Why Are Central Banks Buying Stocks?

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We end the week continuing on the ‘bad news is good news’ theme. Actually, it’s a theme that’s been in vogue for a while now, but it’s really ramped up in the past week.

While you were off playing two-up, more bad news rolled in. US durable goods orders plummeted 5.7% in March, the weakest reading in 7 months. An index of business optimism in Germany fell more than expected…perhaps an early sign that Japan’s currency debasement program is already having success in stealing demand from other exporters. In Spain, the ongoing and painful economic adjustment from an easy money economy just sent unemployment to a record high of 27%.

And mediocre news is good news too. The UK revealed its economy grew in the first quarter of the year, thereby avoiding a ‘triple-dip recession’ – good news indeed. Time to buy stocks.

Which is, worryingly, what central banks are beginning to do. A Bloomberg report tells us that a survey of 60 central bankers conducted earlier this month revealed that 23% own stocks or plan to buy stocks as a way to diversify their foreign exchange reserves.

Of course, that means that 77% do not plan to own stocks, which is a good thing. Since when did equities become a super safe reserve type asset to store the surplus wealth of creditor nations? They’re not, and never will be. But that’s what happens when the world’s supposedly benchmark reserve asset, the 10 year US Treasury bond, yields less than 2%…which is nowhere near enough compensation in a world of monetary extremism.

So central banks do what they’re forcing everyone else to do; take on more risk for less reward. Which is idiotic, but the pressure of short term performance demands it.

Central banks should just stick to doing what they have long done with their reserves…preserve them rather than try to grow them. This is why gold has always been an integral part of their portfolios. Reserves are simply the excess production of a nation. To a large extent, they represent the difference between what a country produces and what it consumes.

They are therefore a nation’s collective savings. They should be preserved for future use, not punted away on equities at or close to all-time highs. Which is what the Bank of Israel did last year. It piled into Apple when every other trend following hedge fund manager was doing the same thing. So far, that hasn’t worked out too well, and the Bank is well down on its investment.

Mind you, if we’re looking at short term returns the central banks haven’t done too well on their recent gold purchases either. In 2012, central banks bought the largest amount of gold since 1964, just before prices started to tank in 2013.

But to view gold’s performance over a one year time frame would be a mistake. Gold is a hedge against political and monetary instability. It’s long term insurance. For that reason, we think gold will continue to do well in the years ahead…regardless of what’s happened recently.

Regards,
Greg Canavan
for The Daily Reckoning Australia

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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slewie the pi-rat
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“…the world’s supposedly benchmark reserve asset, the 10 year US Treasury bond, yields less than 2%…which is nowhere near enough compensation in a world of monetary extremism.”

just sell it and get rich?

the “what are reserves?” part is thought-provoking. thx.
i think at this point, we might be better off saying they are “signs” of a nation’s savings… on their way to becoming purely symbolic?

what we have here… are banksters and financial engineers, committed to and ethos of stahbiileeeTAY,… building the Tower Of Babel.

wpDiscuz
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