The Securities Litigation Expert Blog

This Can Only End Badly: Central Banks are Buying Equities

Posted by Jack Duval

Apr 26, 2013 3:12:16 AM

In a recent survey of 60 Central Banks, 25 percent of them have been buying equities, and most plan to start if they haven't already.  (Bloomberg)

Among central banks that are buying shares, the SNB has allocated about 12 percent of assets to passive funds tracking equity indexes. The Bank of Israel has spent about 3 percent of its $77 billion reserves on U.S. stocks.

In Asia, the BOJ announced plans to put more of its $1.2 trillion of reserves into exchange-traded funds this month as it doubled its stimulus program to help reflate the economy. The Bank of Korea began buying Chinese shares last year, increasing its equity investments to about $18.6 billion, or 5.7 percent of the total, up from 5.4 percent in 2011. China’s foreign-exchange regulator said in January it has sought “innovative use” of its $3.4 trillion in assets, the world’s biggest reserves, without specifying a strategy for investing in shares.

During the buildup of the Japanese stock market bubble in the late 80's, Japanese banks loaded up on local real estate and equities.  When the bubble burst, the banks were bankrupt almost over night.  The result is that now, 23 years later, the Japanese stock market is still down about 70 percent from it's all time high.  Now the BOJ is putting more than a trillion dollars into equities.  When this print money-buy equities bubble bursts, it will be the Japanese government that is bankrupt.

In another historical note:  in the late 1920's, Joe Kennedy got out of the stock market when his shoe shine boy started giving him stock tips - on the logic that if the shoe shine boy was in the market, there was no one left to buy.  In our age of top-down intervention, we have Central Banks getting long equities.  If Central Banks are in the market, who else is left to buy?

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Topics: bubble, investments, equity, Central Banks, Joe Kennedy, Japan

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