In the future will all central banks buy equities?

As the weather shows a few signs of picking up in London it appears that one central banker at least has overheated listening to Glen Frey on the radio.

The heat is on, on the street
Inside your head, on every beat
And the beat’s so loud, deep inside
The pressure’s high, just to stay alive
‘Cause the heat is on

Yes it is our favourite “loose cannon on the decks” which is the Bank of England Chief Economist Andy Haldane. He has been quiet in recent times after his Grand Tour around the UK to take central banking to the people and get himself appointed as Governor was widely ignored. But he is back.

LONDON (Reuters) – The Bank of England is looking more urgently at options such as negative interest rates and buying riskier assets to prop up the country’s economy as it slides into a deep coronavirus slump, the BoE’s chief economist was quoted as saying.

The Telegraph newspaper said the economist, Andy Haldane, refused to rule out the possibility of taking interest rates below zero and buying lower-quality financial assets under the central bank’s bond-buying programme.

There is a lot going on there and certainly enough for him to be summoned to the Governor’s study to explain why he contradicted what the Governor had said only a few days before. Also as is his wont Andy had also contradicted himself.

“The economy is weaker than a year ago and we are now at the effective lower bound, so in that sense it’s something we’ll need to look at – are looking at – with somewhat greater immediacy,” he said in an interview. “How could we not be?”

So we have a lower bound for interest-rates but we are thinking of cutting below it? So it is not an effective lower bound then. I can help him out with just a couple of letters as calling it an ineffective lower bound would fix it. Of course Andy has experience of numbers slip-sliding away on his watch as the estimate of equilibrium unemployment has gone from 6.5% to around 4.25% ( it has got a bit vague of late) torpedoing his output gap theories. Even worse of course it will now be going back up. Time for him to move from Glen Frey to Kylie Minogue.

I’m spinning around
Move outta my way

Then there is Andy’s hint about buying equities.

buying lower-quality financial assets

He has a problem with those who recall him pointing out he does not understand pensions so he would not be a stock picker more a tracker man. Although of course in the UK in many ways that means the same thing. For example if we look at Astra Zeneca it was worth just under £108 billion at the beginning of this month and Royal Dutch Shell some £95 billion whereas if we those bandying for the number 100 slot we are between £3 and £3.5 billion. Then the FTSE 100 is over 80% of the all-share so by now I think you will have figured that yet again such a policy would benefit big business. Andy may not have done so as his “Sledgehammer QE” of 2016 dashed into such UK stalwarts as er Apple and Maersk. An error being repeated in the current operations.

Chair Powell

Chair Powell of the US Federal Reserve was interviewed on 60 Minutes yesterday which was likely to be more like 40 minutes when you allow for adverts. What did he say? Well after a really odd section on virology we got this burst of hype.

But I would just say this. In the long run, and even in the medium run, you wouldn’t want to bet against the American economy. This economy will recover. And that means people will go back to work. Unemployment will get back down. We’ll get through this. It may take a while. It may take a period of time. It could stretch through the end of next year. We really don’t know. We hope that it will be shorter than that, but no one really knows.

Eyes will have turned to the hint that it might be in 2022 as that begs a lot of questions as to what the Federal Reserve might do in the meantime. What about this for instance?

I continue to think, and my colleagues on the Federal Open Market Committee continue to think that negative interest rates is probably not an appropriate or useful policy for us here in the United States. ( Chair Powell)

“probably not” eh? That is leaving the door open to a change of mind. This is in spite of the fact that in central banking terms this is quite a damning critique ( as it involves an implicit criticism of other central banks).

The evidence on whether it helps is quite mixed.

Also as section which is just plain wrong.

PELLEY: So the banks would pay people to borrow money, essentially?

POWELL: Yes.

Let us now move onto what might be called the money shots.

POWELL: Well, there’s a lot more we can do. We’ve done what we can as we go. But I will say that we’re not out of ammunition by a long shot. No, there’s really no limit to what we can do with these lending programs that we have. So there’s a lot more we can do to support the economy, and we’re committed to doing everything we can as long as we need to.

The track record of central bankers using the phrase “no limit” is not good as the Swiss National Bank most famously found out. But there was more and the emphasis below is mine.

POWELL: Well, to begin, the one thing we can certainly do is we can enlarge our existing lending programs. We can start new lending programs if need be. We can do that. There are things we can do in monetary policy. There are a number of dimensions where we can move to make policy even more accommodative. Through forward guidance, we can change our asset purchase strategy. There are just a lot of things that we can do.

Comment

Central bankers are like gamblers on a losing streak desperately doubling down. You do not need to take my word for it as we can take a look at a country which has been enthusiastically buying equities for a while now, which is Japan. For example the Bank of Japan bought over 100 billion Yen’s worth as recently as Friday on its way to this.

The Bank will actively purchase ETFs and J-REITs for the time being so that their amounts outstanding will increase at annual paces with the upper limit of about 12 trillion
yen and about 180 billion yen, respectively.

As of the last update the Bank of Japan had bought some 31.4 trillion Yen of equity ETFs. How is that going?

Japan fell into a technical recession in the first quarter for the first time since 2015

That is from the Financial Times. If you think that does not do justice to an economy 2% smaller than a year ago and seeing nominal GDP declines with a large national debt, well the FT is Japanese owned these days. Meanwhile back in the real world the lost decade(s) carries on.

Why would you copy that? Yet we seem likely to do so…..

Podcast on the UK Gilt Market