Bernanke’s Dogma in Action: Global Central Banks Secretly Acquired $29 trillion of Equities!

Recently I wrote, “when Ben Bernanke, yet as a university professor wrote a “smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse”, which became a social policy, popularly known as the Bernanke/Greenspan PUT, this translates to an implicit subsidy to equity market owners, financed by the ordinary citizens.” 

Such dogma, which turned out as real social policies, became much more than just about manipulating yield curves via zero bound rates and asset purchases on bonds and mortgages, central banks have stealthily made $29 trillion of direct interventions in the stock markets 

From the Financial Times (hat tip Zero Hedge) [bold mine]

Central banks around the world, including China’s, have shifted decisively into investing in equities as low interest rates have hit their revenues, according to a global study of 400 public sector institutions.

“A cluster of central banking investors has become major players on world equity markets,” says a report to be published this week by the Official Monetary and Financial Institutions Forum (Omfif), a central bank research and advisory group. The trend “could potentially contribute to overheated asset prices”, it warns.

Central banks are traditionally conservative and secretive managers of official reserves. Although scant details are available of their holdings Omfif’s first “Global Public Investor” survey points out they have lost revenues in recent years as a result of low interest rates – which they slashed in response to the global financial crisis.

The report, seen by the Financial Times, identifies $29.1tn in market investments, including gold, held by 400 public sector institutions in 162 countries.

Who has been buying? Some clues from the FT:

A chapter in the report on Chinese foreign investment trends argues Safe’s interest in Europe is “partly strategic” because it “counters the monopoly power of the dollar” and reflects Beijing’s global financial ambitions.

In Europe, the Swiss and Danish central banks are among those investing in equities. The Swiss National Bank has an equity quota of about 15 per cent. Omfif quotes Thomas Jordan, SNB’s chairman, as saying: “We are now invested in large, mid- and small-cap stocks in developed markets worldwide.” The Danish central bank’s equity portfolio was worth about $500m at the end of last year.

Overall, the Omfif report says “global public investors” have increased investments in publicly quoted equities “by at least $1tn in recent years” – without saying from what level, or how the figure is split between central banks and other public sector investors such as sovereign wealth funds and pension funds.

At what costs does this interventions come with?

Growth in countries’ official reserves has increased fears about potential risks to global financial stability. In a contribution to the Omfif report, Ted Truman, a senior fellow at the Peterson Institute for International Economics, writes: “Reforms are urgently needed to enhance the domestic and international transparency and accountability for this activity – in the interests of a better-functioning world economy.”

He adds: “Changes, real or rumoured, in the asset or currency composition of foreign exchange reserves have the potential to destabilise exchange rate and financial markets.”

Central banks around the world have foregone between $200bn and $250bn in interest income as a result of the fall in bond yields in recent years, Omfif calculates, without giving details. “This has been partly offset by reduced payments of interest on the liabilities side of the balance sheets,” it adds.

The same equity market interventions can be seen in the Philippines mostly coursed through government pension funds.

Oh by the way here is one unintended cost, in Europe, equity valuations have been stretched to a decade high

From Bloomberg:

The two-year rally that has restored more than $4 trillion to European share prices is sending equity valuations to levels not seen in a decade just as investors turn away from record low bond yields.

Gains have pushed the StoxxEurope 600 Index to 17.5 times annual earnings, the highest since 2002, data compiled by Bloomberg show…

The advance in the Stoxx 600 since June 2012 has pushed the gauge up 48 percent and sent its price-earnings ratio 26 percent above its decade average relative to reported earnings, according to Bloomberg data.

Through repeated central bank interventions which function as guarantees, the mainstream have become deeply addicted to the magic wand of inflationism which they believe can boost stocks (and DEBT) forever. They hardly realize that central bank actions has unintended social-economic and political consequences that will ultimately backfire.

The thought provoking question is: what happens to central bank balance sheets when the current stock market boom turns into bust?  A follow through question is what happens to the currencies supporting these inflated balance sheets? Interesting.

Euro and European Periphery Bonds strength hooked on BoJ’s Abenomics, Reversal Time Coming?

Speaking of carry trades, do you know that BoJ’s ‘Abenomics’ stimulus has fostered the the recent strength of the euro and the latest comeback or reprise of the European peripheral bond’s convergence trade? Part of today's risk ON landscape has been due to this too.

From Bloomberg’s chart of the day: (bold mine)

Euro-area peripheral bonds are hooked on Japan’s monetary stimulus.

The CHART OF THE DAY shows Europe’s peripheral bond rally stalled this month as the yen strengthened versus the euro. Last week the Bank of Japan refrained from adding to the 60 trillion yen ($589 billion) to 70 trillion yen poured into the monetary base each year that has encouraged Japanese investors to put money into higher-yielding European assets.

“Peripheral yield spreads appear vulnerable to a correction following the strong rally and the yen tends to often strengthen on credit risk,” said Anezka Christovova, a foreign-exchange strategist at Credit Suisse Group AG in London. “Japanese portfolio flows usually have an impact. Those flows could now divert elsewhere. We don’t expect any substantial action from the Bank of Japan in coming months and that could also lead the yen to strengthen.”

Japanese investors bought a net 1.41 trillion yen of long-term foreign debt in the week ended May 16, the most since Aug. 9, data from the finance ministry in Tokyo showed on May 22. Flows into Europe may be tempered as yields in Europe’s periphery climb. The average yield spread of 10-year Portuguese, Greek, Spanish and Italian bonds over German bunds has risen 20 basis points this month to 270 basis points, after touching 239 basis points on May 8, the lowest since May 2010, based on closing prices.

New York-based BlackRock Inc., the world’s biggest money manager, said on May 8 it had cut its holdings of Portuguese debt, while Bluebay Asset Management said on May 9 it had seen the majority of spread tightening it was looking for.

This yen euro carry perspective has been shared by my favorite laser focused bubble watcher Credit Bubble Bulletin’s Doug Noland: (bold mine)

Importantly, Draghi’s “ready to do whatever it takes… And believe me, it will be enough” was a direct threat aimed at speculators that had accumulated large bets against European debt and the euro. It’s my view that the Fed and BOJ’s extraordinary measures to devalue the dollar and yen – as the ECB refrained from QE - were instrumental in bolstering the vulnerable euro. And with global central banks supporting the euro coupled with Draghi promising a bond backstop, suddenly European periphery bonds were transformed into an incredible opportunity for speculation - in a world awash in free-flowing speculative finance. Stated differently, the major central banks dictated that the hedge funds and speculators reverse their bearish euro-related bets and instead go leveraged long. This powerful Bubble flourishes to this day.

Aside from ensuring financing flows of government, QEs and ZIRPs have implicitly been meant to suppress “shorts” or bearish bets on the asset markets. In other words, monetary policies have directed to massage market prices by fueling a an asset boom. This is the Bernanke/Yellen-Kuroda-Draghi put in action.

Yet if the BoJ will remain resolute in abstaining from providing further stimulus, then the Yen-Euro carry will reverse and most likely bring back Risk OFF environment. But will the BoJ just take the heat from the Wall Streets of the world?

Also, has the Philippine central bank chief's repeated mentioning of the concerns over foreign "hot money" flows been tacitly referring to this yen-euro carry?

Very interesting times indeed.

US Stocks in V-Shape Intraday Recovery as Bad News is Good news

European stocks got clobbered yesterday reportedly due to the escalation in Ukraine crisis. Ukraine’s government has launched a military offensive against separatist militants sympathetic to the government of Russia from cities in the eastern Donetsk region (Bloomberg). Ukraine is increasingly at risk of a civil war. And worse, if both Russia and the NATO-US intervenes this raises the risks of world war III.

While such sentiment initially plagued US stocks, all these abruptly reversed when a  report saying that the Japanese government is about to release its outlook that will downgrade its ‘overall assessment’ of the economy as private consumption takes a hit from April sales taxes (I must add and inflation). This sent US stocks recovering from the depths of a selloff!

As you can see all three US major stock market indices (Dow Industrial, S&P 500 and the Nasdaq) fashioned out a fantastic simultaneous V-shape intraday recovery. 

Ah, don’t you see? Bad news is good news because the Wall Street’s of the world, like sharks, have smelled blood. They expect that the Bank of Japan to impose additional easing to address faltering Abenomics.

As of this writing Japan’s Nikkei is now on a ramp up by more than 1.5% as the USD-yen soar past 102

Financial journalist Michael Lewis recently raised a controversy saying the stock markets has been rigged in favor of High Frequency Trading. Well, this would seem as  speck considering how central banks “manage” the financial markets.