How many central banks will end up buying equities?

Sometimes we can combine one of our themes with the news flow and today is an example of that. We can start with the role of central banks where what was considered extraordinary policy is now ordinary and frankly sometimes mundane. We have seen interest-rate cuts, then QE bond buying, then credit easing and of course negative interest-rates. Overnight even the home of the All Blacks has joined the latter party.

Some New Zealand wholesale rates fell below zero for the first time on Wednesday as investors increased bets on a negative policy rate. Two and three-year swap rates sank to minus 0.005%, as did the yield on the benchmark three-year bond. ( Bloomberg)

So we have negative bond yields somewhere else as the contagion spreads. Whilst it is only marginal the track record so far is that it will sing along with Madonna.

Deeper and deeper, and deeper, and deeper

Bloomberg thinks it is driven by this.

Most economists expect the RBNZ to cut its cash rate from 0.25% to minus 0.25% or minus 0.5% in April next year, and some see the chance of an earlier move.

However they seem to have missed the elephant in the room.

The Monetary Policy Committee agreed to expand the Large Scale Asset Purchase (LSAP) programme up to $100 billion so as to further lower retail interest rates in order to achieve its remit. The eligible assets remain the same and the Official Cash Rate (OCR) is being held at 0.25 percent in accordance with the guidance issued on 16 March. ( Reserve Bank of New Zealand 12 August)

So we are on the road to nowhere except according to Bloomberg it was a triumph in Sweden.

Negative rates were successful in Sweden because they achieved the aim of returning inflation to target without causing any significant distortions in the economy, said Lars Svensson, an economics professor in Stockholm and a former deputy governor at the Riksbank.

Only a few paragraphs later they contradict themselves.

Swedish mortgage rates dropped below 2%, causing house prices to surge to double-digit annual gains, but unemployment fell and the economy grew. Crucially, headline inflation rose steadily from minus 0.4% in mid-2015 to meet the central bank’s 2% target two years later. Inflation expectations also rose.

And again.

The Riksbank sent its policy rate into negative territory in early 2015, reaching a low of minus 0.5% before raising it back to zero late last year.

It worked so well they raised interest-rates in last year’s trade war and they have not deployed them in this pandemic in spite of GDP falling by 8%!

Oh and there is the issue of pensions.

In Sweden, the subzero-regime was advantageous for borrowers but brutal for the country’s pension industry, which struggled to generate the returns needed when bond yields turned negative.

So in summary we arrive at a situation where in fact even the Riksbank of Sweden has gone rogue on the subject of negative interest-rates. Going rogue as a central bank is very serious because they are by nature pack animals and the very idea of independent thought is simply terrifying to them.

Also the Riksbank of Sweden is well within the orbit of the supermassive black hole for negativity which is the European Central Bank or ECB. We learn much I think by the fact that in spite of economic activity being in a depression no-one is expecting an interest-rate cut from the present -0.5%. When we did have some expectations for that it was only to -0.6% so even the believers have lost the faith. This is an important point as whilst the Covid-19 pandemic has hit economies many were slowing anyway.

Policy Shifts

We are seeing central banks start to hint at ch-ch-changes.

Purchases of foreign assets also remain an option.

The Governor of the Bank of England Andrew Bailey has also been on the case and the emphasis is mine.

But one conclusion is that it could be preferable, and consistent with setting monetary conditions
consistent with the inflation target, to seek to ensure there is sufficient headroom for more potent expansion
in central bank balance sheets when needed in the future – to “go big” and “go fast” decisively.

He then went further.

That begs questions about when does the need for headroom become an issue? What are the limits? One
way of looking at these questions is in terms of the stock of assets available for purchase.

He refers to UK Gilts ( bonds) but he is plainly hinting at wider purchases.

Swiss National Bank

This has become something of a hedge fund via its overseas equity purchases. For newer readers this all started with a surge in the Swiss Franc mostly driven by the impact of the unwinding of the “Carry Trade” where investors had borrowed Swiss Francs. The SNB promised “unlimited intervention” before retreating and now as of the end of June had 863.3 billion Swiss Francs of foreign currency assets. It did not want to hold foreign currency on its own so it bought bonds. But it ended up distorting bond markets especially some Euro area ones so it looked for something else to buy. It settled on putting some 20% of its assets in equities.

Much of that went to the US so we see this being reported.

Swiss National Bank is one of the leading tech investors in the world. 28% of SNB’s Equity portfolio is allocated to tech stocks. Swiss CenBank has 17.4mln Apple shares worth $6.3bn or 538k Tesla shares worth $630mln. ( @Schuldenshelder )

So this is a complex journey on which we now note an issue with so-called passive investing. The SNB buys relative to market position but that means if shares have surges you have more of them each time you rebalance. So far with Apple that has been a large success as it has surged above US $2 trillion in market capitalisation as the recent tech falls are minor in comparison.But the 20% fall in Tesla yesterday maybe a sign of problems with this sort of plan. It of course has surged previously but it seems to lack any real business model.

The Tokyo Whale

The Bank of Japan bought another 80.1 billion Yen of Japanese equities earlier today as it made its second such purchase so far this month. As of the end of last month the total was 33,993,587,890,000 Yen. Hence its nickname of The Tokyo Whale.

Quite what good this does ( apart from providing a profit for equity investors) is a moot point? After all the Japanese economy was shrinking again pre pandemic and there was no sign of an end to the lost decades.

Comment

We find ourselves in familiar territory as central bankers proclaim the success of their polices but are always expanding them. If they worked it would not be necessary would it? For example the US Federal Reserve moving to average inflation targeting would not be necessary if all the things they previously told us would work, had. I expect the power grab and central planning to continue as they move further into fiscal policy via the sort of subsidies for banks provided by having a separate interest-rate for banks ( The Precious! The Precious!) like the -1% provided by the ECB. Another version of this sort of thing is to buy equities as they can create money and use it to support the market.

The catch of this is that they support a particular group be it banks or holders of assets. So not only does the promised economic growth always seem to be just around the corner they favour one group ( the rich) over another ( the poor). They have got away with it partly by excluding asset prices from inflation measures, but also partly because people do not fully understand what is taking place. But the direction of travel is easy because as I explained earlier central bankers are pack animals and herd like sheep. They will be along…..

The incredible story of Tesla and its soaring share price

This week has seen a continuation of what has become quite an incredible story with various messages for our times. So without further ado let me hand you over to IG Index this morning .

Tesla $800 handle – Market cap now > $140bn

For those who do not follow this sort of thing the share price has passed US $800 which is a further advance on the US $780 close yesterday which itself was a rally of just under 20 per cent on the day. Extraordinary enough in its own way but even more so when we note that the low in the past year was US $176.99

Moving onto the concept of a market capitalisation there is always an issue in using a marginal price for a collective concept and this is even more true here as we note the surge. After all it has gone from around US $32 billion to over US $140 billion inside a year! That provides its own critique. Even more so when we see Tesla is mainly a car company at a time the overall industry is struggling. On that subject Charlie Bilello points out this.

Over the past week, Tesla’s market cap has increased by $40 billion (from $100 billion to $140 billion). For some perspective, Ford currently has a market cap of $35 billion.

A response to this illustrated part of the issue.

Ford’s a dying company bro. I literally do not know anyone who owns a Ford anymore.

😂

yet everyone I talk to is at least intrigued by getting a Tesla ( @RobTheBrave )

 

To which he replied.

Ford sold 2.4 million vehicles in 2019. Tesla sold 367 thousand.

The exchange illustrates another feature of this move which can be highlighted by quoting the Imagine Dragons.

You made me a, you made me a believer, believer
(Pain, pain)
You break me down, you build me up, believer, believer
(Pain)
Oh let the bullets fly, oh let them rain
My life, my love, my drive, it came from
(Pain)
You made me a, you made me a believer, believer

Much of the situation here is binary you either believe or do not and indeed it often feels like something George Michael sung about.

‘Cause I gotta have faith
I gotta’ have faith
Because I gotta have faith, faith, faith
I got to have faith, faith, faith

Tesla

If we switch to its situation there are pretty much as many questions around as there were when the share price was some US $600 lower. Here is FT Alphaville on the profit/loss situation.

Margins have also improved, with Tesla’s 2019 ebitda margin rising 1.5 percentage points year-on-year to 9.1 per cent, and even on a net income basis, Tesla has been posting GAAP profits. Although the margins themselves are not much to write home about, at just 2.3 per cent and 1.4 per cent for the last two quarters respectively.

Despite these positives, top-line growth from its automotive segment also came to standstill year-on-year, as lower asking prices counterbalanced its record deliveries of 367,656 cars.

So some improvement but roaring ahead does not usually come with having to cut your prices. Whilst it made record deliveries they were still less than 400,000 which in the grand scheme of things is not much. Also in a mirror image of the discussion we have had in the past about banks and how it is difficult to get absolute profit figures there are plenty of doubters about the Tesla ones.

The other issue is cash flow as there were worries it would run out. One way it dealt with this was typical in an era of low interest-rates and QE.

Turning to the balance sheet, and Tesla has developed a sizeable cash buffer of $6.3bn, up from $3.7bn at the end of 2018. In part thanks to its improved cash generation, and in part thanks to the $2.3bn it raised in May last year. ( FT Alphaville )

So it borrowed some and on the surface it looks as though cash generation has improved although that case fades once you observe the detail as explained by the FT.

Let’s start with 2019’s free cash flow figure of $973m, which we define as operating cash flow minus both capital expenditure and the net cost for solar energy systems.

The first point is that stock-based compensation, a non-cash cost for a corporate but not a shareholder, came to $898m for the year, or 92 per cent of free cash flow. Of that $898m, just under a tenth of the cost came from Musk’s ludicrous-mode pay packet, revealed chief financial officer Zach Kirkhorn on the conference call. Ex-stock based compensation, free cash flow would have been just $75m.

Hard to believe the rules allow you to do that is it not?

Also FT Alphaville points out that capital expenditure had seen some severe austerity.

In the end, 2019’s capex came to just $1.3bn — a $1bn saving which is roughly equivalent to its total free cash flow.

Kirkhorn acknowledged on the call that Tesla has got better at spending cash, not that impressive a feat given the “ alien dreadnought” production system ended up with Model 3s being made in a giant tent. But spending $1bn less than expected nine months ago is more than just counting the cents.

Yet somehow this coincides with plenty of new products and development.

If Tesla had no new models, or factories, on the horizon this may be more understandable. But this year the Model Y is due to go into production, with the Cybertruck, Roadster and Semi-truck all set to follow in the not too distant future:

How does that work exactly?

Also there are questions to be asked about the inventory.

Even though deliveries exceeded production by 7,204 units, inventory remained flat at $3.5bn.

Comment

Firstly if you have been long Tesla shares or derivatives well played. Now if we switch to the soaring share price there has clearly been a technical influence which has been this.

Investors betting against Elon Musk’s electric-auto maker Tesla collectively lost more than $1.5 billion on Thursday as the company’s stock rocketed higher after its better-than-expected earnings report.

Tesla finished Thursday’s session up 10.3% at $640.81 per share, meaning short sellers betting against the stock lost in excess of $1.5 billion in mark-to-market losses on the day, according to data firm S3 Analytics.

That is from CNBC last week which in this fast moving market is now behind the times but it illustrates the issue and there is more.

In fact, Tesla short sellers are now down more than $5.2 billion this year in mark-to-market losses after losing $2.89 billion in 2019, S3 said. Since the stock’s low of $178.97 on June 3, 2019, Tesla short sellers have covered 19.11 million shares, worth $11.1 billion, and are down $12.43 billion in mark-to-market losses, according to S3′s Ihor Dusaniwsky.

These sort of rallies require people to be short the shares and this is where it gets awkward because many of the reasons for them doing that still exist. But the situation is that this has been a “short squeeze” exacerbated in my opinion by two factors. The first is that many smaller investors and some bigger ones wont sell because they are as I pointed out earlier,

You made me a, you made me a believer, believer

Next in an era of environmentally conscious investing then new investors came in and pushed the stock even higher.

One piece of context is that the car industry seems prone to these sort of short squeezes as we saw this happen to Volkswagen back in the day. How did that turn out?

So my hint for holders is to at least consider the advice of Steve Miller and his band.

Bobbie Sue took the money and run
Hoo-hoo-hoo, go on, take the money and run
Go on, take the money and run
Hoo-hoo-hoo, go on, take the money and run
Go on, take the money and run

2019 and all that….

As we arrive at Christmas and reach the end of the blogging year there is a lot to consider and review. Markets have thinned out to such an extent I noted a news service mentioning a rally in Japan earlier. Well I suppose 9 points up to 23,830 is indeed a rally but you get the idea. It also gives us a opening perspective as that level means it has been a successful year for The Tokyo Whale. As it progresses on its journey to buy all the ETFs listed in Japan the buying on down days strategy has been a winner on two counts. Firstly it provides a type of put option for an equity market already bolstered by a negative interest-rate and other forms of QE or rather QQE as the former name got rather debased in Japan by all the failures. Secondly it can declare a marked to market profit although of course there is the issue of how you would ever take it?

Below from this morning’s Bank of Japan balance sheet update are its holding so far.

28,199,294,050,000 Yen

The Plunge Protection Team indeed.

As Governor Kuroda enjoys his glass of celebratory sake there is the issue of the economy though which this was supposed to boost. This morning’s release of the minutes of the October meeting suggest little real progress has been made here.

A different member pointed out that, taking into account the current situation in which downside risks to economic activity and prices were significant, the Bank should continue to examine whether additional monetary easing would be necessary.

Then there was this,

In response to this, some members pointed out that, while it was appropriate for the Bank to maintain the current monetary easing policy at this meeting, it was necessary for the Bank not to hesitate to take additional easing measures if there was a greater possibility that the momentum toward achieving the price stability target would be lost.

This really is fantasy stuff as the inflation rate below indicates.

  The consumer price index for Japan in Novbember 2019 was 102.3 (2015=100), up 0.5% over the year before seasonal adjustment, and up 0.2% from the previous month on a seasonally adjusted basis.

More significant is the index level showing a total of 2.3% inflation since 2015 or in spite of the Abenomics effort there pretty much isn’t any. The Consumption Tax rise will bump it up for a bit and then it will presumably go back down just like last time.

Tesla

As you can see there was quite an event yesterday,

New York (CNN Business)Tesla CEO Elon Musk once said he had a buyer that would take Tesla private at $420 a share. That never happened — but the stock just got there on its own.

Musk tweeted in August last year that he is “considering taking Tesla private at $420. Funding secured.” At the time, the share price was $379.57 — nowhere near $420. Speculation about the identity of the mystery buyer was rife, and many investors thought Musk might be making a joke: 420 has become synonymous with cannabis culture.

This provokes all sorts of thoughts starting with Elon Musk should in my opinion have been punished much harder for that tweet. Next comes the fact that the share price fell to US $180 in June when there were lots of doubts about the company. One of the amazing parts of the rally has been that they have not gone away. In fact in some ways they are reinforced by this sort of thing,

BEIJING/SHANGHAI (Reuters) – U.S. electric vehicle maker Tesla Inc (TSLA.O) and a group of China banks have agreed a new 10 billion yuan ($1.4 billion), five-year loan facility for the automaker’s Shanghai car plant, three sources familiar with the matter said, part of which will be used to roll over an existing loan.

Also I guess it has benefited to some extent by the stock market ramping of President Trump. A development which we noted late last year carried on where he is essence got at least some of the policy moves from the US Federal Reserve he wanted and the equity market has flown.

The S&P 500 climbed 0.09, hitting another all-time high of 3,224.01. The Nasdaq Composite advanced 0.23% to 8,945.65. The S&P 500 is up more than 28% for 2019 through Friday, about 1 percentage point away from 2013′s gain of 29.6%. ( CNBC)

Merry Christmas Mr.President….

Bond Markets

This is a slightly different story from the one above. Yes we saw some extraordinary highs for bond markets this year and out of them the most extraordinary was seen In Germany.  A ten-year yield that went below -0.7% for a while in late summer which begged all sorts of questions. In compound terms you would be expecting to lose more than 7% if you bought and held to maturity which poses the question why would you buy at all? Beyond that there is the issue of the impact on pensions and other forms of long-term saving as who would invest 100 Euros to get around 92 back?

That to my mind is one of the reasons why QE has not worked. The impact on what Keynes called “animal spirits” of the fact that we always seemed to need more monetary “help” and easing unsettled things as well as, ironically in the circumstances, torpedoing the banking business model.

But back to bond markets we saw the futures contract in Germany head near to 180 which to any does not mean much but these things were designed to be between say 80 and 120. The QE era put a light under that.

Now though things have quietened down with some longer-date German bonds in positive yield territory and the ten-year now -0.25%. Still negative in the latter case but less so. It has turned out to be a case of buy the rumour and sell the fact as bond prices have fallen and yields risen since the ECB restarted its QE bond purchases in November. Some were obviously punting on the amount being higher than 20 billion a month which is curious as for some countries ( Germany and the Netherlands for example) there are not so many left to buy.

Meanwhile back home in the UK the ten-year Gilt yield has for now anchored itself around the Bank Rate of 0.75%. There is a tug of war going on between chances of an interest-rate cut and more fiscal expansionism. But there are two themes as the fiscal policy chance to have really low borrowing yields has to some extant passed and as a final point real yields are still strongly negative.

Comment

I intend to take a break until the New Year. So let me wish you all a Merry Christmas and a Happy New Year and I will return in the next decade.