonds trading with a negative yield.
- In March 2015 more than Euro 60 billion of new corporate bonds were issued-a new record.
- Switzerland issued a 10 year bond at a negative yield- a new record.
- Mexico launched a Euro 1.5 billion 100-year Euro bond at 4%.
- And the Market cap of the US tech/biotech industry now exceeds that of Emerging Markets and the Eurozone.
These QE purchases means that central bank assets now exceed $22 trillion. This is the equivalent to the combined GDP of US and Japan.
Central banks now collectively own nearly a third of global GDP in government bonds and equivalent assets and over half of the world's government bonds yield 1% or less. Parallel to this the globe's major stock markets are also in reach of all time highs.
So what does this mean.
It means that we are riding on the back of a tiger. We could discuss ad nauseam how we got here. Why we shouldn't be here. But it wouldn't change the facts. We are now riding a massive tiger with no clear plan as to how we are going to dismount.
The Federal Reserve Bank is slowly marching to the exit. They began by reducing their purchases in the so-called "taper".
In its' place the ECB has stepped up to be the QE liquidity provider of choice. They have an extremely aggressive buy program requiring them to purchase over 2.5 times the net new issuance of Euro governments out to 2016.
During the heyday of the FED's QE program, 2009-2013, foreign issuers, primarily from Brasil, Russia, India and China (the BRIC's), and other developing countries raised over US$9 trillion, which is now having to be paid back with a much stronger dollar resulting in a massive fx move.
Using Mexico's stunning feat of issuing Euro 1.5 billion 100 year bonds at 4% as an example of a similar frenzy in the Euro denominate market on the back of the ECB's QE program it is clear to me that at some point the ECB too will have to start to put the brakes on. One can assume that the value of the Euro will also gyrate wildly as issuers once again scramble to find Euros to repay their debts.
The FED decided that after years of lowering rates whereby the liquidity thus generated rather than stimulating consumption resulted in deflation that they had to face the tiger. Their answer was to introduce the "Taper" which meant a measured reduction in the purchases by the FED. This was accompanied by noises about raising interest rates at some point in the future.
The hope on the part of the FED was that the economy was now robust enough to create its' own demand and they could gradually move away from a zero interest rate environment.
The most recent economic statistics in the US suggest that the economy might not be as strong as the FED has assumed it to be.
So as QE moves from the USA to Japan and now to Europe deflation remains a problem. Raising interest rates won't ignite inflation. And restarting QE will ensure we remain on the back of the tiger.
These are interesting times.
