A central tenet of my view of the markets is that there’s just one worldwide pool of liquidity, and it is ruled by the same Killer Whales operating out of a few world financial capitals. We call those whales (or sharks if you prefer) Primary Dealers. They feed in the ocean of cash pumped in by the world’s major central banks, essentially the Fed, the ECB (Europe), the BoJ (Japan). The PBoC (China) is also playing a growing role as it integrates its financial markets with the rest of the world’s, but its system does not use Primary Dealers, per se, and its linkages to the rest of the world are more obscure. The BoE (UK) is a minnow in the sea of big fish. It swims along with them. The same banks feed at the BoE trough.
Here are the Big 3’s Big Fish. 13 big banks are the kings of the financial world. 28 others are also players who drink from one or two central bank fountains and play in the worldwide sea of liquidity.
The Big Fish- Click to enlarge
(Download PDF)
Central banks only pretend to make policy. Once they print the money and purchase securities from the Primary Dealers (or lend it to them), the dealers decide what to do with it. The dealers are the real policy makers. The central banks have no control over where the cash goes once they intone “Abracadabra†(Aramaic for “I will create as has been spokenâ€) and magic wand wave the cash into existence.
With Quantitative Easing, the central banks bring the money into existence by creating deposits into the Primary Dealers’ accounts at the central banks in payment for the securities the central banks purchase from the Primary Dealers, or by making loans to them. What the dealers do with the money from there is up to them, although they are loosely required to purchase government securities when the central government auctions them. Since there are always plenty of other bidders for the government paper, the Primary Dealers end up with billions in excess cash.
