While entire rainforests have been destroyed to write about the Fed and ‘will they, won’t they’ we have long been of the opinion that the global economy is at the best flatlining and is indeed at a very fragile stage in this rather different economic cycle.
A report from Bloomberg yesterday went some way to showing how much central banks have supported growth this year by boosting their balance sheets. The report suggests that the 10 largest central banks now hold assets totalling $21.4tn, that is a rise of 10% since the end of 2015. During 2014 and 2015 their combined holdings grew 3% or less says the report.
As you may expect the BoJ and the ECB have been the big buyers this year adding $2.1tn while the PBoC and the Fed have reduced their holdings by around 2%. Some interesting points come to light; the Swiss National Bank has been the most aggressive over the last decade increasing their balance sheet 8 fold while Russia was the least aggressive with an increase of just 68%. Indeed both the Swiss and the Russian banks have added 15% to their holdings this year.
Since mid-October 2006, over the last ten years the ten largest central banks have expanded their balance sheets by 265%, while the MSCI All Country World Index of equities is up 19% and the bond market measured by Bloomberg Barclays Global Aggregate Index is up 50%.
Almost three quarters of all central bank assets are held by the big four; the PBoC holds $5 trillion, the Fed $4.5tn, the BoJ $4.4tn and the ECB $3.9tn, while the world's other central banks hold a combined $6.7tn. So $21.4tn held by the top ten equates to 29% of the size of the world’s economy as at end 2015, doubling since the 2008 GFC and is a third of the combined market capitalisation of every stock in the world.
Our question is where would the global economy be without this massive support and indeed if central banks were to ease back on their involvement; global recession? It is true these central bank purchases have also pushed up stock and bond prices but no inflation and low growth would be supportive of bonds especially longer-dated, but stocks oh my where would they be. Ouch.