The Consolidated "Currency Wars" Chart

While we have pointed out various divergences among risk assets, the deterioration in macro fundamentals, the dismal earnings picture, and the potential for various geopolitical hotspots to ignite, there appears to be only one chart that the US equity market is willing to pay any attention to, for now – that of global central bank balance sheet size. The ongoing competitive devaluations of developed market currencies is a by-product of policymakers’ attempts to (repress) lower real bond yields and, as Credit Suisse notes, has an important (and potentially vicious) element of contagion to it (as Europe is finding out currently): currency appreciation continues until the deflationary pressures associated with an overly strong currency become too large and the country is forced to join in the trend of central bank balance sheet expansion. For now, it appears stocks are ‘allowed’ to rise, gold is suppressed, and balance sheets are expanding, but as we saw in Q4 2012, there comes a time when reality interjects (albeit briefly).


Thanks to the Fed and the BoJ most recently, the USD-rebased balance of the world’s largest central banks (Fed+BoE+ECB+PBoC+BoJ) has begun to expand – and sure enough Bernanke’s policy tool – the Russell 2000 – has recoupled…


but gold, in whatever way you believe (via leases or direct manipulation) appears to be held back (for now)…


and Europe is now under pressure once again as its currency rises strongly, impacting its competitiveness (as we warned here and here) – and with its ‘easing’ off-balance-sheet, will it be forced to bring it back on balance-sheet?




As to when this ‘repression’ ends… Credit Suisse notes,

We do not see an end to this process until real bond yields fall to a level that stabilizes government debt to GDP and the unemployment rate in developed world. On our calculations, this implies a real bond yields of around minus 1½% to 2%, compared with the current US 10-year TIPS yield of around minus 0.6%

But, markets do not go up forever, just as occurred in Q4 2012, there are times when not even the man behind the curtain can maintain investor interest amid political uncertainty (Europe in 2013), valuations (earnings drop in 2013 pushing P/Es notably higher), macro deterioration (US starting the year in the red), and unilateral currency wars…

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