Did you blink?
Did you miss it?
Nigel Farage released his long-awaited presentation yesterday at 2pm. Many of you emailed in saying you couldn’t make it.
Well, you haven’t missed anything, yet.
It’s all still available for you here.
If you’ve been wondering why exactly we produce Fortune & Freedom for you each day – why it’s free – well, I think you’ll get your answer by watching the video.
And now, with another Brexit deadline come and gone, we turn to the rather intriguing problem of the stockmarket. And a big question facing all investors.
Who really controls the stockmarket?
Not so long ago, asking that question would’ve got you laughed at.
The stockmarket isn’t controlled, after all. It’s a marketplace of buyers and sellers, interacting based on supply and demand.
But that just ain’t true anymore. These days, you might say the stockmarket really is controlled. By a surprisingly long list of people, in a surprisingly long list of ways…
There’s the Plunge Protection Team, for example. The Working Group on Financial Markets was created in 1988. Their job is to provide financial and economic recommendations to the American President during turbulent financial markets.
In his 2018 article “This secretive group intervenes in moments of financial crisis”, John Crudele explains the nature of the troop in the New York Post:
Has anyone proved that the President’s Working Group actually dons a cape and like Superman comes to the rescue of the financial markets with a big PPT on its chest?
Nope, and they probably will never prove it definitively.
I probably came closest to finding this legend was true when I got hold of Treasury documents from the Great Recession showing Treasury Secretary Hank Paulson conferring by telephone regularly during the darkest days of the 2007-09 stock market with his pals on Wall Street before stocks suddenly came back to life.
The debate about whether and how the Plunge Protection Team boost financial markets during crashes isn’t our focus today. Besides, there’s a more powerful force these days anyway. One that doesn’t just stop markets from crashing, but inflates them to new heights.
It began, some would argue, with the Greenspan Put. Never mind the reference to something called a “put option” – it confuses me in this context too.
The point of the name is that former Federal Reserve Chair Alan Greenspan would implicitly promise to lower the ‘Fed Funds Rate’, which is the interest rate banks pay for overnight borrowing in the federal funds market, each time the US stockmarket fell to a concerningly low level. He was like an insurance company – promising to bail you out if things went wrong in the stockmarket.
This morphed into the Bernanke Put when Greenspan was replaced by Ben Bernanke. And it became far more important as the 2008 financial crisis struck. Bernanke had to resort to money printing to keep the Put alive and get stocks booming again. Interest rate cuts weren’t enough.
At the end of Bernanke’s rein, the stockmarket turned out to be addicted to all this medicine. When he even suggested removing it, stockmarkets went haywire in an episode known as the Taper Tantrum.
His successor, Janet Yellen, who you’ll be hearing plenty about in coming years, was unable to reverse the policy for years. QE became QE2, QE3 and QE4. When Yellen’s successor finally raised interest rates to just 2.5%, the stockmarket plunge of 2018 kicked off. And so rates came down again.
This year, central bankers in many countries even had to resort to buying financial investments like stocks to keep financial markets propped up. Bloomberg reported a quarter of central banks were doing so in 2019. This policy hit absurd levels in Japan.
They’ve ‘nationalised’ the stockmarket
Pensions & Investments summed up the data last week:
The Bank of Japan has taken over as the biggest owner of the nation’s stocks, with the total value of its holdings climbing well above $400 billion.
Massive exchange-traded fund purchases by the Bank of Japan to support the market amid the pandemic this year combined with subsequent valuation gains pushed its Japanese equity portfolio to ¥45.1 trillion ($433 billion) in November, according to estimates by Shingo Ide, chief equity strategist at NLI Research Institute.
That marks the first time that the central bank’s holdings have eclipsed those of the Government Pension Investment Fund, Tokyo, which Mr. Ide estimates stood at ¥44.8 trillion last month, based on gains on top of its holdings as of Sept 30.
Regardless of which whale is larger, the dominant presence of these two public entities has raised concerns over their influence on market prices. The combination of “a state-run institution, the BOJ, and the country’s representative public pension fund, the GPIF, buying up local equities feels distorted,” said Satoshi Okumoto, CEO at Fukoku Capital Management.
See what I mean about “someone” controlling the stockmarket?
According to data from Japan Exchange group, total market capitalisation at the end of November was 687 trillion yen. This means the government pension fund and central bank each own about 6.5% of the entire Japanese stockmarket…
And, given their holdings are not evenly spread, things get even stranger once you focus on individual companies. The Nikkei Asian Review reported in 2019 – before the current buying bout began – that, “The BOJ has likely also become the top shareholder in 23 companies, including Nidec, Fanuc and Omron, through its ETF holdings. It was among the top 10 for 49.7% of all Tokyo-listed enterprises at the end of March .”
The finance blog Matasii summed it up like this:
The BOJ is ushering in a new age for the Japanese market: the age of creeping nationali[s]ation, where a monetary authority is becoming the biggest owner of corporate assets using money printed out of thin air to fund the purchases.
What about in the UK?
The Telegraph reported late last week that our own central bank has been so busy intervening, it is running out of things to buy:
Economists warn Bank of England is running out of room on vast bond-buying programmes
The Bank is on track to own half of conventional gilts – UK government debt – by the end of 2021
Two things worth noting, there. Well, actually a load. But for out topic today, just the two.
The first is the extraordinary size of the intervention. You thought Britain’s Covid-19 deficits were bad? The Bank of England is buying twice as much debt as the Treasury is creating…
The second is that the markets are worried about the Bank of England being unable to continue this intervention as it ends up owning too many of the government’s bonds.
What happens then?
Well, I think Japan may be the model for us. The Bank of England could start buying all sorts of other assets. They’ve already announced a 20 billion corporate bond purchase programme, after all.
What’s my point here?
It’s the potential for the Bank of England to follow the Bank of Japan and others into the stockmarket. For the central bank to “buy everything”.
We’ll dig into what this means for you tomorrow. For now consider…
Why did this happen?
Why are central bankers fiddling with the money supply to try and manipulate stockmarket prices? Why are they bidding up the stockmarket with newly created money?
Their answer is something called the “wealth effect”. Central bankers want people to feel richer. This makes them spend more. And, in the world of central banking, spending is a good thing. Because it makes the economy grow.
I suspect the real reason is a little different. But first, it’s worth pointing out that the wealth effect works both ways. If markets plunge, the loss of confidence can cause spending to crash. So perhaps central bankers are primarily putting out fires, not just shovelling coal into the stockmarket’s furnace.
I suspect the real issue is far more political. Central bankers have the power to goose the stockmarket.
Do you think they’ll just let markets crash?
I don’t. Which is why it makes plenty of sense to own stocks in a world where central bankers have infinite amounts of money to bid them up.
But not all stocks…
Find out how to find some here.
Editor, Fortune & Freedom