In Thursday’s post, I noted that central banks are adding approximately $2 trillion a year to the world’s money supply. Most of that freshly-created money goes into government bonds. However, some of it goes into equities. That’s right, stocks, like those traded on the NYSE and the NASDAQ.
The Swiss National Bank and the Bank of Japan are the two largest buyers of stocks. The BoJ buys stocks that comprise the Nikkei 225 Index, making it the top shareholder in one of the world’s largest equity markets. The BoJ also is one of the top five owners of 81 companies in the Nikkei.
In 2016, the BoJ purchased $36.5 billion, which was up 40% from 2015’s purchases. There has been no indication that the BoJ plans to diminish its infusion of money into stocks.
While the BoJ restricts its equity purchases to the Nikkei 225, the SNB buys US stocks. Apple (AAPL) is its largest holding.
As of December 2016, the SNB owned $63.4 billion in US stocks. And, that’s in addition to the Swiss and European stocks it owns. $63.4 billion is an increase of more than 1,000% over the bank’s 2007 holdings. Equities make up 20% of the SNB’s total reserves.
Twenty years ago, central banks buying stocks was unthinkable. But, we now live in a Brave New World. Because so far there have been no negative ramifications from all the money that central banks have created, we can expect it to continue.
The major problem with central bank money creation is that it has become widely accepted. Esteemed economists (Keynesian) see no harm. The public, which basically is not economically educated, is oblivious to what’s happening. After all, didn’t Fed chair Ben Bernanke save the world in 2008 when the World Financial Crisis hit by printing billions of dollars?
There is no way of knowing when the negative aspects of money creation will be felt, nor how they will manifest. Historically, we worried about inflation, i.e. rising prices. Perhaps scarier, we have to look out for financial crises brought on by cheap money.
When money is cheap, less diligence is spent in determining if investments are good. Consider Puerto Rico, which is $74 billion in debt and bankrupt.
No one should have bought the later Puerto Rican debt issues. Maybe the earlier issues could be justified. The territory could handle that debt load; but, the buyers of the later issues rationalized that the US would bail them out, which if it does, will be by adding to the national debt, now pushing $20 trillion.
This financial climate is very dangerous. Will stocks continue to climb higher? That’s certainly a possibility with central banks buying stocks. But, as Chuck Butler noted in the 6/15/17 Dow Theory Letters, “Markets have deeper pockets than any central bank.”
If the markets turn bearish and central banks try to head off stock and bond declines by creating new money, hyperinflation could be the result. In which case, gold and silver will again be recognized as the ultimate safe havens.