In 2000 or 2001, I was working in Montreal and a gentleman told me that Central banks such as the Federal Reserve had been buying common stocks to support the stock markets. He said that he had seen it first hand while working as a trader in Europe. I had no reason to doubt him. It is well known that the Central Banks have been large buyers of bonds and are the world’s largest purchasers of gold bullion for years……so why not common stocks? What could be better to keep the stock markets up and prevent bear markets? Or could it? We will see and perhaps very soon.
Central Banks investing in common stocks brings enormous buying power and support to stock markets that are often carrying severe overvaluation. As many suggest, it rigs the market. It has been used to stop harsh declines as we see buying suddenly arrive out of nowhere often at the depths of weekly or daily despair in the stock market. The overvaluation creates a pretense of economic strength in an economy that is grinding along but is far from strong.
A major negative is that Central banks stock investments cause other investors such as individuals and institutions to often pay higher prices than they would normally pay. Yes, Central Banks have been and still are “the elephants in the room.”
Did you know that Japan’s Central Bank is the largest investor in common stocks in Japan? Moreover, the Swiss Central bank is now one of the world’s largest investors. It has been reported that it is the largest investor in Facebook.
What does this mean for the world’s markets? We don’t know but believe that it carries with it enormous risk for a market already overvalued on too many fundamental value measures. Not surprisingly, at the same time, selling of their own personally held shares by officers and directors of the companies they work for and advise is near the highest rate in history.
The following article from the very informative and quite accurate site “Zero Hedge” merits your attention.