Central Banks Wade Into Stocks

Readers may recall that we have frequently remarked that the fact that central banks have reportedly become fairly large net buyers of gold over the past two years was at best irrelevant and at worst a contrary indicator. What it never was and never will be, is bullish. There is some hope that it may not be a big negative signal, due to the fact that the central banks doing the buying are not the same ones that sold between $250 and $600 and because they only buy fairly small amounts. However, it sure hasn't been a positive signal so far. Central banks as a rule are the worst traders in the world.

It is therefore interesting that the latest central bank fad is apparently to buy stocks. They didn't buy stocks in early 2009, mind. They probably had to wait for the markets to 'look safe' or something like that.

Bloomberg reports:

 

Central banks, guardians of the world’s $11 trillion in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk- averse investors toward equities.

In a survey of 60 central bankers this month by Central Banking Publications and Royal Bank of Scotland Group Plc, 23 percent said they own shares or plan to buy them. The Bank of Japan, holder of the second-biggest reserves, said April 4 it will more than double investments in equity exchange-traded funds to 3.5 trillion yen ($35.2 billion) by 2014. The Bank of Israel bought stocks for the first time last year while the Swiss National Bank and the Czech National Bank have boosted their holdings to at least 10 percent of reserves.

[…]

The survey of 60 central bankers, overseeing a combined $6.7 trillion, found that low bond returns had prompted almost half to take on more risk. Fourteen said they had already invested in equities or would do so within five years. Those conducting the annual poll had never before asked that question.

“I definitely see other central banks doing or considering equities,” said Jan Schmidt, the executive director of risk management at the Czech National Bank in Prague, which has built up stocks to 10 percent of its $44.4 billion in reserves since 2008.

[…]

Central banks’ purchases of shares show how the “hunger for yield” is changing the behavior of even the most conservative investors, according to Matthew Beesley, head of equities at Henderson Global Investors Holding Ltd. In London, which oversees about $100 billion.

“Equities are the last asset class standing,” Beesley said in a phone interview on April 18. “When you have dividend yields in excess of bond yields, it’s a very logical move.”

 

(emphasis added)

Good grief. Yes, it's only 'logical' to invest in the 'last asset class standing' – which means in translation: the one asset class that's recently been in an uptrend. We weren't actually aware that central banks had a 'hunger for yield'. Aren't they supposed to be out there 'fighting inflation'? Just kidding.

However, they are supposed to be the stewards of the currencies they issue, and it is not entirely clear why that suddenly requires them to pile into equities. One thing is certain though: it is an example of very interesting timing.

 

NYSE Margin Debt Back at Nominal Record High

Just as central bankers eagerly eye stocks as a means to 'diversify' their reserves, margin debt at the NYSE is finally back at its 2007 record high. It may well grow even larger this time around though, as the annual rate of change has not yet achieved a spike similar to those seen in 1999/2000 and 2007.

Still, in spite of rising stock prices, investor net worth has now been negative for more than three years (with a few brief interruptions). That's not as long as during the 1990s mania, but longer than the period preceding the 2007 peak. Naturally, investors have nothing to worry about, since it is well known that the DJIA is going to 36,000 next. Even if it is 'impossible to predict how long it will take'.

 


 

margin debt
NYSE margin debt is back at its 2007 peak. It may make an even higher peak this time around, but it would probably be a mistake to completely ignore this datum – click to enlarge.

 


 

But then again, mutual funds have seen large inflows lately, so surely they have lots of cash to deploy? Unfortunately their cash amounts to only 3.7% of their assets, 40 basis points above an all time low. The small wiggles that can be seen on the chart in recent months are likely the result of said inflows.

 


 

mufu cash
Mutual fund cash-to-assets ratio – it has never been as low as over the past three years – click to enlarge.

 


 

Surely that doesn't mean much though, since it hasn't meant anything for three years running. And besides, investors are bearish, so stocks can only go higher.

 


 

Consensus Inc
Consensus Inc. bullish consensus on stocks – click to enlarge.

 


 

OK, so some investors are bearish. But it isn't as if speculators were heavily long futures on speculative stocks, something like small caps, say.

 


 

CoT RUT
A new record high in speculative net long positions on Russell 2000 futures – click to enlarge.

 


 

Enough already…who cares about these technicalities? Fundamentals are sound! Companies are throwing off oodles of cash!


 

corporate cash flow
Corporate net cash flows turn negative – click to enlarge.

 


 

That seems to leave only one thing: central banks are buying stocks and they know best!

We must admit that the above amounts to some extent to an exercise in cherry-picking of data. Not every stock market-related sentiment and positioning datum looks as stretched as the ones shown above. There are surveys like Consensus Inc. and Market Vane that are pretty much at the top of their historical range, but others like the Investors Intelligence survey look  less extreme. Speculators don't hold record net long positions in all stock index futures, but their long positions are nevertheless historically large in all of them (they are not far from records in most of them – and the records were all set within the past year).

Economic conditions are meanwhile at best middling in the US, and downright atrocious in Europe and Japan. China is growing, but less than it used to and it has a debt problem to boot (of course, everybody has a debt problem).

 

Conclusion:

Either the stock market 'knows' something we don't – and we frankly don't think so, because it usually knows very little – or it is indeed rising on fumes. No doubt the fact that central banks continue to be 'accommodating', i.e., are printing gobs of money, currently lends support to stocks. One must however be careful with such simplistic cause-effect schemata. One could for instance ask, why is this additional money no longer lifting commodity prices? And how does the persistent bid enjoyed by 'safe haven' type government bonds jibe with rising stock prices? To be sure, warning signs like the ones discussed above have been noticeable for many months and this hasn't kept the rally from continuing. It was easy to underestimate its persistence, and may still persist for even longer. However, once even central banks are beginning to buy stocks, a few extra alarm bells should start ringing.

Oh well, at least stocks are cheap.

 


 

S&P 500 Average 12-Year PE
SPX, average 6 year and 12-year p/e ratio 1877- today (chart via our friend BC) – click to enlarge.

 


 

Oops! Sorry! : )

 

 

Charts by: Sentimentrader, St. Louis Fed, BC


 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

3 Responses to “Central Banks and Their Unerring Sense of Timing”

  • Jimmy, there won’t be any redemption cash problems. Those people will get out at the bottom.

    As far as the charts, the bottom one says all. They are all out there saying, stocks are cheap. Compared to what? The whole mess is in its current structure for a reason, that business conditions are in doubt. But, there isn’t a view of risk any more, despite the financial tragedies that have occurred over the past, especially the recent past. Dividend yields are part of the long term risk return on stocks and they are historically low, not high. If long term inflation is 3%, long term real growth 1%, dividends need to be 5% to reach 9%, the nonsense long term return on stocks. As the bottom chart shows, we have been in a historic bubble that is outside the bounds of anything else on the charts. That includes the bottom in 2008.

    Stocks are no different than any financial product, the long term return is established by the purchase price, not by the perceived future. There is over 100 years of data to look at what the future will hold on the broad market and its growth potential. The sizable returns have been made almost exclusively from periods of high dividends and low PE’s and never from peaks. Note the real return made from the 2000 peak in the SPX and even the Dow, which has outperformed, mainly due to timely splits and the replacement of corpses with live entities. The credit bubble influenced high level of corporate profits hasn’t eliminated the overvaluation, only put values on a more unstable slope, as outliers always return to the norm. Corporate earnings have reached almost double prior peaks in percentage of GDP and added to other factors, promise a huge fall in stock valuations. A return to normal would entail a loss of roughly 50% of corporate earnings across the board, not a welcome prospect. What won’t go on forever won’t. The rest of the economy no longer has the resources to support such a transfer of wealth or credit.

  • SavvyGuy:

    “I definitely see other central banks doing or considering equities,” said Jan Schmidt, the executive director of risk management at the Czech National Bank in Prague, which has built up stocks to 10 percent of its $44.4 billion in reserves since 2008.

    ***************

    Monkey see, monkey do!

  • jimmyjames:

    But then again, mutual funds have seen large inflows lately, so surely they have lots of cash to deploy? Unfortunately their cash amounts to only 3.7% of their assets, 40 basis points above an all time low.

    ************

    So when everyone heads for exits at once- where will the redemption cash come from in a possible no bid market?
    No problem–Mutual Funds have forever had the same sort of “bail in” eg: Cypress type of clause that’s become the latest trendy fad across the world now-
    If selling freezes up in a crashing market- they can simply issue you shares “of the fund” in lieu of cash and then you will be allowed to watch your cash disappear from a different angle-

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • The Capital Structure as a Mirror of the Bubble Era
      Effects of Monetary Pumping on the Real World As long time readers know, we are looking at the economy through the lens of Austrian capital and monetary theory (see here for a backgrounder on capital theory and the production structure). In a nutshell: Monetary pumping falsifies interest rate signals by pushing gross market rates below the rate that reflects society-wide time preferences; this distorts relative prices in the economy and sets a boom into motion – which is characterized by...
  • Full Faith and Credit in Counterfeit Money
      A Useful Public Service There are nooks and corners in every city where talk is cheap and scandal is honorable.  The Alley, in Downtown Los Angeles, is a magical place where shrewd entrepreneurs, shameless salesmen, and downright hucksters coexist in symbiotic disharmony.  Fakes, fugazis, and knock-offs galore, pack the roll-up storefronts with sparkle and shimmer.   The Alley in LA – in places such as this, consumers are as a rule well served by applying a little bit of...
  • How to Get Ahead in Today’s Economy
      “Literally On Fire” This week brought forward more evidence that we are living in a fabricated world. The popular story-line presents a world of pure awesomeness. The common experience, however,  falls grossly short.   There are many degrees of awesomeness, up to total awesomeness – which is where we are these days, in the age of total awesomeness, just a short skip away from the Nirvana era. What is Nirvana, you may wonder? We only know for sure that Nirvana is what...
  • US Money Supply Growth Jumps in March , Bank Credit Growth Stalls
      A Movie We Have Seen Before – Repatriation Effect? There was a sizable increase in the year-on-year growth rate of the true US money supply TMS-2 between February and March. Note that you would not notice this when looking at the official broad monetary aggregate M2, because the component of TMS-2 responsible for the jump is not included in M2. Let us begin by looking at a chart of the TMS-2 growth rate and its 12-month moving average.   The y/y growth rate of TMS-2...
  • Gold and Gold Stocks – Conundrum Alert
      Moribund Meandering Earlier this week, the USD gold price was pushed rather unceremoniously off its perch above the $1300 level, where it had been comfortably ensconced all year after its usual seasonal rally around the turn of the year. For a while it seemed as though the $1,300 level may actually hold, but persistent US dollar strength nixed that idea. Previously many observers (too many?) expected gold to finally break out from its lengthy consolidation pattern, but evidently the...
  • Fear and Longing - Precious Metals Supply and Demand
      Waiting for Permanent Backwardation  The price of gold dropped 9 bucks, while that of silver rose 3 cents. Readers often ask us if permanent backwardation (when gold withdraws its bid on the dollar) is still coming. We say it is certain (unless we can avert it by offering interest on gold at large scale). They ask is it imminent, and we think this is with a mixture of fear and longing for a higher gold price.   Lettuce hope this treasure is not cursed... but it probably is....
  • Scorn and Reverence - Precious Metals Supply and Demand
      Shill Alarm One well-known commentator this week opined about the US health care industry:   “...the system is designed the churn and burn... to push people through the clinics as quickly as possible. The standard of care now is to prescribe some medication (usually antibiotics) and send people on their way without taking the time to conduct a comprehensive examination.”   From the annals of modern health care... [PT]   Nope. That is not the standard...
  • Global Turn-of-the-Month Effect – An Update
      In Other Global Markets the “Turn-of-the-Month” Effect Generates Even Bigger Returns than in the US The “turn-of-the-month” effect is one of the most fascinating stock market phenomena. It describes the fact that price gains primarily tend to occur around the turn of the month. By contrast, the rest of the time around the middle of the month is typically far less profitable for investors.   Good vs. bad seasonal timing...   [PT]   The effect has been studied...
  • Tales from “The Master of Disaster”
      Tightening Credit Markets Daylight extends a little further into the evening with each passing day.  Moods ease.  Contentment rises.  These are some of the many delights the northern hemisphere has to offer this time of year. As summer approaches, and dispositions loosen, something less amiable is happening.  Credit markets are tightening.  The yield on the 10-Year Treasury note has exceeded 3.12 percent.   A change in pace: yields are actually going somewhere. There is...
  • Is Political Decentralization the Only Hope for Western Civilization?
      Voting with their Feet A couple of recent articles have once more made the case, at least implicitly, for political decentralization as the only viable path which will begin to solve the seemingly insurmountable political, economic, and social crises which the Western world now faces.   Fracture lines – tax and regulatory competition allows people to “vote with their feet” - and they certainly do. [PT]   In the last few months, over 3,000 millionaires have...
  • Why the Fundamental Gold Price Rose - Precious Metals Supply and Demand
      Gold Lending and Arbitrage There was no rise in the purchasing power of gold this week. The price of gold fell $22, and that of silver $0.19. One question that comes up is why is the fundamental price so far above the market price? Starting in January, the fundamental price began to move up sharply, and the move sustained through the end of April.   1-month LIBOR (London Interbank Offered Rate – the rate at which banks lend euro-dollars to each other). LIBOR and GOFO...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

The Review Insider

Dog Blow

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

Diary of a Rogue Economist