Daily Archives: October 20, 2017

Bits and Pieces – 20171020, Friday

 

Commentary: After publishing my last commentary, Bits and Pieces – 20171013, Friday, I came across this video by Gordon T. Long: UnderTheLens – 09 21 17 – OCTOBER – Coming “Nationalization” of Markets. It subsumes my comments with the exception of the scenario of how the Fed might take over the US stock market. In the 26 minutes, he does a much more thorough job of documenting how central banks globally are the dominant players in many capital markets such as sovereign bonds, and are rapidly becoming the dominant players in stock markets.

In the case of stocks, where their “printed money” has gone is a puzzle. If they print a billion dollars and buy a billion worth of equities in the market, the money goes into the accounts of the sellers. What do the sellers do with it? Do they use it to ‘walk the market higher’ isolating the new money in the market or do they take it out and move it into the economy causing inflationary pressures?

Already, in some sovereign bond markets, there is a liquidity problem, Investment funds and pension funds have traditionally used sovereign bonds as a a stable, low-risk component of their portfolios. These institutions are finding that they can’t get the bonds they require because the governments are mopping them up. The other problem is that these are not free markets and proper risk and price discovery simply can’t happen. Given the global history of sovereign defaults, particularly by the top economies, a zero interest or negative rate sovereign bond is simply not pricing in the real, if small, risk of a sovereign default. With central bank taking over ownership in these markets the risk of default is rising because so far, current monetary policy is proving to be a one way street.

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