The Real Reason Central Banks are Buying Stocks

Are we wrong or is everyone else wrong?

Can we see things no one else can see?

Maybe.

We’ll start believing we have unworldly powers if this carries on.

Perhaps your editor is the ‘chosen one’ of financial forecasting.

OK. We don’t really believe that. We don’t really have special powers. It’s just that the rest of the market appears to have gone completely bonkers.

Despite all the clues, they just can’t see what’s really going on with this market. We don’t know why. It’s simple…

We’re not kidding. This market has taken by surprise some of the smartest minds in the financial markets.

Take this report from the Financial Times:

‘Like many investors, Mr Hasenstab [portfolio manager at Franklin Templeton] was wrongfooted by this year’s unexpected fall in US Treasury yields; also like many others, he has yet to find a single convincing explanation.’

Is it really that hard?

What more convincing do these folks need other than the fact that central banks are using every power they have to keep interest rates low.

And by every power, we mean it.

How can this surprise anyone?

Governments and central banks simply can’t afford for interest rates to rise too high. The higher interest rates go, the more interest governments have to pay on new debt.

In the past, governments would have to grin and bear these interest rate fluctuations. As odd as it may seem now, the threat of higher interest rates forced governments to be cautious about going into too much debt.

We know that seems crazy. Because at the time government debt levels seemed high. Of course, that’s nothing compared to where they are now. Even the Aussie government is now in hock for $320 billion. Just six years ago the federal debt level was around $60 billion.

The five-fold increase in debt levels by the Aussie government is among the biggest debt increases in the Western world.

So with all this in mind, how can it surprise anyone that central banks and governments would do all they can to keep interest rates as low as possible?

As the chart shows, the US 10-year bond yield is already well above where it was from 2011 to 2013 during the height of the US money printing program:

Our bet is the US Federal Reserve won’t want interest rates going too much higher, as each tenth of a percentage point rise adds US$62 billion to the US government’s interest bill.

So even though all the talk is about the end of money printing, don’t let that fool you. The experiment in low interest rates isn’t over by a long shot. And now it’s taking a new turn.

‘Buying’ the entire Australian stock market

Another report in the FT reveals the extent to which central banks are going to keep interest rates low:

‘Central banks around the world, including China’s, have shifted decisively into investing in equities as low interest rates have hit their revenues, according to a global study of 400 public sector institutions.’

The report suggests that central banks have increased stock holdings by US$1 trillion in recent years. That’s the rough equivalent of buying nearly every stock listed on the ASX.

It’s a big number.

But we dare say the report misses the mark. The inference is that central banks are buying stocks because they aren’t making enough money by holding bonds.

Read the rest of this article at Money Morning