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:

  • mad_professor-600x399A Historic Rally in Gold Stocks – and Most Investors Missed It
      Buy Low, Sell High? It is an old truism and everybody has surely heard it more than once. If you want to make money in the stock market, you're supposed to buy low and sell high. Simple, right?   Successful stock market investing in two simple steps Photo via slideshare.net   As Bill Bonner once related, this is how a stock market advisor in Germany explained the process to him:   Thirty years ago, at an investment conference, there was a scalawag analyst...
  • gold barGold and Negative Interest Rates
      The Inflation Illusion We hear more and more talk about the possibility of imposing negative interest rates in the US. In a recent article former Fed chairman Ben Bernanke asks what tools the Fed has left to support the economy and inter alia discusses the use of negative rates. We first have to define what we mean by negative interest rates. For nominal rates it’s simple. When the interest rate charged goes negative we have negative nominal rates. To get the real rate of...
  • NYSEWhy is the Stock Market so Strong?
      Dismal Earnings, Extreme Valuations The current earnings season hasn't been very good so far. Companies continue to “beat expectations” of course, but this is just a silly game. The stock market's valuation is already between the highest and third highest in history depending on how it is measured.   Photo credit: Kjetil Ree   Corporate earnings are clearly weakening, and yet, the market keeps climbing. The rally is a bit of a “all of worry” type of...
  • 800px-JuergenHabermasCultural Marxism and the Birth of Modern Thought-Crime
      What the Establishment Wants, the Establishment Gets If a person has no philosophical thoughts, certain questions will never cross his mind. As a young man, there were many issues and ideas that never concerned me as they do today. There is one question, however, which has intrigued me for the longest time, and it still fascinates me as intensely as it did back then: Does spirit precede matter or is it the other way around? In other words, does human consciousness create what we...
  • the worst-1Why All Central Planning Is Doomed to Fail
      Positivist Delusions [ed. note: this article was originally published on March 5 2013 – Bill Bonner was on his way to his ranch in Argentina, so here is a classic from the archives] We’re still thinking about how so many smart people came to believe things that aren’t true. Krugman, Stiglitz, Friedman, Summers, Bernanke, Yellen – all seem to have a simpleton’s view of how the world works.     A bunch of famous people with a simpleton view of how the...
  • mecca-3Gold Stampede
      Stampeding Animals The mass impulse of a cattle stampede can be triggered by something as innocuous as a blowing tumbleweed.  A sudden startle, or a perceived threat, is all it takes to it set off.  Once the herd collectively begins charging in one direction it will eliminate everything in its path.   Better get out of the way... stampeding bisons Photo credit: Surface Niusance   The only chance a rancher has is to fire off a pistol with the hope that the shot...
  • the-pantsir-s1-a-combined-short-to-medium-range-surface-to-air-missile-and-anti-aircraft-missile-system-the-system-consists-of-12-surface-to-air-guided-missiles-and-two-30-mm-automatiRussian Aggression Unmasked (Sort Of)
      Provocative Fighter Jocks Back in 2014, a Russian jet made headlines when it passed several times close to the USS Donald Cook in the Black Sea. As CBS reported at the time:   “A Pentagon spokesperson told CBS Radio that a Russian SU-24 fighter jet made several low altitude, close passes in the vicinity of the USS Donald Cook in international waters of the western Black Sea on April 12. While the jet did not overfly the deck, Col. Steve Warren called the action "provocative and...
  • 12-Capital vs consumer goods prod LTUS Economy – Ongoing Distortions
      Business under Pressure A recent post by Mish points to the fact that many of the business-related data that have been released in recent months continue to point to growing weakness in many parts of the business sector. We show a few charts illustrating the situation below:   A long term chart of total business sales. The recent decline seems congruent with a recession, but many other indicators are not yet confirming a recession - click to enlarge.   Wholesale...
  • chart-2-gold and treasury yieldGetting it Wrong on Silver
      Erroneous Analysis of Precious Metals Fundamentals We came across an article at Bloomberg today, talking about silver supply troubles. We get it. The price of silver has rallied quite a lot, so the press needs to cover the story. They need to explain why. Must be a shortage developing, right? At first, we thought to just put out a short Soggy Dollars post highlighting the error. Then we thought we would go deeper. Here’s a graph showing the price action in silver since the...
  • trumpedPolitical Pundits, or Getting Paid for Wishful Thinking
      Bill Kristol - the Gartman of Politics? It has become a popular sport at Zerohedge to make fun of financial pundits who appear regularly on TV and tend to be consistently wrong with their market calls. While this Schadenfreude type reportage may strike some as a bit dubious, it should be noted that it is quite harmless compared to continually leading people astray with dodgy advice.   To answer the question posed in the picture with the benefit of hindsight: not really.... (look...
  • HPQRunning Mate Turns Into Fall Girl
      Odd Couple While checking on the US primaries a few days ago, we came across a piece of news informing us that pretend candle-swallower Ted Cruz had picked Carly Fiorina as his “vice-presidential running mate”. Our first thought upon hearing this was “WTF”?   The match made in heaven... two loooosers find each other. Photo credit: AP   It's not so much that he's picking another “loooooser” as The Donald would put it...the real absurdity of it is that...
  • Queen_2100 Years of Mismanagement
      Lost From the Get-Go There must be some dark corner of Hell warming up for modern, mainstream economists. They helped bring on the worst bubble ever… with their theories of efficient markets and modern portfolio management. They failed to see it for what it was. Then, when trouble came, they made it worse. But instead of atoning in a dank cell, these same economists strut onto the stage to congratulate themselves.   The scalawag himself. Keynes provided governments with the...

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