"No Reason" Why ECB Shouldn't Buy Stocks: Peterson Institute

Tyler Durden's picture

Last week, we highlighted a troubling Reuters article, which we classified as a quiet "trial balloon" to set the stage for an ECB launch of stock purchases. As Reuters put it, the ECB may soon be forced to follow the Bank of Japan's example and buy equities as part of any expanded stimulus programme. Reuters recapped the familiar problem: "The European Central Bank could run out of eligible bonds for its 1.7 trillion euro bond-buying scheme, meaning alternative options are on the table should it decide to loosen policy further to lift growth and inflation across the bloc. Analysts say these could include large-scale share buying, a policy that the BOJ has already adopted after it started purchasing equity exchange traded funds (ETFs) for its own quantitative easing scheme six years ago."

Overnight, the WSJ doubled down on this "warning", writing that central banks have become some of the biggest investors in bond markets. Now some in the financial markets think stocks should benefit more from their largess. The amusing spin came when the WSJ cited "some economists" who say the European Central Bank, which meets Thursday to decide if it should expand its current bond-buying program, should invest in equities. The reason - one we have discussed for years, and which Reuters touched upon last week - "It is running out of bonds to buy."

While certainly redundant, the WSJ observes that "a move by the ECB into equities would have big implications for Europe’s stock markets." Well yeah: with equities becoming risk-free, it would mean prompt all time highs as a completely price-indescriminate buyer would now be on the verge of nationalizing yet another market, and crushing all the fundamental signals that link corporate health, the economy, or underlying industry dynamics with risk asset prices.

The prospect of billions of euros flowing into equities could prop up prices, much as ECB bond purchases have done for debt securities. The signaling effect from the ECB’s unlimited money-printing power may also limit downturns in equities.

 

Stock purchases don’t appear to be on the near-term agenda. But ECB officials haven’t ruled them out, and the idea could gain steam if they continue to undershoot their 2% inflation target.

As we first explained in early 2015, the ECB would merely join such other central banks as the BOJ and SNB in openly monetizing equities (as opposed to the hidden stock purchases by entities such as the NY Fed which does so however using Citadel as a momentum-igniting intermediary when the US stock market is in danger of tumbling). The Czech central bank has been buying stocks since 2008. Israel’s central bank also holds stocks.  In fact, the SNB has been buying stocks for over a decade "to diversify" its massive foreign-currency holdings. They now account for 20% of reserves, the resultof an unprecedented buying spree in the second quarter as first reported on this site:

 

Another big stockholder is the Bank of Japan. It had ¥10.182 trillion (about $98 billion) in individual stocks and exchange-traded funds as of Aug. 20, in terms of book value. It roughly doubled the pace of its annual ETF purchases to ¥6 trillion on July 29, 2016.

The SNB holds only foreign stocks, because buying overseas assets is supposed to weaken the strong franc. To avoid stock-picking, it mirrors broad stock indexes. The bank employs external experts to advise which companies should be excluded due to red flags such as arms dealing or environmental damage. The Japanese buy domestic equities as part of a more traditional stimulus program.

And while the ECB may not go ahead and announce equity monetization imminently, it may have no choice: "The obvious reason for the ECB to buy equities is they have almost run out of German bonds to buy,” said Stefan Gerlach, chief economist at BSI Bank and a former deputy governor of Ireland’s central bank. "The basic idea is that the central bank can put essentially anything on its balance sheet and there is no reason to be straight-laced about this.”

The good news is that once the ECB starts buying up European stocks, it would have a far bigger selection. "Equities offer a deep pool of assets. The market capitalization of listed eurozone companies was $6.1 trillion at the end of 2015, according to World Bank data."

Meanwhile the push is on, and the think tanks are already on board. First up, the Peterson Institute:

“I don’t see a reason not to do this,” said Joseph Gagnon, senior fellow at the Peterson Institute for International Economics. “It isn’t obvious to me why a central bank wouldn’t always want a diversified portfolio, including equities.”

That a member of a think tank just said that it is not obvious to him why a central bank should not buy equities - at a time when even central bankers lament that collapse in fundamentals and market logic due to central bank intervention - is so idiotic we won't even comment on it. So here is what else he said:

Mr. Gagnon suggests a more aggressive approach, pointing to the success of Hong Kong’s central bank in supporting the economy during the late 1990s Asian financial crisis by buying around 10% of the Hang Seng Index. That move sparked a 40% rally in stock prices within two months, and the index more than doubled over the next 18 months.

Which, of course, Mr. Gagnon sees no problem with.

Not everyone has completely lost it: "some economists also worry that by purchasing only public and private bonds, central banks may fuel bubbles in rate-sensitive sectors such as housing."

ECB stock purchases “would be justified: European equities are undervalued, while there is a bubble—that the ECB continues to inflate—in bonds,” said Patrick Artus, chief economist at French investment bank Natixis, in a research note.

Just ignore the bubble in equities, please.

* * *

With this full court press already in play, it is likely only a matter of time before Draghi does announce an expansion to the ECB's QE, one which will see the central bank a buyer of last resort in government and corporate bonds, as well as equities, thereby distorting all three key capital markets.

There is some hope that the only adult left in the room, Germany, will put a stop to this insanity before it is too late: "it would also raise the prospect of having Germany’s Bundesbank taking on the risk of Portuguese or Greek stocks. Germans are already deeply wary of the ECB’s bond buys and negative-rate policy."

Sadly, just as the Bundesbank rolled over in its opposition to both forms of bond purchases, so it will ultimately cave when it comes to the monetization of stocks.

Finally, while this is good news for stock bulls, as equities will have yet another artificial support, the question is what happens if and when the time comes to sell: after all, the only reason to buy stocks when central banks are in the market is to frontrun them. Which does miracles to PE multiples on the way up, however once the selling begins, especially in an illiquid market where the central bank itself has soaked up the bulk of the liquidity, it would mean an immediately bidless market as everyone rushes to the other side of the boat. Conveniently, that particular scenario is not one any current traders will have to worry about: while central bankers are notoriously experienced when it comes to buying, their selling skills have been and remain "optional."

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SomethingSomethingDarkSide's picture

What's a Reputation worth nowadays anyways?  I hear the ECB is going to start buying those too!

Manthong's picture

F yeah….

No reason at all except for maybe destroying the concept of free markets and price discovery.

Adam Smith is spinning in his grave.

 

Forward ECB Soviet!

 

economessed's picture

Hey, if printing-up money to buy ownership stakes in public companies is a good idea, why stop at that?  The ECB should expand their portfolio of policy tools to include purchasing items off of Craigslist as well.   The market for slightly-worn/stained baby clothes is in the grips of a deflationary spiral, and the ECB can fix that like it fixes everything else.

SomethingSomethingDarkSide's picture

I've got some Bonds Collaterlaized by 2nd Hand Playskool Toy Set Obligations that would diversify the shit out of their portfolio.

Maplehood's picture

Who gives a crap about diversification when you own the monetary printing press?

knukles's picture

This is a fucking bank balance sheet, fucktard.
Oh wait ... he did know.
It's the only feasible way for Global Nationalization of Everything
The domestic CB's buy all stocks.
Governments Nationalize the CB's
Uniting under the UN roof.

One World Government

OpenThePodBayDoorHAL's picture

This. It's nothing but a stealth leveraged buy-out of the world economy by a brand-new set of PE vultures...only this crowd can exchange an asset created from thin air for actual ownership of something real and tangible like the discounted future cash flows of a productive enterprise. And presumably they never ever need to sell?

I can't recall any public debate of the wisdom of this. Seems to me the sheeple would be interested to learn we have abandoned capitalism in favor of inverted hyper-communism, only without any of the pesky problems with regular communism...like letting actual people have a piece of the pie.

 

knukles's picture

 

                Word Brother

***** Knukies 5-Star Review *****

tricorn teacup's picture

"... ECB Soviet!"

indeed, a nightmare scenario: A central bank uses unlimited fiat to buy controlling shares in corporations, with focus on controlling key industries.  Defacto communism by the back door.

Piranha's picture

Yeah why not, what difference does it make?

NEOSERF's picture

Exactly, there are no bubbles when the world has been cleared of pins.

RaceToTheBottom's picture

Is anything not corrupted?

anarchitect's picture

Correct, it makes no difference.  After all, central bankers are immune to moral hazard.

Thebighouse's picture

A bank is a store of value. 

A stock is an ephemeral guess at value.

Which  is why they separated banking and equities with the Glasseye-Seagull act.

:/

It will blow up.  This is an accelerant.

Manthong's picture

“A bank is a store of value. “

 

A bank WAS a store of value.

ZIRP, NIRP and the G20 at Brisbane have converted banks to transaction exchanges and depositor supported speculators in which the depositors take all the risks and the banks keep all the gains.

pods's picture

So a scam set up by Joo Bankers is now being pimped to buy stocks as if they were an actual person?

"They need a diverse portfolio."

What's next, central banks get votes in elections?  

A complete and utter clownfuckery this world has become when there is an actual piece of writing that condones this.

How about every central bankers get their heads on a pole?  

Mencken comes to mind when I read this sort of shit.

pods

Hammer of Light's picture

A pole? You're being too kind I think! Shot in the face and thrown in the ditch would be a more befitting end to these diseased bastards and left for the vultures to pick.

August's picture

Nah.  Shot in both hips and thrown in the ditch. provided the ditch is already half full of water... and it's raining hard.

NoDebt's picture

Agree, pods.  A central bank needs a diverse portfolio..... why, exactly?  Isn't their job to regulate the money supply?  Since when is building a diverse investment portfolio a part of that charter?  Why would they need one?  Are they going to run out of printed dollars sometime soon?  (Don't answer that last one.)

They want claims on the productive assets of the world to hold control and power after the collapse.  Hell, Japan's central bank now owns enough controlling interest in every major Japanese company they really have, finally, earned their old nickname:  "Japan, Inc."  

Central banks are LIARS.  There is NO reason for them to own stocks in ANYTHING EVER to do their official job.  Which means they are now doing.... their UNOFFICIAL job.

monad's picture

I have certain rules I live by. My first rule is I don't believe anything the government tells me. And I don't take very seriously the media, or the press, in this country. George Carlin

Brotherhood of the Bell

https://www.youtube.com/watch?v=TKOhJppgmuw

falak pema's picture

dogma is the bane of human value systems and reasoning...

Anybody who has not understood that has not understood how people who are prejudiced to the point of being blind to the inevitable consequences of their own absolute logic are victims of self fulfilling prophecies of THEIR OWN MINDSET.

rlouis's picture

fiat - fix it again Erdogan 

Hammer of Light's picture

At what point don't these YEWBAG Bankers start turning up dead? I truly think this maggot would whore his wife, mother and your mothers out for a few extra sacks of money. This guy is as diseased as they come. The time to say death to bankers and the media shills that run front for them is rapidly approaching. This world is about to burn.

order66's picture

"I don't see a reason not to do this since I'm being given preferred shares to make this statement and already long for the win."

MajorFall's picture

Central banks are not supposed to have any portfolio

zagzigga's picture

Sure, why not? Print money out of thin air and buy stocks with it, what could go wrong? After conquering stocks, the central banks should buy real estate also and start collecting rent from all the serfs. Now, if they had to back up the money printed with gold, then it would be a whole different ball-game. It is abundantly clear by now that these academics are in a bubble of their own, relishing tv coverage and all the attnetion, and have misused and will continue to misuse the power they have been vested with. Absolute power corrupts absolutely and it is a shame these people are not called out for the bullshit they have been feeding to the masses for so long.

101 years and counting's picture

"banks should buy real estate also and start collecting rent from all the serfs."

already being done.  see: Fed buys MBS.  also see: Blackrock buys up all foreclosed properties and rents them out with money borrowed at 0% from Fed.

101 years and counting's picture

fuck stocks.  HELICOPTER money, dammit.  just print 100K (euros, dollars, etc) for every PERSON in the WORLD.  at this point, why the fuck not?  who cares if it sparks hyperinflation, as long as the precious economic market...i mean stock ponzi goes up another 10%.

Sudden Debt's picture

WHY?

WHAT ABOUT THE FREE MARKET PRINCIPLES???

This is exactly what a state run economy is like! COMMUNISME!!!


 

BurningBetty's picture

There is a reason why Mikhail Gorbatchev asked the rhetoric question as to why the West was so obsessed in creating a new Soviet state through their policies. 

Soul Glow's picture

Right because in no way does central banks buying stocks and bonds create a moral hazard.  In no way.

Bam_Man's picture

Buy everything. Buy it all.

It's only Monopoly money, anyway.

BigCumulusClouds's picture

“It isn’t obvious to me why a central bank wouldn’t always want a diversified portfolio, including equities."

Does this guy really want every with a brain to answer his stupid rhetorical question?

I wish they buy up my bad investments for 100 cents on the dollar.  It isn't obvious to me why I shouldn't get that privilege.

Fuku Ben's picture

Corporations can invest in other corporations right now. They're all on each others Board's of Directors. Why can't a fraudulently operating corporation like a Central Bank created by organized criminal racketeers (OCR) also invest in other corporations? We can't discriminate against the criminals they'll start whining about needing a safe zone. After all OCR's have rights too. If not they'll just have someone create a code or statute call it law and pretend it is legal.

south40_dreams's picture

The US fed certainly buys stocks through surrogates. Lots of stocks

Iconoclast421's picture

It is all but announced. That is why earnings are down to 2013 levels while stocks are 30% higher than 2013 levels.

aldol11's picture

the level of incompetence i encounter in all professions, including economists, is staggering

aldol11's picture

the level of incompetence i encounter in all professions, including economists, is staggering

GRDguy's picture

If Peterson is not the top agent of The Great Red Dragon, he's damn close.

"Blackstone was founded in 1985 as a mergers and acquisitions boutique by Peter G. Peterson and Stephen A. Schwarzman, who had previously worked together at Lehman Brothers, Kuhn, Loeb Inc. "

https://en.wikipedia.org/wiki/The_Blackstone_Group

northern vigor's picture

Once the ECB runs out of bonds, equities and stocks to buy with all that printed money, I hear tulip bulbs are a good investment.

theprofromdover's picture

Why???

cos they'll never get their money back (without driving the share price through the floor)

GRDguy's picture

That's the point.  When they decide nothing is worth nothing, they'll have legal TITLE.

Everyone else will be holding worthless paper promises.

One-Eyed-Thong's picture
One-Eyed-Thong (not verified) Sep 6, 2016 3:39 PM

??????, ???? !!!!

Vin's picture

Sure, all the central banks that can create "money" out of thin air should buy every asset on the face of the earth.

Isn't that the plan?

falak pema's picture

corporate monopoly capitalism : the end game as defined by Marx. We are there.

Marx said it and Reaganomics the essence of American capitalism has created it.

Talk about a self fufilling philosophy. Friedman and Nixon started it and Reagan and Thatcher took this ANGLO neoliberal template to its logical conclusion.

NWO neocon globalization under the Bushes and Clintons made it a universal disease.

QED.

Marx must be laffing in his grave in Highgate, not far from where the shard stands tall in name of : FIRE economy makes City the nexus of 1% Oligarchy.

Haha! Brexit now has the awesome task of looking itself in the mirror of Lady Shalott.

And moving thro' a mirror clear
That hangs before her all the year,
Shadows of the world appear.
There she sees the highway near
Winding down to Camelot:

There the river eddy whirls,
And there the surly village-churls,
And the red cloaks of market girls,
Pass onward from Shalott.

NaiLib's picture

If they really wanted inflation they would have bought Gold.

dunce's picture

I thought Glass Steagal act was designed to keep banks out of the stock market but it was repealed because someone could not see what purpose it had. Things have been getting worse since then but "who" knows why? It is like some fool with an complicated machine wondering what would happen if i pushed this button? Probably nothing.