Going Forward, There Is No Debate: ‘The Balance Sheet Effect Is One Of Tightening’

For quite some time now, there’s been considerable debate about whether it’s the “stock” or the “flow” that matters when it comes to QE.

There are good arguments on both sides, but common sense dictates that the flow should matter more precisely because the flow represents an ongoing incremental bid by a largely price insensitive buyer, whereas the stock simply represents the sequestration of assets on CB balance sheets. The latter is obviously supportive, but not nearly as much as the former.

Last week, Citi was out updating what some believe are the most important charts in the world, namely the following visuals which depict the rather close relationship between HY spreads and global equities on one hand, and  central bank asset purchases on the other:

Frankly, that pretty much settles the flow vs. stock debate, but as BofAML notes on Wednesday, that debate may not matter as much going forward precisely because when flow is abating and the overall stock is falling, there is no longer an argument to be made that the aggregate CB balance sheet effect is one of easing. To wit:

The flow of global QE peaked a few quarters ago. Now we have likely reached another milestone: per our estimates, the aggregate balance sheet of the G4 central banks peaked this quarter.

Investors have been divided about whether the stock of QE matters more than the flow. Going forward there should be more of a consensus that the aggregate balance sheet effect is one of “tightening” rather than “easing” because the stock is declining and the flow is not just falling, it is negative.

But hey, this should be fine, right?

I mean after all, according to your favorite FinTwit personalities, QE never had anything to do with the global equity rally in the first place.

It was all “fundamentals” – and nothing to do with that $20 trillion in liquidity that was dumped at the top of the quality ladder.