April 26, 2013
As we’ve predicted for 5 years, central banks have been buying stocks in order to goose the economy.
Zero Hedge writes today:
When tin-foil-hat wearing … blogs first suggested that Central Banks were actively buying stocks, the mainstream media scoffed at the idiocy and un-independence of such an idea. However, it is clear the central banks themselves are now not only actively buying stocks but are activley encouraging it and propagandizing their efforts to lever this last policy tool left in the toolbox.Via Bloomberg,
As Bloomberg reports, 23% of central bankers surveyed said the bank owns shares and plans to buy more. From the Bank of Japan to the Bank of Israel and with the SNB and the Czech National Bank now at over 10% allocation of reserves to stocks, is it any wonder there is an inexorable bid under the ‘free’ markets. Rick Santelli is rightly concerned that, “there is a danger that everyone is loaded in the same direction,” asking what happens if all the Central Bank pump-priming does not work, given these equity valuations, “who gets caught holding the bag? What chairs are left when the music stops?”
Of course, the big banks are all for this. CNBC reports:Central banks, guardians of the world’s $11 trillion in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk- averse investors toward equities.…
In a survey of 60 central bankers this month by Central Banking Publications and Royal Bank of Scotland Group Plc, 23 percent said they own shares or plan to buy them. The Bank of Japan, holder of the second-biggest reserves, said April 4 it will more than double investments in equity exchange-traded funds to 3.5 trillion yen ($35.2 billion) by 2014. The Bank of Israel bought stocks for the first time last year while the Swiss National Bank and the Czech National Bank have boosted their holdings to at least 10 percent of reserves.
“If reserves are growing, so are diversification pressures. Equities are not for every bank tomorrow, but more are continuing down this path.”
The survey of 60 central bankers, overseeing a combined $6.7 trillion, found that low bond returns had prompted almost half to take on more risk. Fourteen said they had already invested in equities or would do so within five years.
The SNB has allocated about 12 percent of assets to passive funds tracking equity indexes.
As the Bank of Japan ramps up its monetary stimulus to include buying equities, Jim O’Neill, chairman of Goldman Sachs Asset Management, said it makes sense for central banks to own stocks. O’Neill spoke with CNBC at the Goldman Sachs Growth Markets Summit in New York.Moreover, the Fed has been doing everything it could to entice, lure and bully mom and pop investors back into stocks.
After a survey by RBS was published earlier this month that showed a greater appetite for central banks to invest in equities, “I don’t think people should worry about that,” said O’Neill. He added that many sovereign wealth funds are tied to central banks and are already investing in stocks.
Earlier this month, the Bank of Japan promised to pump $1.4 trillion into the economy in less than two years to combat deflation through open-ended asset purchases. The central bank said on April 4 that it will more than double investments in equity exchange-traded funds by the end of 2014. The Bank currently holds ¥1.4 trillion ($14.1 billion) in ETFs with a target of ¥3.5 trillion ($35.3 billion) in 2014.
“Frankly, it makes a huge amount of sense in a world of floating exchange rates and such incredible opportunity, why should central banks keep so much money in very short term, liquid things when they’re not going to ever need it?” O’Neill said. “To help their future returns for their citizens, why would they not invest in equity?”
Central bank buying of stocks will drive stocks higher, and lure more investors into the market.
Of course, the Fed’s quantitative easing program does little more than boost the price of stocks andredistribute wealth to the very richest Americans.