Maitre D’: “And finally, monsieur, a wafer-thin mint.”
Mr Creosote: “No.”
Maitre D’: “Oh, sir! It’s only a tiny little thin one.”
Mr Creosote: “No. F**k off. I’m full…” [Belches]
Maitre D’: “Oh, sir… it’s only wafer thin.”
Mr Creosote: “Look – I couldn’t eat another thing. I’m absolutely stuffed. Bugger off.”
Maitre D’: “Oh, sir, just… just one…”
Mr Creosote: “Oh, all right. Just one.”
Maitre D’: “Just the one, sir… voila… bon appetit…”
[Mr Creosote somehow manages to stuff the wafer-thin mint into his mouth and then swallows. The Maitre D’ takes a flying leap and cowers behind some potted plants. There is an ominous splitting sound. Mr Creosote looks rather helpless and then he explodes, covering waiters, diners, and technicians in a truly horrendous mix of half digested food, entrails, and parts of his body. People start vomiting.]
Maitre D’: [returns to Mr Creosote’s table] Thank you, sir, and now the check.
The Monty Python skit depicted has a lot of truth in it.
Only idiots refuse to acknowledge excess. Society is littered with examples of the consequences. Eating too much results in indigestion and lethargy, and, if done, regularly obesity and an early grave.
We’d be forgiven for thinking that these simple truths don’t or won’t apply to the financial markets.
Indeed, the GFC was but one of the last examples of such excess, and Canada’s own Real estate market is now suffering what Mr Creosote suffered.
There are naturally other examples, many covered in my subscriber-only publication, but there is one elephant in the room worth looking at:
The above graph, which I nicked from Bloomberg, is actually only a few months old… and as such out of date.
How out of date can it actually be, you might ask? Heck, it’s less than a month old.
Well, that’s true but since these numbers are changing by the minute. When I sat down this afternoon to write this and I look at my Eikon terminal, the BOJ, for example, is already over 504.8 trillion yen.
These numbers should boggle the mind. They’re tough to get your head around.
Combined, these three central banks account for roughly 14 trillion dollars of balance sheets.
What I want to point out today, however, is that the BOJ is actually accelerating this trend… quintupling its size in under a decade.
Today, the BOJ is much like Mr Creosote – their balance sheet being larger… yes, larger than the entire country’s GDP. Now, isn’t that some achievement?
Of all the three musketeers the FED actually looks relatively benign. Crazy when you think about the numbers but true nonetheless.
This is what happens when even though you’re gorging yourself at the buffet your two mates are shovelling sausages down the hatch without even chewing them and thus ingesting more than you are. You’re all going to suffer massive indigestion and quite possibly death but they’re probably going to get them sooner.
In terms of numbers the ECB balance sheet is roughly 43% of the Eurozone’s GDP, though with Draghi’s ongoing asset purchase program this will blow out further.
The Fed, on the other hand, are sitting at just 25% of US GDP and now actively discussing reducing the balance sheet. Whether they can actually do this or not without all sorts of market disruptions remains to be seen, of course.
What we have, however, is a massive divergence in monetary policies going forward… something I’ve been beating the drum on here. There are a number of factors that will cause a fracturing of the unprecedented coordination between global central banks, which the world has come to accept as standard.
At the tail end of this insanity sits the BOJ who shortly will own the majority of the Japanese bond market as well as a healthy slice of the equity market. Unwinding those positions is quite simply impossible without it looking quite similar to Mr Creosote divesting of his overconsumption.
The yen will slice through the last recent lows of 120, heading rapidly for 150 and there will be all sorts of fun to be had for those positioned.
The question to ask yourself is this: “How far can the Fed push this divergence between central bank policies without causing a disruption (in bonds) to the overall market?”
As you ponder this question, let me remind you of what that last wafer thin mint did to Mr Creosote.
“Nature gave us pain as a messaging device to tell us that we are approaching, or that we have exceeded, our limits in some way.” — Ray Dalio