After keeping rates at historically low levels for almost a decade, and after buying bonds and mortgage-backed securities valued in the trillions of dollars, central banks appear to have have arrived at their last policy option - buy stocks.
As early as five years ago, the suggestion that central banks were actively buying equities was considered ridiculous - part of a vast conspiracy theory.
See here....
The Japanese central bank is a top-ten investor in the majority of companies on the Nikkei, and it owns 2/3 of the ETFs on that exchange outright. The Swiss central bank and the Chinese central bank have also bought hundreds of billions of dollars worth of equities world-wide.
The rational for buying equities is varied. The Swiss are buying stocks to earn more than can be earned from buying in bonds. The Japanese are clearly buying in order to prop up their flagging stock market. The Chinese are probably buying for both reasons.
The mandate of a normal central bank - including those in Canada and the United States - is to keep inflation low and employment high. They are usually NOT there to make any type of a return on their investments.
Larry Summers, economic advisor to Barack Obama, and a former US Treasury Secretary, has explained why central banks may need to buy equities like this...
"It is something that economic logic suggests should be considered in other places where the zero lower bound is a potentially important monetary policy issue,” he said, referring to the perceived lower limit for benchmark rates set by central banks.
This is the Swiss argument - with rates so low, for central banks top make any money they need to buy equities.
This ignores certain uncomfortable realities...
1. Central banks set the rates that the Swiss and Summers think are so low that they should buy equities in order to get a better return. If they have a problem with return, then just raise rates.
2. Central banks can print money. It is impossible to predict what a policy of central banks buying equities may lead when the purchaser has no limits in terms of its buying power. It should seem obvious that this will lead to a massive distortion in the price of equities. The "talking heads" claim that Bank of Japan purchases of equities have not distorted the Nikkei, ignoring the fact that it owns 2/3 of the ETFs that are listed there, and propping up the exchange is the whole point of the policy. This is normally called "lying".
3. This policy has nothing to do with the mandate of the central banks which is low inflation and high employment.
4. In the long run, this policy means that the public sector will own huge swaths of the private sector, effectively undermining our present understanding of capitalism and setting up a situation where the public sector directs major private sector activities, especially if the public sector managers start asking for seats on corporate boards.
This blog has warned of an overpriced stock market and looming recession over the past few months. If central banks world-wide start to buy equities, all bets are off....they have unlimited funds, and could drive markets to any level they want.
However, Japan is in a decades-long recession as it has never been able to deal with mass borrowing and assets bubbles that accumulated in that country in the late 1980's. If central banks start buying equities, we may see a situation similar to the one in Japan where we have a recession, but with rising stock prices with those prices pumped by fantasy money. If this were to happen, then as soon as the buying stops, one would expect the public markets to essentially collapse.
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