How many more central banks will end up buying equities?

One of the features of modern economic life is the way that central banks have expanded their operations. In a way that development is a confession of failure ( as why are new policies requited if they existing ones are working? ) Although of course that would be met with as many official denials as you can shake a stick at. We moved from sharply lower interest-rates to QE (Quantitative Easing) bond purchases to credit easing and in some places to negative interest-rates. The latter brings me to the countries I classified as the “Currency Twins” Japan and Switzerland who both have negative interest-rates and some negative bond yields. In fact this morning the Bank of Japan gave Forward Guidance on this subject.

The Bank intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, taking into account uncertainties regarding
economic activity and prices including the effects of the consumption tax hike scheduled to take place in October 2019.

So the first feature seems to be negative interest-rates and perhaps ones which persist as both Japan and Switzerland are on that road. Thus you start by funding yourself with money at a negative cost something which ordinary investors can only dream of. But we also have countries with negative interest-rates which have not ( so far) bought equities such as Sweden and the Euro area although the latter does have a sort of hybrid in its ongoing corporate bond programme.

However we find more of a distinguishing factor if we note that both Japan and Switzerland ended up with soaring exchange-rates due to the impact of the large carry-trades that took place before the credit crunch. This was what led me to label them the “Currency Twins”  and the period since then has seen them respond to this which has seen them via different routes end up as equity investors on a larger and larger scale albeit by a different route. An irony comes if we look at an alternative universe where Germany had its own currency too as in that timeline it too would have seen a soaring currency and presumably it too would be an equity investor.

Bank of Japan

Here is this morning’s announcement.

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. With a view to lowering risk premia of asset prices in an appropriate manner, the Bank may increase
or decrease the amount of purchases depending on market conditions.

As you can see the Tokyo Whale will continue to gobble up the plankton from the Japanese equity world and at quite a pace. The latter sentence refers to the way it buys more when the market drops which of course looks rather like a type of put option for other equity investors. That is what it means by “lower risk premia” although more than a few would question if this is “appropriate”

Also there are ch-ch-changes ahead. From the Financial Times.

the BoJ also said it would alter the balance of its ¥6tn ($54bn) per year ETF buying programme so that a much greater proportion was focused on ETFs that track the broader, market cap-weighted Topix index. The scale of its Topix-linked ETF purchases would rise from ¥2.7tn to ¥4.2tn per year, the bank said in its statement.

The Japanese owned FT fails however to note the main two significant points of this. The first is that the Tokyo Whale was simply running out of Nikkei index based ETFs to buy as it was up to around 80% of them and of course rising. The next comes from a comparison of the two indices where the Nikkei is described as very underweight this sector and it is much larger in the Topix ( ~9%). Regular readers will no doubt have figured that this is the “precious” or banking sector.

As of this month it has made major purchases on 3 days buying 70.5 billion Yen on each occasion.

Let us move on by noting that Japan has bought equities but so far they have been Japanese ones boosting its own market and keeping the impact on the exchange-rate to an implied one.

Swiss National Bank

The SNB has been a buyer of equities as well but came to it via a different route which is that once it implemented its “unlimited” policy on foreign exchange intervention it then found it had “loadsamoney” and had to find something to do with all the foreign currency it had bought. The conventional route would be to buy short-dated foreign government bonds which it did but because of the scale of the operation it began to impact here and may have been a factor in some Euro area bond yields going negative. The Geneva Whale would have found itself competing with the ECB QE operation if it had carried on so switched to around 20% of its foreign exchange reserves going into equities.

That is a tidy sum when we note it had some 748.8 billion Swiss Francs of foreign exchange reserves at the end of June. How is that going?

. The profit on foreign currency positions amounted to CHF 5.2 billion.

So at that point rather well but of course it is rather strapped in for the ride with its holdings which will have led to some fun and games more recently as it notes its holding in Facebook as the tweet below illustrates.

 

If you ride the tiger on the way up you can end up getting bitten by it in the way down. Also a passive investment strategy means you raise your stake as prices rise whereas an active one means you are an explicit as opposed to an implicit hedge fund. Some like to express this in terms of humour.

SNB OFFERS TO BUY UNLIMITED AMOUNT OF TESLA AT 305 ( @RudyHavenstein )

We do not know if the recent weakness in the so-called FANG tech stocks is just ebb and flow or a sea change, but the latter would have the SNB entering choppy water.

Comment

We see that this particular development can be traced back to the carry trade and a rising currency. Both of the countries hit by this ended up with central banks buying equities although only the Swiss have bought foreign equities. Perhaps the Japanese think that as a nation they own plenty of foreign assets already or there is an inhibition against supporting a gaijin market. That would be both emotional and perhaps logical if we note how many lemons have been passed onto them.

Looking ahead newer entrants may not follow the same path as we note that once a central bank crosses a monetary policy Rubicon it has the effect of emboldening others. The temptation of what so far have been profits will be an incentive although of course any suggestion that such moves are for profit would be meant with the strictest official denial. Should there be losses however we know that they will be nobody’s fault unless they become large in which case it will be entirely the fault of financial terrorists.

Putting this into perspective is the price I am about to describe. Around 1000 until the middle of 2016 but rose to 8380 earlier this year and as of the last trade 6080. One of those volatile coins the central bankers dislike so much? Nope, it is the SNB share price in Swiss Francs.

 

17 thoughts on “How many more central banks will end up buying equities?

  1. This blog is truly shocking – if you had said fifteen years ago that the Snb would own those shares, people would have said that you were mad. And yet, the MSM seems so punch drunk with the list of extraordinary things that it has given up reporting anything. My list of things that would have been unthinkable only ten years ago, but now pass unremarked includes:
    1. QE;
    2. Negative interest rates;
    3. Target2 imbalances;
    4. Central banks buying bonds;
    5. Central banks buying equities;
    6. The size of the derivatives markets;
    7. The US deficit projections;
    8. The Japanese national debt;
    9. Banks still paying bonuses despite being bust.
    I am sure that others can add to the list.
    the thing that seems to unite them all is the magic money tree aka central banks’ ability to spend whatever they like/do whatever it takes etc to kick the can down the road.
    The only slight problem is that none of it seems to have the faintest connection to the real world… what could go wrong?

    • with all this loose money around you would have thought that we’d have high inflation and booming economies in the western world

      but we don’t

      if we apply Forbin’s correction constant to GDP and inflation , well we have inflation alright , but the GDP is mediocre ….

      God only knows what will be done when the next downturn happens ( although I’m not certain we’ve left the last one yet! )

      by 2038 we’ll know – recovery or these were the halcyon days before the 2nd great crash ….

      Forbin

      • Yes – foot-to-the-floorboards monetary policy, Fuel tank is full, The engine revs, the wheels spin, but the car hardly moves. and sometimes slips backwards.

        As they say in Yorkshire – Summat’s up

  2. Hi Shaun,

    I was wondering how the record of the BoJ in giving Forward Guidance compares to that of our own unreliable boyfriend, Mr Carney.

    Or, to put it another way, were Mr Carney in the employ of the BoJ would he have been expected to fall on his sword by now?

  3. Shaun, following Jim M’s comment above, how’s that for forward guidance – no change to BoJ policy until the effects of a tax change are understood, which is scheduled for October 2019?! That’s not a typo is it?

    • Hi DD

      You have made me check it again on the original and there is no typo I can see. They are saying they have no intention of raising rates before the 2020s unless something significant happens. The mention of the proposed Consumption Tax rise is interesting as last time the economy took a dive and inflation rose so if anything they would respond by easing more if history repeats.

      • Thanks for your reply. They should disband the BoJ rate setting committee and save their salaries. We could save over £650k per year if Mark Carney was put on a zero hours contract, and that’s just one member of the English equivalent!

  4. uh oh

    “An empty taxi drew up outside the Bank of England, Threadneedle Street, and when the door opened, Carney got out.”

    Forbin

  5. Look at it from a UN Agenda 21 perspective & it all makes sense:
    Protect the value of the assets of the elites, (property, market investments, etc.) whilst destroying the wealth of ordinary folk (annuities, savings etc.) in the developed World.
    You think it’s by chance that the elites have defined benefits pensions, with millions going in, whilst we have to work our arses off in order to buy an eight grand annuity?

    • Hi therrawbuzzin

      It has not been a good day for us all being equal in the eyes of the law either.

      “Commenting on the update Andrew Bailey, FCA Chief Executive said:

      ‘Given the serious concerns that were identified in the independent review it was only right that we launched a comprehensive and forensic investigation to see if there was any action that could be taken against senior management or RBS. It is important to recognise that the business of GRG was largely unregulated and the FCA’s powers to take action in such circumstances, even where the mistreatment of customers has been identified and accepted, are very limited. Taking action was therefore always going to be difficult and challenging but after carefully considering all the evidence we have concluded that our powers to discipline for misconduct do not apply and that an action in relation to senior management for lack of fitness and propriety would not have reasonable prospects of success.”

      https://www.fca.org.uk/news/press-releases/statement-further-investigative-steps-relation-rbs-grg

      I think we both know what would have happened if either of us had behaved in such a manner.

  6. Once they started on the road to QE, there was no way back, it is print now to infinity, whether it is houses, bonds equities or helicopter money, they have to keep the pretence the system is still viable, and that requires exponentially ever more fiat…..until the people behind the curtain decide to stop.Then the lever gets pulled, and all those holding equities, bonds, property etc fall through the trapdoor……

    • Why would ‘they’ want to stop, Kevin. Recent history has demonstrated they can keep it up for almost 10 years; so why not longer.
      Over 9 years of emergency base rate so why not 19 or 90? When we get into the hundreds of trillions the actual numbers cease to have any significance and bear no relation to reality. Infinity is a long way; forever is a long time. Keep printing and knock off a few zeroes if it gets embarrassing. More £££££s than grains of sand in the Universe. Greenspan forever.

      They are lost deep in the woods and believe in as many as six impossible things before breakfast.

      Alice meets the Emperor’s new clothes. As long as we believe we survive.

      All it requires is Faith, Hope and Charity and the greatest of these is Faith, because there’s no Hope and precious little Charity. (with due deference to true believers).

      end of short rant.

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