Over the last several years, two powerful forces have helped to drive the stock market far higher than many have expected. The first, as we all know, has been very loose monetary policy through a combination of low rates and continuous rounds of QE by the Federal Reserve.
The second has been the record amount of stocks bought by companies through share buybacks—close to half a trillion dollars last year with another $160 billion in the first quarter of this year (see story).
It appears we may now have to add a third item to the list.
Last month, a report released from the Official Monetary and Financial Institutions Forum (OMFIF) gained wide attention by shedding light on yet another powerful force that may contribute to overheating markets around the globe.
In a recently published interview with Financial Sense, David Marsh, Co-Founder and Managing Director of the OMFIF, explains how central banks are now suffering the consequences of their own low-rate policies and, like everyone else, attempting to earn greater returns by shifting directly into stocks.
Although a limited number of central banks have been doing this for quite some time, on a “worldwide scale it is relatively new...and therefore really worth taking heed of,” said David.
When asked how long this might last, David didn’t think this was a temporary move but “part of a longer-term trend.” Central banks, he said, “tend to be rather herd-like creatures. They will look at this market for a number of years, figure out how best to attack it…and then once they’ve discovered a taste for these markets, they will stay there.”
Although careful with his choice of words, David does warn that this growing trend may contribute to a “slightly overheated international equity market”:
“I'm not saying that this is the factor driving the markets but it may be a factor in some areas leading to a possible tendency for overheating. It is interesting that the central bankers’ bank, the Bank for International Settlements, just over the weekend has pointed out that some capital market participants are getting a little bit carried away by euphoria and investing too much in risky assets. And, of course, this is really like the pot calling the kettle black because many of the shareholders of the BIS, which includes 60 central banks from around the world, are themselves investing in equities. Although they are trying to do it, I'm sure, in a way that isn't driving up equity prices, they may be in aggregate helping to lead to what we might think in future years has become a slightly overheated international equity market.”
That may be putting it mildly. Ben Bernanke did after all admit that by threatening to use the printing press and "expand the menu of assets that it buys...sufficient injections of money will ultimately always reverse a deflation."
It will be interesting to see where this goes.
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