These markets can turn on a dime and the market reaction to last weeks hopes of a China – US trade settlement is testimony to that . We will cover more on it this week . The truth is the market has given no indication whatsoever of an intermediate- bottom , much less a major bottom . Sentiment indicators still show historic optimism on a long term basis , substantial optimism on an intermediate term basis and a return of optimism on a short term basis . There was a bout of pessimism heading into the low of Dec 26 but that has totally reversed over the course of last four weeks . In fact by all measures investors and traders are more optimistic today then they were at major market tops .
What are the latest rationale for such optimism ? . It was the most successful hedge fund manager Druckenmiller who coined the idea to never go against the Central banks . It must have worked for him and it all depends on the time frame . Let us look at some of the central bank activities and see if they are really market leaders and if they are any smarter than the markets .
The clear evidence is in gold . When central banks were selling gold its price was rising and when they started buying gold , it has peaked and fallen . I don’t think central banks pushed gold prices around . On the contrary, the gold markets played them for suckers . If you don’t trust me check out BOE where they sold and bought gold . Do you think the implications of their stock buying will be any different?. Let’s check that out as well .
The BOJ was the pioneer in buying stocks from the markets outright . In 2002-2004 and again in 2009-2010 they bought relatively small amounts of stocks , specifically shares owned by troubled Japanese banks . Incredibly it was a net seller of stocks in 2008 along with rest of the world . But later they got the idea that buying and holding stocks is some sort of anti- deflationary, pro- economy, monetary easing policy . On that note they have been buying stocks and stocks related derivatives non – stop since 2010 . According to a broker report the BOJ has become a top – 10 shareholder in about 70 pct of shares in the Tokyo stock Exchange. The bank bought a record 6 trillion yen worth of stock oriented instruments for 2018 and has pledged to continue buying them at that pace . At the end of last year they owned 30 trillion yen worth of exchange traded funds .
Let’s look at another central bank . The Swiss National bank joined the party in 2005 . By late 2018 , 20 pct of their foreign assets were in the form of stock shares . It had sunk 700 bio of its new francs into foreign assets , an amount that exceeds the entire GDP of the Swiss economy. It’s portfolio includes nearly 9 bio usd of 3 high flying US tech stocks . Acting just like the odd – lotters of the old days , the central banks have become much confident at the top that owning stocks is a safe bet and a good idea .
Since none of us have a very long term perspective the facts are not clear to us . If you take the history of BOJ and SNB going back to 1950 none of them bought any stocks in the 1950s , 1960s , 1970s, 1980s, 1990s. It is only after the peak in 2000 they started buying . There are other central banks who have been also buying stocks . The clear ones are the central banks of Norway and Israel but the figures indicating their full participation is not publicly available. The central bank of Norway stopped reporting in mid – 2017 when they were holding about 200 US company shares worth about 250 bio dollars . The BOJ is so bullish now that it is among the ten biggest investors in 40 pct of all Japanese companies.
How is it working out so far ? . As per an article on Jan 9 , 2019 in the wall street journal , one year after posting a record 55 bio dollar profit , the SNB has swung to a 15 bio dollar loss in 2018 . That’s a lot of money to loose . By the way the SNB itself is a publicly traded company and the price of its stock has plunged from 10,000 CHF to 4000 CHF a decline of nearly 60 pct . The BOJ has done even worse . After peaking at 740,000 yen at the top of the Japanese bull market in 1989 , it is down to 37,000 yen .
One would think such historical information would deter other central bankers from taking the plunge . Not really . Look what the Chinese are up to and it is the most worrying thing at a global level . Will cover that through a separate letter some other time .
Author: ©Abraham George, CEO, Founder at AllSeasonsPTL Capital Management Ltd
