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! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

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:

  • tintedFree Money Leaves Everyone Poorer
      Destroying Lives BALTIMORE – A dear reader reminded us of the comment, supposedly made by Groucho Marx: “A free lunch? You can’t afford a free lunch.”   Groucho dispensing valuable advice Photo via imdb.com   He was responding to last week’s Diary about the national referendum in Switzerland on Saturday. Voters will decide whether to give all Swiss residents a free lunch – a guaranteed annual income of about $30,000 a year [ed note: the initiative was...
  • French labour union workers and students attend a demonstration against the French labour law proposal in Marseille, France, as part of a nationwide labor reform protests and strikes, March 31, 2016. REUTERS/Jean-Paul Pelissier/File PhotoHow the Welfare State Dies
      Hollande Threatens to Ban Protests Brexit has diverted attention from another little drama playing out in Europe. As of the time of writing, if you Google “Hollande threatens to ban protests” or variations thereof, you will find Russian, South African and even Iranian press reports on the topic. Otherwise, it's basically crickets (sole exception: Politico).  Gee, we wonder why?   They don't like him anymore: 120.000 protesters recently turned Paris into a war zone. All...
  • offendFree Speech Under Attack
      Offending People Left and Right Bill Bonner, whose Diaries we republish here, is well-known for being an equal opportunity offender  - meaning that political affiliation, gender, age, or any other defining characteristics won't save worthy targets from getting offended. As far as we are concerned, we generally try not to be unnecessarily rude to people, but occasionally giving offense is not exactly beneath us either.   The motto of the equal opportunity...
  • cameron-doomedMoving Closer to BREXIT
      Polls Show Growing Support for a Break with the EU In the UK as elsewhere, the political elites may have underestimated the strength of the trend change in social mood across Europe. The most recent “You-Gov” and ICM pools show a widening lead in favor of a UK exit from the EU as the day of the vote comes closer.   Pro-BREXIT campaigners Boris Johnson (ex-mayor of London) and Michael Gove (UK Secretary of Justice) are in a good mood. Photo credit: Paul Grover /...
  • water houseA Market Ready to Blow and the Flag of the Conquerors
      Bold Prediction MICHAELS, Maryland – The flag in front of our hotel flies at half-mast. The little town of St. Michaels is a tourist and conference destination on the Chesapeake Bay. It is far from Orlando, and even farther from Daesh (a.k.a. ISIL) and the Mideast.   St. Michaels, Maryland – the town that fooled the British (they say, today). Photo credit: Fletcher6   Out on the river, a sleek sailboat, with lacquered wood trim, glides by, making hardly a...
  • The-answer-is-yesToward Freedom: Will The UK Write History?
      Mutating Promises We are less than one week away from the EU referendum, the moment when the British people will be called upon to make a historic decision – will they vote to “Brexit” or to “Bremain”? Both camps have been going at each other with fierce campaigns to tilt the vote in their direction, but according to the latest polls, with the “Leave” camp’s latest surge still within the margin of error, the outcome is too close to call.   The battle lines are...
  • nails-in-a-bed-of-nails-new-yorker-cartoonGoing... Going... Gone! The EU Begins to Splinter
      Dark Social Mood Tsunami Washes Ashore Early this morning one might have been forgiven for thinking that Japan had probably just been hit by another tsunami. The Nikkei was down 1,300 points, the yen briefly soared above par. Gold had intermittently gained 100 smackers – if memory serves, the biggest nominal intra-day gain ever recorded (with the possible exception of one or two days in early 1980). Here is a picture of Haruhiko Kuroda in front of his Bloomberg monitor this...
  • queen_gold-840x501Rule Britannia
      A Glorious Day What a glorious day for Britain and anyone among you who continues to believe in the ideas of liberty, freedom, and sovereign democratic rule. The British people have cast their vote and I have never ever felt so relieved about having been wrong. Against all expectations, the leave camp somehow managed to push the referendum across the center line, with 51.9% of voters counted electing to leave the European Union.   Waving good-bye to...
  • MACAU, CHINA - JANUARY 28: Buildings of Macau Casino on January 28, 2013, Gambling tourism is Macau's biggest source of revenue, making up about fifty percent of the economy.What Could Possibly Go Wrong?
      A Convocation Of Gamblers The Wall Street Journal and BloombergView have just run articles on the shadow banking system in China.  This has put me in a nostalgic mood. About 35 years ago when I was living in Japan, I made a side trip to Hong Kong.   Asia's Sin City, Macau Photo credit: Nattee Chalermtiragool   I took the hydrofoil to Macau one afternoon and the same service back early the next morning.  On the morning trip, I am sure that I saw many of the...
  • tree removal permit-1The Real Reason We Have a Welfare State
      From Subject to Citizen BALTIMORE – June 5th, the Swiss cast their votes and registered their opinions: “No,” they said. We left off yesterday wondering why something for nothing never works. Not as monetary policy. Not as welfare or foreign aid. Not in commerce. Not never, no how. But something for nothing is what people most want.   The future Switzerland just managed to dodge... for now   The Swiss voted against awarding all citizens a “universal basic...
  • junkThe Problem with Corporate Debt
      Taking Off Like a Rocket There are actually two problems with corporate debt. One is that there is too much of it... the other is that a lot of it appears to be going sour.   Harvey had a good time in recent years...well, not so much between mid 2014 and early 2016, but happy days are here again! Cartoon by Frank Modell   As a brief report at Marketwatch last week (widely ignored as far as we are aware) informs us:   “Businesses racked up debt in the...
  • saupload_loves-me-loves-me-notA Darwin Award for Capital Allocation
      Beyond Human Capacity Distilling down and projecting out the economy’s limitless spectrum of interrelationships is near impossible to do with any regular accuracy.  The inputs are too vast.  The relationships are too erratic.   The economy - complex and ever-changing interrelations. Image credit: Andrea Dionne   Quite frankly, keeping tabs on it all is beyond human capacity.  This also goes for the federal government.  Even with all their data gatherers and...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

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]

 

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

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com