Central Banks Buy Stock Markets in Record Amounts!

I always try to point out of the parallel universe or the detachment between financial markets and the real economy.

I also kept pounding on the table that stock markets are being propped up by central banks via QE and zero bound rates and not by any conventional methodology.

Now many central banks admit to buying record amounts of equities.

From Bloomberg:

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…

Managers of banks’ assets are looking for alternatives to holding government bonds after efforts to stimulate growth from the Federal Reserve, the Bank of Japan and the Bank of England helped send yields near to record lows. Central banks’ foreign- exchange holdings have increased by about $8.5 trillion globally in the past decade, exceeding levels needed for day-to-day currency administration.

First, central banks put up a zero interest rate environment. Then they flood the system with cash via asset purchases principally directed to bonds.

Next, they use low interest rates (as a strawman) to justify supposed asset “reallocation” into equities.

Media projects yield chasing phenomenon to have seeped into the central bankers mentality. From the same article.

Central banks’ purchases of shares show how the “hunger for yield” is changing the behavior of even the most conservative investors, according to Matthew Beesley, head of equities at Henderson Global Investors Holding Ltd. in London, which oversees about $100 billion.

While part of equity purchases may indeed signify as yield chasing, a bigger segment has been politics.

Central bank investing in equity markets functions as subsidy or via redistribution of public money to stock market participants. That subsidy comes in support of the one of the biggest owners of stock markets whom are financial institutions e.g. investment trust, pension funds and insurance. Below chart from Bank of Japan’s flow of funds.

As I have long pointed out, central banks have imbued the Bernanke doctrine of propping up the economy via a supposed rekindling the “animal spirits” through stock market friendly policies.

As an academe Ben Bernanke wrote:

History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.

Mr. Bernanke’s preference of supporting asset markets has been converted into policies. This has been expressed in his 2010 speech, the portfolio balance channel, which explicitly states that the Fed’s buying of long term securities had been designed to “affect financial conditions by changing the quantity and mix of financial assets held by the public”. He reiterated the same in his Q&A segment in February report to congress stating the need to boost “household wealth--for example, through higher home prices” in order to promote spending. 

We really don’t need conspiracy theories. Market manipulation via indirect and direct interventions have been made official. 

Central banks outside the US has only made interventions more direct.

Nonetheless all these propping up of asset markets via inciting of the speculative frenzy, has reduced the incentive for the public to invest in productive enterprises (see UK as example) and has been ballooning a global pandemic of bubbles which commensurately has been increasing fragility of the overall financial economic system.

Rising stocks has engendered a manic phase as manifested by the portrayal of central bankers as superheroes.

Yet when stock market bubbles go bust, taxpayer money will get vacuumed into the sinkhole. Otherwise if the currency will be destroyed, skyrocketing stocks like in Zimbabwe in 2008 may only buy 3 eggs.