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Analyzing The Five Largest Central Banks

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The latest Macro Watch video (uploaded today) analyzes the strategies and compares the balance sheets of the world’s five largest central banks: The People’s Bank of China, The Federal Reserve, The European Central Bank, The Bank of Japan and The Bank of England.

Central banks print money for one of three reasons: 1) To end financial panics, 2) to manipulate their currency, or 3) to push up asset prices. Once the money has been created, it can be lent, used to buy domestic assets or used to buy foreign assets. How much is created and how it is employed strongly influences the direction of exchange rates, interest rates and asset prices.

In this video, we see what the Big Five have been doing, the impact they are having, what they are likely to do next and how that is likely to impact the financial markets. Finally, their total assets are projected out to 2016 in order to better understand how markets will react if Quantitative Easing ends this month, as well as the market consequences if it doesn’t end.

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  1. Hi Richard, your analysis, facts and presentation are excellent. I find Macro Watch a valuable resource. I agree with your overriding assertion that we must closely monitor the Fed and other central banks as they use QE to support their respective economies. Personally, I am becoming increasingly concerned about the Fed’s ability to buy “stocks” in the stock market through the purchase of S&P future contracts to prop up the market when it is plunging. Know as the “Plunge Protection Team”, and highlighted in this months AIG lawsuit proceedings, is this, in your opinion, yet another way the stock market is manipulated? John Crudele, writing in the NY Post on 10/20/14 wrote a very provocative article on this subject https://nypost.com/2014/10/20/plunge-protection-behind-markets-sudden-recovery/
    What are your thoughts on this disturbing revelation?

    1. Michael, Thanks for your comment and for the article you attached on the PPT, Plunge Protection Team. As I have written many times, I believe the government is managing the economy at the Macro level and that they will do WHATEVER IT TAKES to prevent a depression. So, I would not at all be surprised if the government has been propping up the stock market over the last couple of weeks.
      The Fed has been working too hard to drive economic growth by printing money and pushing up the stock market to sit back now and watch it crash. They can’t afford to allow that. It would cause a New Depression.

  2. I am no expert at all but I can’t help feeling that really the cat is out of the bag when it comes to government market manipulation and the illusory nature of what is touted as ‘capitalism’. Please correct my understanding, but surely if the mainstream awareness of the effects of QE (and similar actions) on asset prices is sharpening, then what the Fed does now must be less maintenance of some domestic economic modus operandi or its parameters, but driven by something more political perhaps, something more global. Or is this just being fanciful? I find it equally hard to swallow that the Fed would be mopping up S&P futures with one hand while announcing to the world that stimulus is not needed given domestic data – unless they were in such a desperate position that any short term diversion would be acceptable. And this itself is damning for the future credibility or even viability of the institution.

    When I look at oil prices dropping, the conflicts in the middle East, funded by petrodollar surpluses, and then the BoJ devaluing Yen to help take the slack lost by the Fed, the media response to Europe and Russia, all I see are geopolitical axial shifts, and vague implications of cooperation in some kind of global strategy, while domestic economics seems to be an academic side-show in comparison.

    Is what we are witnessing here the rejection of QE because the Fed truly believes it is not necessary given domestic economic data, or is it that such radical structural change on a global level is expected that it no longer believes it mandatory ? (I still wonder for example what US atlantic and shale oil exports priced in dollars will mean for OPEC oil pricing, and the implications for USD as reserve currency….) It’s all quite confusing!

  3. So, the Fed’s quantitative easing did draw to close last week. But a day later, the BOJ announced expanded quantitative easing. And now that it has done so, other Asian neighbours likely to follow suit in order to suppress their currencies. So, I wonder if this changes the outlook here Richard?

  4. As always Richard, you are providing a most helpful big picture context over which I can apply investing and trading strategy to the capital markets.

    My only quibble might be on the timing. Last month you posited the idea that we could have a big sell off and a panicked Fed launching QE4 by years end. I don’t know, I think they will let the ECB and BoJ do the heavy lifting for a while. Well into 2015 maybe?

    The other thing I was wondering was, is there a scenario where the PBoC decides that they can’t accept a materially weaker JPY, and therefore weaken the RMB against USD? Wouldn’t the extra printing also dovetail with the desire to clean up the balance sheets of their banks?

  5. Hi John,
    Thanks for the comments and questions.

    James Bullard, President of the St Louis Fed, seems to have stopped the stock market panic in its tracks on October 16th when he told Bloomberg TV that the Fed should extend QE. The S&P and the NASDAQ were down about 10%, and plunging fast until then.

    I still think the stock market is likely to have a big correction before long; and that the Fed will have to do something (probably QE4) to reverse it (again). And, as a result of the Fed action, I still think the stock market will end 2015 higher than it is now.

    You are right, China (and Korea) must be very worried about the sharp fall in the Yen. But, I believe that China and the US have come to an arrangement about which way China’s currency will move (i.e. slow and relatively steady appreciation). China’s trade surplus with the US is more than $300 billion per year. I don’t think the US would tolerate a sharply lower Yuan. But, it has tolerated Chinese currency manipulation for a very long time, so perhaps I’m wrong about this.

  6. Thanks for the reply. I certainly agree that the US and China having made an “arrangement” in regard to currency relationships is more than likely. The one thing the central banks have going for them is that they are obviously working together on this whole enterprise.

    1. I don’t think we will go back to a Gold Standard unless this monetary system completely collapses. If that happens, there will be a terrible Great Depression like the 1930s or worse. I don’t expect that any time in the foreseeable future.

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