June 23, 2014
Weekly Market Outlook
By Mish Schneider
The old stock trader axiom, “Don’t fight the Fed” may need to be updated to, “Don’t fight the GPIs”.
Last week the Official Monetary and Financial Institutions Forum released a report innocently entitled, “Global Public Investors – the new force in markets”. On the surface this is not a very alarming headline, but the contents of the report are much more exciting than the headline suggests.
First, who is the Official Monetary and Financial Institutions Forum (OMFIF)? Based on their own description on their LI (Linked In) page, “The OMFIF is formed around a core of public sector asset and reserve holders at the heart of world finance. OMFIF offers a confidential, convenient and discreet forum to a unique membership of central banks, sovereign funds, financial policy-makers and market participants who interact with them.”
Without being too cynical, I’d like to be a fly on the wall at their gatherings!
Second, what is a “Global Public Investor” (GPI)? As this relates to the report, a GPI is a central bank, public pension fund or sovereign fund. As you may know some of these entities are more transparent in their disclosure of their investments than others, and that’s where the report gets interesting.
This report surveyed 400 GPIs who control $13 trillion at central banks, $9.4tn at public funds, and $6.5tn at sovereign wealth funds. This amounts to assets equal to 40% of world output!
The report would not have received any attention at all had the reference of the GPIs “force in markets” been directed toward global bond markets, but it wasn’t.
The report highlighted they fact that GPIs, and specifically global central banks, are aggressively chasing returns that cannot be found in the bond yields.
As a result, the report concluded, “GPIs as a whole appear to have built up their investments in publicly-quoted equities by at least $1tn in recent years.”
That’s a lot of stock buying.
Reading this caused me to do a little more research, and what I found was that central bank buying of stocks really should not come as any surprise at all.
Many foreign central banks have publically stated that purchasing publically traded stocks is a part of their policy goals.
To be clear, I’m not implying that the U.S. Fed is buying stocks. However, the report stated that the reason for GPIs moving into stocks was based on a need to find better returns that bonds, and that GPIs where shopping beyond their own borders.
I can’t point to data and charts that illustrates a direct correlation between central banks’ stock purchases and rising equity index prices that is as clear as we’ve seen in all of our Fed’s QE experiences. However, any student of the markets knows that you, “don’t fight the Fed”, and you only need to know the general intentions of the Fed for that rule to apply.
If you take a look at equity markets around the globe (ETFs make that easy to do), it certainly looks clear that we are in a “don’t fight the GPIs” environment right now!
Unfortunately, it is also well known that our own Fed has a habit of overshooting, or sticking with overly accommodative or restrictive policies for too long. I think our Fed is one of the best at its game around the globe, and if that’s is true, we can enjoy the bulls ride in global equity markets, but we can’t expect that the GPIs will know when to take their foot of the gas.
It also makes our new Country ETF trading strategy even more compelling for riding the global bull markets in a disciplined fashion! (yes, that’s a shameless plug, I know, but it’s true).
Due to our travel schedules this weekend there will not be a video this week.
Have a great weekend.
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