When Central Banks Underwrite the Stock Market
Consider a situation where vast droves of the stock market are owned by central banks. Guess what? that is exactly what we are seeing today. Much like days during the GFC when central banks started buying as much debt as possible increasing balance sheets to record levels, just to fend off what would have been a catastrophic event for financial markets. Central Banks to their credit warded off or at least deferred a severe crisis. For credit investors it was a license to print money, interest rates were falling and central banks would soak up liquidity. Shares in companies and investments in ETF’s are now the norm when we look at the gambit of Public Investor bodies (Central Banks, Pension Funds, Sovereign Funds etc)
Now let’s consider a future where credit markets freeze. Should we expect credit to collapse? By the new construct of the market, a collapse might not necessarily occur in the fashion we have traditionally expected. Why? First the central banks hold large amounts of debt on their balance sheets so they aren’t likely sellers in the open market. Contrast this scenario with the heydays of the 80’s 90 and 00’s. When Goldman Sachs, Merrill, Warburg (UBS) etc were investing their balance sheets into various credit structures. These banks were the first to dump debt into the market causing the classic panic and subsequent freeing of the market. As we know, negative credit borrowing means recession i.e. tight money. We had the Central banks to thank for stepping in during the GFC to reboot the economy, but only after markets had halved. Today, those series of events are unlikely to occur as the large holders of debt happen to be Central Banks and they are unlikely to dump assets into the market.
In the years after the GFC we have a totally different structure where risk taking is rewarded with handsome rewards. Stepping back and reflecting on the new structure one should actually feel great relief even though the markets generally do not allow this sentiment.
Today we have Central Banks around the world that have the greatest incentive in keeping the markets moving higher or at the very least preventing from a forbidding market correction of damaging proportions. Extracting the emotions that go into investing in the stock market knowing Central Banks playing pack-man gobbling stocks, one should be able to sleep at night without much to worry. For the very same reasons as credit investors, equity investors have started to enjoy this sanctuary. Central Banks are highly unlikely to dump stocks into a falling market and going by previous attempts they are more likely to be buyers.
This market rally described by some commentators as the most unloved and reticent rally, fortunately, it is adored by the Central Banks, with streams of super smart board members occupying powerful positions at those institutions. Betting against these powerful fiefdoms has been injudicious for many.
Analysis by OMFIF shows that Public investors (those being central banks, government agencies and government pensions etc) hold a total of $33trn invested across all asset classes. The People’s Bank of China, the largest with over $3.5trn is the hardest to track whereas the worlds largest pension fund, The Norwegian Pension Fund ($1trn) publicly discloses its holdings. However institutions like the Japanese Monetary Authority and the Japanese Government Pension make it the second and third largest public investors with total assets of $2.5trn (2017). With virtually zero yields, you cant blame them moving up the risk curve. The Norwegian and Japanese ( BOJ now the largest holder of Japanese ETF’s, is a top 10 shareholder in 90% of the Japanese stock market) wealth funds are increasingly exposed to large swathes of the global stock markets. Maybe they will start looking at bitcoin soon????