Contagion & The Globalised Economy

We often talk about how unprecedented the current ‘interconnectedness’ of the global economy is and how different it will be when, not if, we have the next financial crisis.  There are a myriad of potential threats to bringing down this global house of cards, whether it is Deutsche Bank going down in Germany, MPS in Italy, a big shadow banking default in China, an unexpected US rate rise, Trump winning the US election, or an escalation of the South China Sea tensions just to name a few.  The risk, or dare we say certainty, of global contagion on one event is very real.  

We’ve written before how Australia (relatively) cruised through the GFC but now have over $1 trillion in foreign loans and no China to our rescue.  There are many examples of this ‘new world’ of economic globalisation but the following is both hot off the presses and so instructive it is worth sharing.  It also shows how, apart from record corporate share buy backs, US shares are reaching new heights against this poor economic back drop (listen to today’s Weekly Wrap for a summary of the last week’s economic news).  The following charts from Bank of America Merrill Lynch (BofAML) paint a very clear picture of the 3 main traditional participants leaving the US sharemarket.  

You will note ‘central banks’ are not listed in this chart.  As we mentioned in today’s Weekly Wrap, this week saw global quantitative easing hit $200b/month.  Traditionally QE just bought domestic sovereign bonds with its freshly ‘printed’ money.  The problem is there is not enough for the amount they are printing so they have started buying corporate bonds as well.  Even that has its limitations.  So where else?  Well you can buy shares of course.  We wrote on Wednesday Japan has gone so hard in this regard it is now a top 10 holder of 90% of the Nikkei.  And now yesterday we learn that the Swiss National Bank has bought over $20billion of US shares in just the last 6 months, taking their total long position on Wall Street to $61.8 billion!  What could possibly go wrong….?  Contagion anyone?