John Carney has a puzzle. Why are stocks booming despite a lackluster economy? He may have found part of the answer:
Another lackluster quarter of economic growth is likely to have the same impact on the market as its predecessors—which is to say, not much.
Despite a prolonged period of weak improvement in gross domestic product, stocks have continued on a progressive, albeit bumpy, ride higher.
The 136 percent stock market surge over the past four years has come despite the weakest recovery since the Great Depression, and more recently signs that those expecting a period of stronger growth will be disappointed.
No matter, though, as investor—riding a wave of Federal Reserve liquidity and sentiment that the U.S. remains a safer store of money than its troubled global competitors—keep buying despite the slow economy.
The folks at BusinessWeek expand on that:
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.
If I understand things correctly the central banks issue credit to themselves, use the credit to purchase equities, the value of stocks rise, and the dealers in equities take commissions and pay themselves bonuses.
Now on to the next puzzle. Why is the inequality in incomes increasing?
Is that enough to bump up stock prices? World stock market valuation was about $50 trillion at the end of last year. Japan currently owns $17 billion of equities. Are stock prices that inelastic?
Steve
It’s not just Japan. It’s a dozen central banks pumping money into equities over a fairly short period. I would think that would create a little froth. Following Ev Dirksen, a billion here and a billion there and pretty soon you’re starting to talk about real money.
Then there’s the confidence that having central banks pump money into equities brings to other so-called investors. There’s plenty more where those central banks’ money comes from.
Between central banks, sovereign wealth funds, and people who know a sure thing when they see it, I find it a bit concerning.
Maybe the confidence thing might be true. Your article notes that Japan, at $17 billion has the second most invested in equities. Suggests central banks dont have that much actual money sunk into them. I think QE would matter more. I also think that there is a lot of undocumented improvement in productivity.
Steve
Yield chase. Believe me or not. But if you don’t, its at your own peril. And when the game of musical chairs ends, and the Fed stops printing and fixed income security prices rise……….I sure as hell hope all here, who I actually admire and respect greatly, aren’t in the equities markets disproportionately.
Its a classic market dislocation.
My point here, RB, is that central banks of monetary sovereigns are different. I’m wary of their investing in equities at all.
Dave
Let me try to be clear, and we may be saying the same thing. Fixed income yield has been depressed, so people go up the risk curve……and buy equities. That is a really, really bad public policy.
In addition, when you make the price of money to a bank almost zero, and then they turn around and buy risky securities – but not make loans – …….that’s even worse public policy. Its regulatory capture. I’m not sure there are 4 people here who really get it.
Think about who suffers with artificially low cost of money. Its almost criminal.
This administration is perhaps the worst of my adult lifetime. They should be all over this and using the bully pulpit. However, it serves their political goals………and the rest be damned.
It is a yield chase on some level. But this time, it is different and scarier. It is primarily due to the Fed and secondarily other central banks. Fed investment in equities is something new since September 2008. Probably should not be investing in equities. It is the only thing stabilizing the US stock market in my opinion. Also, Fed has been buying up or has bought up other securities. Loaded up with subprime mortgages for example. Fed has a specific guy in charge of a desk that does this on an ongoing basis.
It will work until it doesn’t. When the music stops, not gonna be any chairs.
Here is part of the answer. Is it a conflict of interest for the number two guy at JP Morgan to be the Chief Advisor to the US Treasury? See link. Also, recall JP Morgan is a member bank of the Fed. So they are on all sides of “the deal”. What did Rothschild say about controlling a country’s money? Zero rates for savers, widows and orphans. 0.25% for private Fed banks to borrow plus control monetary policy and decisions. Btw, you will never learn this from CNBC. They get paid from these outfits to stay on air and not dig. They should be investigating and reporting this stuff. (remember Obama chief of staff Bill Daley in first term came from JP Morgan where he was vice chairman)
http://www.zerohedge.com/news/2013-04-28/chief-advisor-us-treasury-set-become-jpmorgans-second-most-important-man
A bit of a tangent:
Lately I’ve been thinking of turning points. Consider these graphs:
Federal Funds Rate
years-to-payback-us-government-debt
And public debt any number of ways:
Constant Dollars
Constant dollars per capita
Percentage of GDP
Incomes in constant dollars. (note that stagnation begins about 1970.
US Trade surplus/deficit(600×349)
Right around 1980, give or take a few years, something happened. What was it?
“In addition, when you make the price of money to a bank almost zero, and then they turn around and buy risky securities – but not make loans – …….that’s even worse public policy.”
Dont they always seek the highest yield? For sure, if the cost of money is zero they can make money just buying Treasuries at zero risk, which is what they have been doing. If they want higher yield, they can make loans. That should hold whether they get their money at 0% or 2%.
Given the higher risk of securities, how much can they buy? Dont they always have the incentive to buy riskier securities for higher yield?While banks have some ability to assess the risk on loans, when they choose to do so, what expertise do they have on assessing the risks of securities?
Steve
China ended its official policy of autarky in 1979.
Dave,
Can that explain all the changes we’ve seen?
I think that when you combine China’s entrance into the world economy with China’s pegging the yuan to the dollar and the policy responses to both it does.
When the smartest people begin accepting the obvious, things are about to explode.
The stock market is an indicator of future stock market behavior. It has not been tethered to reality for a decade or more. It should finally be obvious that the market movement is related to future market prices.
Presently, it is obvious that stock prices are moving based upon future prices not business performance or the economy, and this is not a new phenomenon. There will be those who disagree, and they will ride it down.
Those who proclaimed there was no pending housing/financial crisis should not be trusted. They were either stupid, or they were hustling the idiots.
“Dont they always seek the highest yield? For sure, if the cost of money is zero they can make money just buying Treasuries at zero risk, which is what they have been doing. If they want higher yield, they can make loans. That should hold whether they get their money at 0% or 2%.”
steve
You are completely missing my point. Of course they seek highest yield. That’s axiomatic. Everyone does.
But what is happening is that lenders are taking the path of least resistance. And they are smart cookies; they know what the Fed is doing. You get free money and you get to put it into Fed induced appreciating equities. Wow.
Meanwhile, you get to oh-so-slowly bleed out your bad mortgage forclosure assets without changing reserve requirements. Presto!!
Not much of a finance guy, are you steve?
“But what is happening is that lenders are taking the path of least resistance. And they are smart cookies; they know what the Fed is doing. You get free money and you get to put it into Fed induced appreciating equities. Wow.
Meanwhile, you get to oh-so-slowly bleed out your bad mortgage forclosure assets without changing reserve requirements. Presto!!”
I get this part I think. I have said before that the Fed and Treasury are doing this to help the banks recapitalize. The part I dont get is how raising the rates banks borrow to, say, 2% would make a big difference. Banks would still seek yield. They would still want to have risky equities.
“Not much of a finance guy, are you steve?”
Nope. Read macro and micro and some behavioral plus health care economics, so I will sit at the feet of the master and learn. I am sure you will have me crossing rice paper w/o a mark in a decade or two.
Steve
@steve
… The part I don’t get is how raising the rates banks borrow to, say, 2% would make a big difference. Banks would still seek yield. They would still want to have risky equities.
At one time, banks with access to the Fed were not allowed to have risky equities. They were highly regulated, but they had access to cheap money.
Many of the Fed programs are intended to keep the banks solvent and meeting their capital requirements. The low Fed rate is an attempt to get money into the economy through lending. What we are learning is that you cannot force the banks to lend and that you cannot force people to borrow.
The banks have been bashed for making too many sub-prime loans, and now that they are making prime loans, they are being bashed again. Interestingly, this is being done by the same people.
The low Fed rate is hurting many people.
TB- Your last line is a non sequitur. I mostly agree with everything you say, pushing on a string is tough, but how do those low rates hurt people? If the Fed rates are higher banks wont want higher yielding, riskier equities anymore? They will suddenly stop chasing yield? Why?
Steve
@steve
The zero interest rate is only helping a few people, but it is hurting a lot of people. It is supposed to be “serving the greater good”, but it is not. The Fed is a quasi-government entity, and therefore, it should not be hurting people, needlessly.
Anything called a bank can now access the Fed, and they have all the protection of traditional banks. I do not know what the new rules are, but they cannot operate as hedge funds. The banks still need shareholders to fulfill their capital requirements, and many of those shareholders do not want a high risk investment.
Instead of a debate about the Fed’s interest rate, there should be a debate about the Fed’s purpose.