January 5, 2024
Central banks may be talking QT, but data shows they have yet to make a dent in shrinking balance sheets back to pre-pandemic levels. The “big 6” balance sheets contracted 5% in 2023 – most of that was likely attributable to FX moves (figures below are in USD).
The Federal Open Market Committee (FOMC), European Central Bank (ECB), and People’s Bank of China (PBOC) are the biggest central bank balance sheets, but in our view the Bank of Japan’s role in the global financial plumbing is outsized relative to their economy and central bank assets.
We believe central banks need to get out of the way so that the price of money (interest rates) can be set by market supply and demand. Based on our analysis, adjusting the “big 6” balance sheets back to 2019 levels ($21T) will be a structural force pushing rates higher (without consideration for economic growth) and equity multiples below 19x (without consideration for the earnings cycle).
RiskBridge aims to help investors navigate wealth assets through this coming transition.
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