In the future will equities be allowed to fall?

The credit crunch era has seen an enormous expansion of monetary policy activity which has manifested itself in two main ways. We have seen interest-rates cut not only to zero but below it into negative territory. Then we saw enormous expansion of central bank balance sheets as well as Quantitative Easing style policies were added to the play book. Indeed this is continuing apace in both the Euro area and Japan and the latter of course has moved into newer areas as well. Japan Macro Advisers have updated us on the current state of play.

At the end of May 31 2017, the Bank of Japan held a total of 500.8 trillion yen in assets, of which Japanese government securities accounted for 427.2 trillion yen.

I think we have a new candidate for the largest number we have used on here! That sends out its own message but also there is the issue that some 14.7% of the total is not purchases of Japanese government bonds or JGBs. So what might be regarded as conventional QE is already out of date as we note that the Bank of Japan calls its operations Quantitative and Qualitative Easing or QQE.

What is it buying?

You might expect this as after all both the Bank of England has recently and the ECB currently, have ventured into this area.

As for CP and corporate bonds, the Bank will maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen, respectively. ( CP is Commercial Paper ).

Whether it does much good is of course another matter as it ossifies economic structures but subsidising larger companies who are able to issue such debt whereas smaller ones cannot. But the main game here is shown below.

The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual
paces of about 6 trillion yen and about 90 billion yen, respectively.

Here we see intervention in a different sphere as both property and equities are being bought here. The property purchases are relatively small, if you can say that about 90 billion! But the main game in town is the equity purchases.

For comparison here is the plan for what is conventional QE.

With regard to the amount of JGBs to be purchased, the Bank will conduct purchases more or less in line with the current pace — an annual pace of increase in the amount outstanding of its JGB holdings at about 80 trillion yen — aiming to achieve the target level of a long-term interest rate specified by the guideline.

The target level of JGB yields is around 0% for the ten-year.

The Tokyo Whale

Just over a year ago on the 25th of April I alerted readers to what was taking place.

They may not realize it yet, but Japan Inc.’s executives are increasingly working for a shareholder unlike any other: the nation’s money-printing central bank……….It’s now a major owner of more Japanese blue-chips than both BlackRock Inc., the world’s largest money manager, and Vanguard Group, which oversees more than $3 trillion.

That begged more than a few questions as for example shareholders are supposed to hold company directors to account and sometimes provide direction to the business. How can a central bank possibly do that? There is of course the issue of potential losses as well before we get to the creation of a false market.

Let us bring this up to date with thanks to the Nikkei Asian Review.

Japan’s central bank nearly doubles ETF holdings in one year.

With the rate of purchases we looked at above I suppose that is no great surprise but there are genuine questions as to where this is taking us?

The Bank of Japan has stepped up purchases of exchange-traded funds as part of its monetary easing policy, with the balance surging to 15.93 trillion yen ($144 billion) as of March 31.

The total marks an 80% rise from a year earlier and more than a sevenfold increase since the central bank kicked off its quantitative and qualitative easing — adding riskier assets to its balance sheet — in April 2013.

Will stock markets be allowed to fall?

I do not mean on a day to day basis as for example the Nikkei 225 equity index dipped below 20,000 earlier today. But I am starting to wonder about this in terms of sustained corrections. Why? Well take a look at this from the Nikkei Asian Review.

The bank apparently buys frequently on days when the stock market dips in the morning, serving to stabilize share prices.

At what point did central bankers become experts in where share prices should be at? If anybody else did this they would be facing accusations of creating a false market. The point gets reinforced later.

“The BOJ’s ETF purchases help provide resistance to selling pressure against Japanese stocks,” says Rieko Otsuka of the Mizuho Research Institute.

This is quite different to central banks responding to a market collapse and panic in terms of timing,size,scale and indeed intention. There is also the danger of a Buzz Lightyear “To Infinity! And Beyond!” reality as we mull the consequences of this.

The bank’s growing market presence has raised concerns about the repercussions when the easing policy eventually winds down. When speculation of a BOJ exit grows, the anticipated cutbacks on ETF purchases would accelerate selling of Japanese stocks. As a precaution against a sharp market decline, “the BOJ many need to set aside provisions,” Otsuka says.

So that poor battered can has been kicked into the future one more time! If we cannot allow equity market falls now how will we be able to in say 5 years time? This leaves the Bank of Japan sounding rather like Elvis Presley.

Don’t you know I’m caught in a trap?
I can’t walk out

As time goes by the situation will go from bad to worse in terms of market manipulation.

Should the current pace of buying continue, the BOJ’s ETF holdings would reach about 30 trillion yen in about two years. The market capitalization of the Tokyo Stock Exchange’s first-section companies comes to 550 trillion yen.

Also all the jokes and humour about a “Plunge Protection Team” stopping equity market falls move from satire to reality.


There is much for us to consider here. So far the expansion of central bank activity has not been put into reverse. Even the US Federal Reserve which has nudged interest-rates higher has only talked about reducing its balance sheet as opposed to actually doing it. Others are still chomping away like Pac-Men and Women but the scale of their purchases is increasingly posing problems for government bond markets.

Should the next recession or slow down hit before we see any form of exit strategy then there will be much less scope to buy government bonds. Now that the Bank of Japan has broken the moral barrier around buying equities and indeed property such a scenario would see others follow. If we look at the UK then as the current Bank of England Governor is a “dedicated follower of fashion” he would be likely to join the party.

There are a lot of catches here as we look forwards to a potential future. Equities are supposed to provide a form of price discovery as individuals buy and sell and hopefully there is investing in what are good ideas and people. Central banking bureaucrats are unlikely to add any value here.There attempts so far have fallen on stony ground.

Despite the initial excitement among major financial institutions, the Bank of Japan’s push for exchange-traded funds tracking companies that actively raise employee pay or invest in new equipment has run aground. ( Nikkei Asian Review)

But their loudspeakers should have Yazz on repeat in terms of equity indices..

The only way is up, baby
For you and me now
The only way is up, baby
For you and me now



19 thoughts on “In the future will equities be allowed to fall?

  1. Hi Shaun
    Price discovery and capitalism are not
    the same thing’s since le crunch.
    If all central banks soak up their own
    and indeed others assets then what happens
    when there is nothing left to buy. If Japan is
    anything to go by, we don’t have to wait that long
    to find a conclusion.

    Clowns to the left of me, jokers to the right.
    Here I am stuck in the middle with you.


    • Hi JRH

      I fear the most for the next recession as presumably more and more central banks will go “all in”. Also something I did not put in the post but there were clear problems with price discovery concerning bank share prices for example in the era of crony capitalism which led up to the credit crunch.

  2. Hello Shaun

    “..the expansion of central bank activity has not been put into reverse…”

    I don’t think they planned to reverse it .

    what happens when all shares are owned by the Banks ? and all the assets?

    can they print enough to cover it all – erm , well its electronic money so……

    Bank Socialism? sorry I know you don’t do politics but these actions are making the markets a political football ….

    this is not the beginning of the end , just the end of the beginning of the on going economic crisis of the early 21 century ………….

    sit back , have some popcorn , this is going to be quite the ride !


  3. This QE is going to soak the US middle class pensions. People privately saved and invested real money, the central banks are acquiring a massive share of bonds & shares using monetary expansion. It looks like they’re magiccing money from nowhere but it stealthily reduces private defined contribution pension fund wealth.

    The scale of asset acquisition from printed money makes Bernie Madoff look like a small time con artist …..

    • I though the Irish had a blatant example of what the Pensions are for ?

      did they get their money back yet ?

      All to save the Banks…….

      Forbin ,

      PS Bernie should have been promoted for showing the Banks what to do!!
      or was he punished for giving the game away and trying it privately ?

    • “….but it stealthily reduces private defined contribution pension fund wealth.” How? In the absence of any serious inflation it would appear to be pushing Pension fund wealth/values up until the time at which a pension holder tries to take an annuity which would be based on bond rates although nowadays there are alternatives to taking out a conventional annuity.

      • Firstly it depends whether you believe the official inflation figure, which has been fiddled to avoid showing house price rises.

        Secondly I made an assumption close to a zero sum game relative to the real economy – food is limited for example. So real savings previously held a far greater proportion of stocks, bonds and so on. Now govts/central banks hold a large proportion bought with money printing. Real wealth (food manufactured, goods etc) have not increased in proportion to bonds issued ….

        Bond yields are terrible and bond prices are rigged by ongoing CB purchases. I’m sceptical of current market price for bonds – negative real yields are nonsensical for bond holders and a correction could be vicious.

        • If you look at my posts down the years you see I accept no official figures but feel the all items RPI is a rough and ready measure which has not been particularly high in the last 20 years with the exception of 07 – 08 and 10 – 11 inclusive.

          I don’t understand the allusion to Bonds and food/goods manufactured. Stock markets have risen over the last 20 years due to increased supply of money, goods and food which has led to increased profits for companies on the back of which markets rise, Sovereign bond issuance has nothing to do with it although corporate issuance may have a vague link to extra finance required to fund expansion/innovative projects etc.

          Admittedly, markets have risen quicker than profits if P/E ratios are examined but not massively so imo.

          I agree bond yields are terrible which is what I was referring to when I spoke of an annuity being purchased and bond prices are indeed rigged by the CB’s which helps increase the value of Pension Fund holdings. It is for those Pension Funds to think creatively and trade their stock of older bonds to make a profit which would greatly assist their positions re assets to liabilities in the short run. It is time it was realised that annuities don’t work any more as happened with endowments in the 90’s/2000’s and alternative uses are made of the pension pots built up as a result of, firstly, contributions and secondly, Fund managers bond trading to generate extra profit.

          I am certain a correction without CB intervention would be vicious but CB non intervention on Sovereigns is a non starter as they are too deep into the poker game now with too much in the pot. Their intervention serves as back door way of artificially cheapening the price of issuance as I’m sure you are aware. whilst leaving the problem of funding tomorrow’s pensioners to tomorrow. This problem will probably be picked by the UK social security system via the Single Tier pension and in current and later on, extreme cases, Pension Credit (which will never go away no matter what the Govt says)

          The zero sum game only applies if we look to the end of time itself e.g. back in the 70’s when oil was being brought ashore from the North Sea, experts were absoloutely adamant that it would run out completely by 1985 and yet here we are with diminishing amounts still being brought ashore 32 years after the drop dead time, but of course a day will come when the oil does run out, assuming alternatives are not found, whenever that day may be,

  4. Interesting point about central banks being major shareholders but not holding boards to account… They may also be diluting the voting rights of the existing shareholders?

    • Hi Screamoutsite and welcome to my corner of the web.

      That is a good point and will particularly apply to votes which require a certain percentage of the shareholder base to vote for them. As presumably the central bank would abstain in such votes…..

  5. It’s all rather chilling………will the end result be that the central banks own all the global assets and then they can play the global Monopoly game amongst themselves? But what about us poor mortals……..where do we fit in to their game?

    • Hi Jan

      This is a game for the “masters of the universe” or at least those who think that they are! Some will gain along the way via owning a house or shares but the major gains go to the 0.001% who seem unlikely to hand it back.

  6. Shaun, you raise a valid question. As if there was a plan, its mission creep by increment. The CB’s never thought too far ahead and this is what happens, against better judgement they find themselves doing formerly un-thinkable things. Their ruling Govts are all too happy that the show stays on the road but obviously everybody has to be involved in the charade.

    I cant see anyone taking responsibiity for the final outcome.

    I think its time you called a face 2 face meeting of your blog contributors. Call it a conference where you call for “papers”, under the banner of “what next and how will this end?”. I will be first on the roster with a 15 minute presentation on how local govt leveraged enterprise investment is dirty bomb divised by central Govt and timed to go off soon. I will also bring popcorn, sugar coated of course. You never know, such a stunt might get you more notoriety and coverage. We can invite both Taleb and Roubini

    I think early October is always a good time, there’s usually jitters then.

    😉 Paul C.

    P.S. Been surfing in Varazze (Liguria) this afternoon, now having an iLLy caffe, I’ll update you anything interesting economically from Italy.

  7. I’ve never believed in price discovery – the assumption that a “true” price may be arrived at as long as there are many players in the market. I also think many confuse price discovery with value discovery and very rarely shall those two concepts cross paths.

    Prior to 2007 there wasn’t much Govt/CB intervention in markets and the “true” price tended to be true until it wasn’t any more, usually because of sentiment changes, at which point a crash would arrive and the new low price would be “true” until it wasn’t any more and it began increasing due to sentiment changes again.

    You seem to believe that volatility is a guarantor of true price discovery, for me volatility or stable increase/decrease it’s all the same. Prices are true each day until they are not regardless of whether it’s purely private, a mixture of private and public or purely public players.

    If you think the CB’s are manipulating prices I would put to you that the likes of marketing and finance companies also manipulate prices of IPO’s when they release their version of the relevant company’s financial position alongside their upbeat messages.

    Rating Agency’s and Chartered Accountants are complicit in this manipulation on an ongoing basis via their respective ratings and signing off on accounts that are usually works of fiction. There is further manipulation from the companies themselves always telling a positive story even when the converse is true. When enough investors swallow the fantasy, the price goes up, others see the price increase and follow in because someone must know something they don’t just as they follow others out when the price falls because someone has better knowledge than them when the reality could well be there has been no material change in trading conditions or profits for the relevant companies throughout the boom/bust cycle

    Don’t get me started on the plethora of pseudo financial shows with pseudo financial experts like Max Keiser all of whom are there to manipulate parts of the market their way – Price Discovery? Are you serious?

    • Hi Noo2

      I agree that there were more than a few issues with price discovery before the credit crunch. However some of them were actionable and should have been treated as illegal but they were not. Even so manipulation by bank boards for example was minor compared to what we have now.

      As to a pure price from an equilibrium I agree that such a concept if for the fantasies of the Ivory Towers but it is different to say there are problems with it to deliberately sending prices to somewhere far away such as where many bond prices and yields are.

      As to Max Keiser presumably he is bathing in the rise of Bitcoin but rather quiet about gold right now.

  8. So the subject of market manipulation by central banks rears its ugly head again, previously only dismissed as conspiracy theory, now everyone knows it is either directly or indirectly in virtually every traded market.

    Whether you think it is part of a conspiracy by globalists to introduce communism by the back door(see my previous posts) or as apart of a New World Order of one government, one central bank and one currency, or even a combination of the two, it is now blindingly obvious to anyone that either a monumental crash or the next phase of a money printing melt up/inflationary boom is about to start.

    The Fed is almost comically trying to raise interest rates into a weakening economy twitching back to life after the previous bubbles induced by said Fed burst in spectacular fashion, but does it really have the cajones to see it through Volker style, or is it merely a gesture seen to fail following the inevitable bond and stockmarket collapses leading back to the panic and knee jerk QE to infinity???

    Who knows what the next move will be, it is like the entire world economy is being bet on red or black but noone knows the outcome. Investing for income or capital appreciation or protecting ones capital against the ravages of central bank induced inflation has never been more dangerous or uncertain.

    The choice is yours,there is only betting on massive deflation or inflation, the losers are wiped out, so please feel free to take the gamble that central bankers are forcing people to make. A coin toss on everything you have ever worked for and saved.

    And don’t forget to vote for the political parties that enable them to do this next week!

    • The US economy will improve in Q3, what we’re seeing now was hard baked in, in Q3/Q4 last year, There is upwards pressure on wages through full(ish) employment in the US and the Fed won’t like that combination so yes, they will raise again before year end but it’s nothing to do with cajones, it’s everything to do with them being scared of inflation getting a hold at the same time the economy starts overheating as their potential growth rate is quite low now. The real threat to the US economy is called Donald Trump and it’s his antics that may stay the Fed’s hand.

      I think the early 70’s and 80’s beats this time hands down for CB led big inflation numbers as money velocity is so low it is acting as a damper on the QE ops of the CB’s.a

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