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The biggest issue with this is that it distorts the market in a way that normal quantitative easing doesn't. Normally the stock market prices are kept in check
by chollida1 11y ago
The biggest issue with this is that it distorts the market in a way that normal quantitative easing doesn't. Normally the stock market prices are kept in check with short sellers putting downward pressure on stocks that are priced too high.
With the government buying so much, being long only, it makes it very hard for a fund to short a stock. Its one thing to be right, but its another to try and short a stock knowing that you've got the government taking the other side of your trade. It doesn't matter what fund you are, they have more firepower than you, which leads to decrease in short interest, which leads to an overall inflation in market values that goes away the moment the markets get any hint that the government will stop propping up prices.
Or put another way, the government is now in a position where they'll need to keep on buying and holding the stock market forever.
Nothing about the Japanese stock market surprises me anymore.
Below is a good article illustrating how one leveraged ETF got so big that it was literally moving the market at the end of ht day in its attempt to re balance itself. Sort of a tail wagging the dog scenario.
http://www.bloomberg.com/news/articles/2015-10-18/the-etf-whale-blamed-for-moving-japanese-markets-gets-reeled-in http://www.bloomberg.com/news/articles/2015-10-18/the-etf-wh...
I guess the one good thing about Japan is that its essentially a petri dish for maco economists and macro funds to experiment with to determine what the US markets will look like if/when the US hits an end to its economic growth.
- xiphias 11y agoQE and the banks buying stocks is the same thing: QE helps banks loan money extremely cheap which they can use to long the stock market.
- MichaelApproved 11y agoAren't they free to do what they like with that cheap money? They can short the stock market as well as many other things. There's no requirement to long the market. OP is saying the govt only buys which keeps underpinning the market higher. On the other hand QE allows the market forces to do what it likes with the cash which will more easily balance.
- slv77 11y agoShorting a stock would remove cash from the system which is essentially the opposite of QE. To short a stock the short seller first "borrows" the stock from another stock holder and then sells that stock on the open market. In most cases the investor who the stock is borrowed from won't even be aware that his stock has been loaned out to a short seller. The effect is that there are now two individuals who believe that they own the same share. From the perspective of the market the short seller has effectively created shares out of thin air, sold the shares and is now sitting on the cash. When a central bank is the one shorting the market the effect is to pull cash onto it's balance sheet which removes it from the economy which is deflationary. Interesting idea though! One that I hadn't considered as a tool for central banks to constrain inflation.
- jcfrei 11y agoShorting might be an option for the retail investor but I doubt it's so simple when your dealing with the amounts of a large bank. Banks usually borrow stocks and then sell them back (in order to short) and finding a counterparty for that might be very costly.
- ramchip 11y agoI doubt a bank can just go and short stock speculatively. The Volcker rule basically banned that kind of prop trading.
- xiphias 11y agoI don't know the exact reason why all banks and central banks are long stocks and not short right now, and I'm sure they will change their position when they think it's worth it, but currently QE money has a big correlation with the stock market.
- chollida1 11y ago> QE and the banks buying stocks is the same thing: No they most certainly are not. QE puts money into the economy. People can then use that money to buy stocks or short stocks, they can also use that money to do things like travel, purchase a new house or put a kid through school, etc. It can be viewed as a market neutral strategy in terms of buy vs sell pressure on the stock markets. Now this can cause the stock market to rise through "organic" growth from increased consumption leading to increased corporate profits. On the other hand the government buying stocks only puts pressure on the buying side of the equations, causing the market to move up. They both may cause the markets in general to rise, but in terms of market dynamics they are not the same thing:)
- parsnips 11y ago>No they most certainly are not. QE puts money into the economy. Did a helicopter fly over your house?
- _yosefk 11y agoIs there that big a difference between inflating stock prices the way the BOJ does and depressing bond yields through "normal QE" (which amounts to buying bonds, thus inflating their prices)? Depressing bond yields distorts the market in the sense of encouraging risky investment/"risk mispricing", and then indirectly it inflates stock prices as investors' safe alternatives now yield less income.
- Symmetry 11y agoIt does change the availability of low-prices debt but so would the government failing to issue debt in the first place. In both cases there's less distortion than if the government starts blessing specific stocks.