Einsteinian Insanity: Media, “Experts” Say Central Banks Should Buy (More) Stocks

Einsteinian Insanity: Media, “Experts” Say Central Banks Should Buy (More) Stocks

Earlier today, I touched on the fact that the BoJ and the ECB have largely failed to rekindle the inflationary impulse in their respective economies.

And it’s not for lack of trying.

Haruhiko Kuroda is monetizing the entirety of gross JGB issuance, imperiling liquidity and market function in the process. Recent POMOs have seen wild swings in the bid-to-cover resulting in sharp price movements that in some cases tripped the circuit breaker on the Osaka Securities Exchange.

Indeed, it now appears that before long, the BOJ will be effectively forced to taper its asset purchases because the bank simply won’t be able to source enough bonds. Have a look, for instance, at the following graphic from Barclays which models the situation:

Of course Kuroda isn’t scared to “go there” when it comes to the nuclear option: buying stocks.

The bank currently buys JPY3 trillion a year and went so far in December as to actually earmark an additional JPY300 billion for buying companies that deploy capital in certain, government- sanctioned ways (e.g. spending on capex and human capital). Essentially, that put the BOJ in the business of dictating how Japanese corporations spend their FCF, but that’s another story.

As for the ECB, Draghi has of course taken the plunge into corporate credit - IG for now. Even from the beginning (i.e. March of last year) there were concerns that it would be impossible for the central bank to source enough EGBs to meet PSPP’s targets, especially given constraints around the depo rate floor and the issue cap. Although that floor has been lowered and the issue cap raised, the concerns persisted into March of 2016, prompting Draghi to move into IG credit.

Still, concerns linger. Have a look at the following graphic from Cantor (courtesy of Reuters) which shows that the ECB may be having a hard time sourcing eligible bonds in Portugal and, to a lesser extent, Ireland:

The problem: despite trillions upon trillions in euros and yen spent monetizing assets, both the BOJ and the ECB have yet to make much progress when it comes to banishing the deflationary impulse. Not only that, but as I noted this morning, the EUR and the JPY have firmed against the USD in the wake of the central banks’ (in)decisions last month.

This is leading some to speculate that Draghi could soon follow Kuroda into the monetary insane asylum by purchasing equities. Here’s a bit from Reuters:

“Such an option would add to evidence that conventional monetary policy has long run its post-crisis course, and suggest unconventional measures may be reaching their limit too.

“But with 'nuclear' easing measures such as printing 'helicopter money' to directly finance public spending by governments now also part of the debate, money managers reckon that, while inflation remains so far below target, large-scale share buying is firmly on the 'whatever it takes' menu.

With around 6 trillion euros in potential equities that ETFs can buy in Europe, there is ample liquidity, according to Nikolaos Panigirtzoglou at JP Morgan.

“Critics say owning significant quantities of shares would represent excessive risk for central banks and tread dangerously close to national ownership of domestic companies.”

Well yes, yes it would “tread dangerously close to national ownership.” In fact, it amounts to partially nationalizing domestic firms - owning stock means owning a part of a company.

And yes, it would also severely imperil central banks’ balance sheets. The BoJ owns something like JPY7 trillion in ETFs. What happens when those units trend lower in a sell-off? You can’t mark your equity book “held to maturity.” Proponents of this approach argue that ECB purchases of European bank stocks would help to shore up jitters about Deutsche Bank’s solvency, Italian banks’ capital needs, and other pressing concerns that have weighed on shares. Back to Reuters:

“Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington and former Federal Reserve Board economist, argues that the BOJ needs ‘bold initiative rather than renewed paralysis.’

“Such a move would contribute to ‘pushing up equity prices and encouraging consumption and investment through higher household wealth and lower cost of capital,’ he wrote in a blog earlier this month.”

There it is. The old Bernanke “wealth effect,” argument.

The curious thing about all of this is that everyone seems to be acting as if it hasn’t been tried. The BOJ owns trillions of yen worth of stock via its ETF purchases. In fact, the BOJ is a top 10 shareholder in 90% of the Nikkei!

(Chart: Bloomberg)

Nevertheless, Japan is still stuck in the deflationary doldrums and recently experienced the rare “quintuple dip” recession. In short: it hasn’t worked yet, why should we think doing more of it will help?

Then again, one could make the very same argument about QE and unconventional monetary policy in general.

It appears the world’s penchant for Einsteinian insanity is alive and well.