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Tags: Central Banks | risks | investors | markets

Central Banks Turning Into World's Biggest Hedge Funds

Central Banks Turning Into World's Biggest Hedge Funds
(Dollar Photo Club)

Dr. Edward Yardeni By Tuesday, 26 April 2016 08:49 AM Current | Bio | Archive


The major central banks are no longer just the Banks of Last Resort. They are turning into Investors of First Resort. In the long run, it’s hard to imagine that having the central monetary planners buy corporate bonds and stocks with the money they print can end well.

In effect, the central banks are turning into the world’s biggest hedge funds, financed by their own internal primary (money-printing) dealers and backstopped by the government — which can always borrow more from the central bank or force taxpayers to make good on this Ponzi scheme. Nevertheless, in the short run, it should be bullish for bonds and stocks. Consider the following:
 
(1) ECB. Yesterday, we discussed the ECB’s plan to start buying corporate bonds in June. When ECB President Mario Draghi was asked at his press conference last Thursday whether the ECB is considering buying corporate shares too, he said there are no plans to do so. Of course, by buying corporate bonds, the ECB is benefitting share prices by providing companies with a more liquid market for their bond issues, with yields likely to be lower than before the ECB entered the market.
 
In fact, while the ECB can buy government bonds issued by the members of the Eurozone only in the secondary market, and not in the primary market for new issues, there is no such restriction for the ECB’s corporate bond purchases, with the central bank buying as much as 70% of individual issues. So the ECB can be an extremely important financier for Eurozone corporations.
 
(2) BOJ.
On January 29, the BOJ shocked and awed financial markets by introducing negative interest-rate policy (NIRP). At the end of last week, there were rumors that the central bank is considering helping banks to offer negative interest-rate loans (NIRLs). More shocking and awesome has been the BOJ’s low-key purchases of stocks.
 
On 4/24, Bloomberg reported: “While the Bank of Japan’s name is nowhere to be found in regulatory filings on major stock investors, the monetary authority’s exchange-traded fund purchases have made it a top 10 shareholder in about 90 percent of the Nikkei 225 Stock Average, according to estimates compiled by Bloomberg from public data. It’s now a major owner of more Japanese blue-chips than both BlackRock Inc., the world’s largest money manager, and Vanguard Group, which oversees more than $3 trillion.”

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

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EdwardYardeni
Central banks turning into world’s biggest hedge funds, financed by their own printing presses.
Central Banks, risks, investors, markets
409
2016-49-26
Tuesday, 26 April 2016 08:49 AM
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