When you hear the term “market whale,” it typically refers to individuals and institutions that hold large portions of an asset’s available market cap. Think Michael Saylor with his 17,000 Bitcoin, or Vanguard with over $7 trillion in assets under management.
With that definition in mind, we often overlook the glut of assets that governments around the world have taken on over the last 18 months. Because of this, a few of the biggest federal spenders during that period have now accrued a market cap larger than most of the globe’s biggest public companies combined, making them a new variant of the market whale.
A different kind of whale
A trio of the world’s largest central banks went on a $9 trillion spending spree over the last 18 months or so, and now, they’re some of the biggest whales in the market. Between the United States Federal Reserve, European Central Bank, and the Bank of Japan, these few government whales now hold a combined $24 trillion in assets.
Governments around the world commenced the purchasing of assets to lubricate the cash flow of their countries and keep money moving throughout the economy in an inherently contractionary period of time, and the totals added up exponentially.
What do they own? Well, these central banks have bought a lot of bonds and mortgage-backed securities (MBS) since the start of the pandemic, and John Maynard Keynes couldn’t be more proud.
Why do they own them? Simply put, they buy bonds to control the money supply and keep interest rates low to stimulate investment and other forms of spending. Specifically, to increase the money supply, the Fed will purchase bonds from banks, which injects money into the banking system. When the government buys MBS, they are basically looking to keep interest rates low and the housing market stable (and recall this was the very sector that caused a lot of trouble during the global financial crisis in 2008).
And now with talk of the Fed tapering their asset purchases, which usually begins when the economy has made substantial progress towards its goals, we can probably expect a dip or a crash of sorts if they taper too fast, but if they taper slowly, wealth will continue to be created.
- The Federal Reserve’s balance sheet has roughly doubled since February of 2020, rising from $4.3 trillion to about $8.1 trillion by the end of June 2021. Exemplary quantitative easing.
- The Fed’s balance sheet to GDP ratio presently represents an approximate all-time high of about 35%, which is up from the pre-pandemic levels of around 20%.
- They’re spending about $120 billion per month on government debt and mortgage-backed securities at about a 1:3 MBS to bonds ratio.
- This intervention by the Fed helped to prop up the economy, and 60% of the wealth growth we saw in 2020 went to the top 10% of households, while just 4% went to the bottom 50%.
The optics of all this
As there are two sides to every coin, this situation is no different. Certain economists are concerned we’re inching closer to modern monetary theory ideologies as central banks around the world have continued to rack up debt and spend freely over the last 18 months, with the US leading that pack.
Fears concerning inflation, markets trading at high multiples, and how the Fed will proceed moving forward also contribute to the pessimism and speculation circulating amidst the worried folks as well.
Others would argue this is a normal response and a natural progression, and that it’ll all be fine in the long run. Which side is right? Only time will tell.