The Only Game in Town – 2016/10/01

“The road we’re on is coming to an end”Muhammad El-Erian on March 15, 2016.  His reason is that quantitative easing, which has increasingly propped up stock and bond prices, must end when central banks run out financial assets to buy. This may occur as soon as 2017, but may stretch through 2018.

Mohamed El Erian argues in his book, “The Only Game In Town”, that the global economy cannot continue on its current path of sluggish, stable growth for much longer. Economic activity and asset prices have been helped continuously by quantitative easing (QE) since the Federal Reserve initiated the first program back in 2009. Since then, a steady stream of liquidity has poured out of the world’s largest central banks to the tune of $13 Trillion. At the current rate of purchases the ECB and BOJ will run out of eligible bonds and stocks by late 2017 and 2018 respectively.

While not an entirely new concept, the size and scope of QE across the world’s largest central banks is unprecedented. Jim Grant offered this humorous description of how bizarre some QE operations have become:

“The Swiss National Bank’s portfolio of US stocks has grown to more than $60 billion…they own a lot of everything. Let us consider how they get the money for that: They create Swiss francs from the thin alpine air where the Swiss money grows. Then they buy Euros and translate them into Dollars. So far nobody’s raised a sweat. All this is done with a tab of a computer key. And then the SNB calls its friendly broker – I guess UBS – and buys the ears off of the US stock exchange. All of it with money that didn’t exist. That too, is something a little bit new.” – Jim Grant August 24, 2016

The consequence of this is unmistakable. When the largest central banks signal a continuation of further “liquidity” via QE, asset managers pile into the assets that they know central banks will buy at any price. As a result, while CB liquidity is up, bond and stock prices go up as well. The country of origin matters, but only to an extent. We live in a global market, so when the price of one financial asset goes up, it has a positive effect on the price of related financial assets.


This observation at least partially explains why asset prices are responding less to fundamentals. It also explains why assets that have traditionally moved in opposite directions (i.e. stocks and bonds) are becoming increasingly correlated. One need not discard the efficient market hypothesis in order to accept this result. Quite the contrary; only in an inefficient market would asset managers ignore the arbitrage almost guaranteed by front running central banks who, in their quest for transparency, announce to the world up front their intent to buy billions worth of assets.

Feel free to share your own thoughts on asset bubbles and whether there are any present today. There is no better compliment you can give us than your thoughtful criticism. You can reach us at, or follow us on Twitter @intuitecon


IntuitEcon Team

Disclaimer: These are our personal views. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action. Our hope is that these observations will merely help you to more critically examine your own beliefs about finance and stimulate dialogue.

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