Central banks and the next bubble
Central bank balance sheets are expanding at what some say is an alarming pace. Can this cause the next bubble to form and burst?
JP Morgan estimates G4 (U.S., Japan, euro zone and Britain) balance sheets are now around 24% of GDP combined, with around 11% of GDP comprising bonds held for monetary purposes.
“The recent pace of balance sheet expansion is the fastest since the immediate aftermath of Lehman, largely down to the ECB. The increased BOJ purchases, more QE in the UK, and 200 bln euros upwards of increased ECB lending from this month’s LTRO together point to a further $600bln+ rise in G4 central bank balance sheets this year, to around 26% of GDP.”
Outside G4, Switzerland is a country which saw a massive expansion in its central bank balance sheet. And because of its huge holdings, its balance sheet has been very volatile.
The Swiss National Bank suffered a loss of 21 bln francs last year — its biggest ever — due to currency interventions to weaker the Swiss currency. It expects to swing back to a profit of 13 bln francs this year.
Its acting chairman Thomas Jordan himself admitted: “Our profits have been and will be very volatile … because our balance sheet is four to five times as big as it was five years ago.”
Nomura’s strategist Bob Janjuah warns that central banks may be sowing the seeds for the next bubble/burst with their swelling balance sheets. But the party — or what he calls “Monetary Anarchy” — may last well into 2013.
When looking for where the bubbles may be, realise this: in this current cycle, where central bank balance sheets are at the core, the bubble is everywhere — in stocks, in bonds, in growth expectation, in credit spreads, in currencies, in commodity prices, in most real asset prices — you name it! This is why I think this current bubble, if it is allowed to fester and develop into 2013, will have such widespread consequences when it bursts that it will make 2008 feel, relative speaking, like a bull market.
The really dangerous thing about this next bubble is that it will likely ruin current central bank credibility, as their balance sheet expansion, accumulating ever more ‘toxic’ assets, is at the centre of the current cycle… If/when the current cycle implodes, central banks which have seen explosive balance sheet growth will add to the problems.