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This post The Real Reason Stocks Are Setting Records? appeared first on Daily Reckoning.
Strange winds gust through Wall Street…
Janet Yellen and her mates have elevated interest rates four times over the past 18 months.
And in September they plan to start working on the impossible $4.5 trillion balance sheet they’ve amassed post-2008.
Key members of the Federal Reserve itself have admitted that equity prices are “high” — a near declaration of war.
Stocks are normally cowards that go to pieces at the first sight of trouble — when the central bank menaces their prosperity, for instance.
But not these days…
Stocks conquer new records almost daily. The Nasdaq posted another yesterday. The S&P closed within three points of its own. And today it set another record.
Something’s not right…
Morgan Stanley suggests the market could be “in broad agreement with monetary authorities over withdrawing accommodation.”
Yes, we suppose it could. Anything’s possible.
But they also venture on another possibility altogether:
“It may also suggest that there are alternative sources of liquidity funding the current risk bull run.”
A scandalous suggestion.
But could it be? Are stocks setting records due to alternative sources of liquidity yet to be identified?
Morgan Stanley pursued the question no further.
So we stepped into our gumshoes… opened our sleuth bag… and took to the investigation trail…
We immediately got the scent of a possible suspect, a possible alternate source of liquidity.
And the suspect was a usual one — central banks.
Not necessarily our own central bank. But foreign suspects like the European Central Bank… the Swiss National Bank… the Bank of Japan.
For example, analyst Bryan Rich noted in Forbes (May 16) that the Swiss central bank has been scooping U.S. stocks with both hands — $80 billion worth through the end of the first quarter.
Rich says that’s 29% more than at the end of last year.
And is it a coincidence that the Nasdaq trades at record heights?
Perhaps not once you realize that the $80 billion poured primarily into shares of Facebook, Alphabet (Google) and Apple.
And the Swiss central bank is no trifle — it’s the world’s eighth-largest public investor.
Meanwhile, we understand the Bank of Japan is now among the five largest owners in 81 companies on the Japan Nikkei 225 index… and nearly the primary owner in 50 of them.
In April, Bank of America (BofA) noted that central banks around the world had already purchased $1 trillion in assets to that point of the year.
BofA’s team of analysts likened it to a “supernova of liquidity”… the “$1 trillion flow that conquers all”… and said it was the “best explanation” for record-high stocks.
MarketWatch went so far as to claim that BofA’s analysis “might be all you need to know about stock and bond market performance in 2017.”
And so we may have solved our caper… the alternate source of market liquidity.
As noted above, the Fed will soon engage in “quantitative tightening” — trimming its gargantuan balance sheet.
To which MarketWatch sneers:
Quantitative tightening? Oh, please. Central banks, courtesy of the eurozone and Japan, are still buying financial assets …read more
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