For the past couple of years we have seen two stock markets dramatically outperform the rest of the world. It is no coincidence that these two countries’ balance sheets have also exploded upwards like an atomic explosion.

Both the Federal Reserve and the Bank of Japan have expanded their balance sheet like drunken sailors over the past half dozen years. The other two big Central Banks, the PBOC (People’s Bank of China) and the ECB, have been much more reserved in their expansion.

Regardless of what you think is the correct policy, there can be no denying that this has had a large effect on the pricing of financial assets.

The S&P 500 has been one of the best performing stock indexes over the last half dozen years. And recently with the aggressive Bank of Japan monetary expansion, the Nikkei has caught up with the crazy move to the upside.

Meanwhile emerging markets are basically unchanged over the last five years, and the Eurostoxx is up just over 10%.

The US stock market bulls will tell you why the “US is the cleanest shirt in a dirty pile of laundry.” They will give you all these reasons why US stocks are about to embark on a secular bull market that will last another few years at least.

Maybe they are correct. Maybe the US is really that much better than the rest of the world and deserves the massive inflows they are receiving.

But how do they explain Japan? Is that too “the cleanest shirt in a dirty pile?” Do the fundamentals also justify the 85% increase in the Nikkei over the past two years?

Or maybe, could it be that both stock indexes are up because their Central Banks have had the most aggressive balance sheet expansion?

Although I acknowledge that both the US and Japanese economy are probably also going to outperform in the months to come because of their easy money policy, I am not sure that this means you should pile into their respective stock markets.

These two stock markets have been goosed higher by massive Central Bank balance sheet expansion. It is as simple as that. Don’t let all that other noise fool you. The more you expand your balance sheet, the higher your stock market goes.

It is sad, but investing has come down to front running Central Bank balance sheet expansions. At some point, this will end as I believe that eventually the Central Banks will lose the confidence of their bond markets, but until then, the money flows into the countries who are most aggressive with their balance sheet expansion.

This latest move by the Bank of Japan has convinced the rest of the world’s Central Bankers who were previously on the fence about easing their monetary policies that they better snap to it before they get left behind. On Friday, the PBOC lowered their interest rates for the first time since 2012 and the ECB signalled that they will be expanding their QE program shortly. Expect more announcements like these.

The rest of the world cannot afford to sit out this balance sheet expansion. They have to play “catch up” with the Fed and the Bank of Japan. Failure to expand will result in too much deflation being imported into the relatively tighter economy. We have now hit a point where the rest of the world is going to panic with more and more easing.

Although the Bank of Japan will continue expanding their balance sheet, the Federal Reserve has discreetly altered their balance sheet expansion with their Quantitative Tightening programs. The Fed’s balance sheet has stopped expanding, and in fact is “synthetically” tightening.

So although everyone and their dog is all bulled up on the US stock market, I think that on a relative basis, it is set to under perform. I think that it makes sense to buy almost any other stock index, whether it is Europe, China, or emerging markets, and short the S&P 500 against it.

The rest of the world is about to engage in the same sort of balance sheet expansion that the US and Japan have engaged in over the last few years. There will be more announcements from the ECB, PBOC and every other Central Bank who is getting drowned in a sea of deflation.

Meanwhile, the US is becoming progressively more tight, while the rest of the world is just starting to loosen up. I am trading accordingly by being short S&Ps against other country’s risk assets.