Markets Are Surprisingly Liquid. Here’s Why

Markets Are Surprisingly Liquid. Here’s Why
Jonathan Hobbs

12 months ago1 min

Mentioned in story

The US Federal Reserve (Fed) has been scaling back the size of its balance sheet (orange line) since early last year. Essentially, it has stopped using its bond interest payments to buy more Treasuries, and instead is letting bonds mature without reinvesting them. That’s put a strain on market liquidity and downward pressure on most investments.

But since October, the world’s four biggest central banks have, in total, actually increased the size of their balance sheets. So according to this gauge, global liquidity conditions have improved over the past few months.

The blue line shows the total balance sheet size of the Fed, the European Central Bank (ECB), The People’s Bank of China (PBoC), and the Bank of Japan (BoJ) – all converted into US dollars. Since October, that number’s grown by about $650 billion to just over $28 trillion, and is up more than 2%. Those Eastern central banks are the reason for the rise: the PBoC’s balance sheet is around 10% bigger (a $550 billion increase) and the BoJ’s is about 16.5% bigger (a $750 billion increase). The Fed and the ECB of the West, meanwhile, have scaled back their assets by around 4% each over the same time – or $320 billion and $330 billion, respectively.

Since October, the S&P 500 is up about 10% and bitcoin is up about 20%. So if you’re looking for a reason to be bullish on stocks and crypto, you‘ll want to keep tabs on what central banks are doing outside the US too.

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