Stock Markets: A Managed Affair?

There is no other place to put your money.

Investors from around the world are parking their money in the United States stock market.  The economy is rebounding.  All this may be true.  But is it not also true that the “stock market” has become a managed affair? Managed by whom one might ask.  Well, some evidence is starting to come to the surface.

The Federal Reserve is a Central Bank that is charged with a curious power to smooth out the blips in the banking system, keep stable prices, maintain moderate interest rates, and promote full employment.  Noble endeavors no doubt.

The Fed, as with other central banks around the world, have their ranks often filled by those plucked from the banking and brokerage industry.  Those schooled in economics and the like should be in position to dispense wisdom when such is required. 

Some claim that the entire arrangement is designed to enrich a few due to special flows of information regarding the bank’s operations.  In the past the Central Bank’s machinations have mostly dealt with interest bearing securities such as bonds and notes.

The Fed and other Central Banks seem to operate at arms length to any arrangement of accountability. Because of this, these banks seem to self expand their powers and broaden their scope.  If the environment is good, a blind eye is turned.  If the environment is really good, both eyes are blind.  Stocks are at all time highs. 

Central Banks are buying the stock market.  Do not question if this is in their mission statement or within the scope of their mandated operations.  Stocks are up, all is good.

But if all is good, why do the Fed and other Central Banks feel the need to support what should be a self supporting stock market?

Zero Hedge reports,

...we now know, with certainty and beyond merely speculation by tinfoil fringe blogs, that central banks around the world trade (and by "trade" we mean buy) S&P 500 futures such as the E-mini, in both futures and option form, as well as full size, and micro versions, in addition to the well-known central bank trading in Interest Rates, TSY and FX products.

Exchanges have even created special commission and fee structures for Central Bank “trading” in the stock market. 

One of the reasons for the move into equities reflects central banks’ efforts to compensate for  lost revenue on their reserves, caused by sharp falls in interest rates driven by official institutions’ own efforts to repair the financial crisis….

This is among the findings of Global Public Investor (GPI) 2014, the first comprehensive survey of $29.1tn worth of investments held by 400 public sector institutions in 162 countries…The report, focusing on investments by 157 central banks, 156 public pension funds and 87 sovereign funds....

To be fair, pension and other funds find investing in stocks well within their realm of normal activity.  But, when Central Banks buy stocks, a light must go off.   Central Banks’ main operations deal with curing short term liquidity events in the banking system.  Because banks borrow short term and lend long term, Central Banks play an important role.  But Central Banks buying stocks because they are being hurt by the low interest rates that they themselves create is a new event. They explain that because they aren’t getting enough of a return on their reserves they have turned to buying stocks. Since when is a Central Bank a for profit entity?  It is a dangerous notion.

One might ask, who at these Central Banks decide what to buy, and when? Who decides when to stop buying?   And exactly how will they manage their portfolios when it becomes necessary to raise interest rates?  Who will decide, and who will know, and when?  Would they ever choose to raise rates and perhaps harm their portfolio? Will they ever trim their equity exposure by selling out to unknowing buyers?  How could that not happen?  And how could that not be insider trading, manipulation, and just inherently unfair? “We reduced our equity position by selling, then we raised interest rates,” they might explain.  But then certainly those who bought and did not have the knowledge that a rate increase was imminent are harmed and thus certainly possess a legitimate grievance.

Central planners, as Hayek warned, reward some groups over others, deliberately.  It is crystal clear that those in the know, those who appointed the board members to these Central Banks, those who are fully invested and fear not geo political events, those who have knowledge of Central Bank decision making, are in the group rewarded by the central planners.  For they must realize as do the banks themselves, that there is money to be made in the markets if it is known that supportive measures for stocks will remain in full effect mode. 

Just like Lawrence Olivier delving into Dustin Hoffman’s dental work in the movie Marathon Man, and asking “Is it safe”, the answer has been given.  It is safe, because the Central Banks will make it “safe”.  Don’t ask why they need to support the markets; they just are and that’s all you need to know, for now.

But for the others, those who won’t be first to receive the “get out” memo, enjoy the ride or maybe the sidelines.  This is new territory for Central Banks.

There is no other place to put your money.

Investors from around the world are parking their money in the United States stock market.  The economy is rebounding.  All this may be true.  But is it not also true that the “stock market” has become a managed affair? Managed by whom one might ask.  Well, some evidence is starting to come to the surface.

The Federal Reserve is a Central Bank that is charged with a curious power to smooth out the blips in the banking system, keep stable prices, maintain moderate interest rates, and promote full employment.  Noble endeavors no doubt.

The Fed, as with other central banks around the world, have their ranks often filled by those plucked from the banking and brokerage industry.  Those schooled in economics and the like should be in position to dispense wisdom when such is required. 

Some claim that the entire arrangement is designed to enrich a few due to special flows of information regarding the bank’s operations.  In the past the Central Bank’s machinations have mostly dealt with interest bearing securities such as bonds and notes.

The Fed and other Central Banks seem to operate at arms length to any arrangement of accountability. Because of this, these banks seem to self expand their powers and broaden their scope.  If the environment is good, a blind eye is turned.  If the environment is really good, both eyes are blind.  Stocks are at all time highs. 

Central Banks are buying the stock market.  Do not question if this is in their mission statement or within the scope of their mandated operations.  Stocks are up, all is good.

But if all is good, why do the Fed and other Central Banks feel the need to support what should be a self supporting stock market?

Zero Hedge reports,

...we now know, with certainty and beyond merely speculation by tinfoil fringe blogs, that central banks around the world trade (and by "trade" we mean buy) S&P 500 futures such as the E-mini, in both futures and option form, as well as full size, and micro versions, in addition to the well-known central bank trading in Interest Rates, TSY and FX products.

Exchanges have even created special commission and fee structures for Central Bank “trading” in the stock market. 

One of the reasons for the move into equities reflects central banks’ efforts to compensate for  lost revenue on their reserves, caused by sharp falls in interest rates driven by official institutions’ own efforts to repair the financial crisis….

This is among the findings of Global Public Investor (GPI) 2014, the first comprehensive survey of $29.1tn worth of investments held by 400 public sector institutions in 162 countries…The report, focusing on investments by 157 central banks, 156 public pension funds and 87 sovereign funds....

To be fair, pension and other funds find investing in stocks well within their realm of normal activity.  But, when Central Banks buy stocks, a light must go off.   Central Banks’ main operations deal with curing short term liquidity events in the banking system.  Because banks borrow short term and lend long term, Central Banks play an important role.  But Central Banks buying stocks because they are being hurt by the low interest rates that they themselves create is a new event. They explain that because they aren’t getting enough of a return on their reserves they have turned to buying stocks. Since when is a Central Bank a for profit entity?  It is a dangerous notion.

One might ask, who at these Central Banks decide what to buy, and when? Who decides when to stop buying?   And exactly how will they manage their portfolios when it becomes necessary to raise interest rates?  Who will decide, and who will know, and when?  Would they ever choose to raise rates and perhaps harm their portfolio? Will they ever trim their equity exposure by selling out to unknowing buyers?  How could that not happen?  And how could that not be insider trading, manipulation, and just inherently unfair? “We reduced our equity position by selling, then we raised interest rates,” they might explain.  But then certainly those who bought and did not have the knowledge that a rate increase was imminent are harmed and thus certainly possess a legitimate grievance.

Central planners, as Hayek warned, reward some groups over others, deliberately.  It is crystal clear that those in the know, those who appointed the board members to these Central Banks, those who are fully invested and fear not geo political events, those who have knowledge of Central Bank decision making, are in the group rewarded by the central planners.  For they must realize as do the banks themselves, that there is money to be made in the markets if it is known that supportive measures for stocks will remain in full effect mode. 

Just like Lawrence Olivier delving into Dustin Hoffman’s dental work in the movie Marathon Man, and asking “Is it safe”, the answer has been given.  It is safe, because the Central Banks will make it “safe”.  Don’t ask why they need to support the markets; they just are and that’s all you need to know, for now.

But for the others, those who won’t be first to receive the “get out” memo, enjoy the ride or maybe the sidelines.  This is new territory for Central Banks.