Stanley Fischer, who cost his central bank a lot of money with his ill-timed bet to invest billions of the Bank of Israel's foreign currency reserves on names such as Apple last year [10], has demonstrated that Einstein's definition of insanity is alive and well when it comes to central-planners, has just decided to double down on stocks. Alas, this is not a joke. Bloomberg reports [11]that "The Bank of Israel plans to almost double equity holdings by the end of the year after falling bond yields prompted the central bank to invest in European shares for the first time. The bank will increase its stock holdings to as much as 6 percent of foreign-exchange reserves, or about $4.5 billion, from 3 percent at the end of 2012, according to Yossi Saadon, a Bank of Israel spokesman. Investments in shares rose to about 4.5 percent of assets in the first four months of 2013 as the institution made a “small allocation” to European equities in addition to its U.S. funds, he said." Well, if the BOI's investment in AAPL was the beginning of the end for that company, one can start shorting Europe - an academic Keynesian just called the top.
Why is the Bank of Israel gambling in a manner that until recently was seen as taboo by even the most clueless of economist PhDs? For a reason only an absolutely clueless academic could come up with: "risk-premia." Bloomberg again [11]:
“The basis for the decision to invest in equities is the expected equity-risk premium over bonds,” Saadon wrote in an e- mailed response to questions today. “The goal of this move is to improve the return-to-risk ratio of the reserves.”
Is that like Obama's " [12]profit and earning ratios [12]"?
Where will Israel allocate capital ?
The Bank of Israel bought equities for the first time in March of last year, according to Saadon. The initial purchases were made through UBS AG and BlackRock Inc. The bank’s investments are in passive funds tracking broad MSCI indexes, including companies like Apple Inc.
“There has been talk for a long time that they needed to diversify out of Israel,” said Uri Landesman, president of New York-based hedge fund Platinum Partners, which manages about $1.2 billion. “I’m not thrilled with the European equity market this second, but when a central bank makes a move like this, it’s not a day trade. They’re not going to reverse themselves overnight.”
The Israeli institution joins the the Swiss National Bank in buying shares this year. The Zurich-based SNB’s stock portfolio rose to 15 percent of assets last quarter, from 12 percent at the end of last year, according to data released yesterday on its website.
And that is how it's done.
So for all those who still have something as trivial as a cost-basis when chasing risk in the "new normal", and unlike central banks, can't simply conjure buying dry powder out of thin air printer, which they then use to accumulate "foreign reserves" with which to buy stocks, all we have to say is "condolences."
Of course, the central banks know this, and hope that everyone else merely comes along for the ride and front runs the banks to such an extent that an actual investment is unnecessary. Kinda like Draghi's Europe and the whole still non-existent OMT. The one thing these same academics forget is that the reason nobody wants to invest in markets anymore, is because being side by side central banks guarantees yet another epic bubble burst just like last time. And since the market is now officially broken, and since everyone else will get to exit first, what is the point of being herded into whatever stock some Princeton or MIT professor says you should buy?
In the meantime, central banks can just buy and sell stocks to each other sending "markets" to 30,000, 40,000, 50,000 or some other now meaningless number. Everyone knows now we are in the biggest and final bubble. If nothing else, at least having cluless economists buying stocks regardless of prices will bring the final reset that much faster.