Central Banks Buying Stocks Have Rigged US Stock Market Beyond Recovery

Ask yourself an honest question if you believe in the Fed’s continual recovery narrative: “Is this what recovery looks like — continued record amounts of stimulus forever?”

Yet, the story only gets richer. (Well, for some.)

The newly created money invested by the Swiss National Bank didn’t attempt to buy important but dying companies. It went predominantly to Facebook, Alphabet (Google) and Apple. Is it any wonder, then, that these stocks, known as the FAANG stocks, are the ones that drove the Nasdaq to new heights?

The Swiss National Bank has gone from having about 9% of its holdings in stocks back in 2007 to currently having 22% of its much larger balance sheet in stocks. Last year, when I speculated about all of this, the SNB had already increased its stock holdings by 41% in a year’s time! By the third quarter of 2016, when I was just speculating the central banks were the major driver, the SNB owned $1.7 billion of Apple, $1.2 billion of Microsoft and $1.08 billion of Exxon. (Remember my speculations on the oil connection?) Reuters reported last year that …

Switzerland’s central bank now owns more publicly-traded shares in Facebook than Mark Zuckerberg, part of a mushrooming stock portfolio that is likely to grow yet further. The tech giant’s founder and CEO has other ways to control his company: Zuckerberg holds most of his stake in a different class of stock. Nevertheless this example illustrates how the Swiss National Bank has become a multi-billion-dollar equity investor due to its campaign to hold down the Swiss franc.

In 2017, it stepped up its purchases.

Is this situation of central banks buying stocks insignificant to US stock prices? Not according to Bank of America:

BofA’s analysts called this “supernova of liquidity” the “only one flow that matters”and the “best explanation” for the double-digit gains in stocks that was happening in the first half of the year. They called it the “the $1 trillion flow that conquers all.” So, now we have moved from my speculating all of last year that central banks buying stocks were the sole factor that was pushing up stocks to Bank of America now proclaiming outright that it is the sole factor that matters in the rise of US stocks — a factor so huge that it dwarfs all other drivers.

More evidence of central banks buying stocks in the US

Is the Fed in bed with the Chicago Mercantile Exchange? I owe the following research to Chris Martenson on his Peak Prosperity website in an article titled “Where There’s Smoke … There’s central bank manipulation” and to Zero Hedge. I’ll summarize Martenson’s findings here, and you can check out the article if you want more detail:

After Hurricane Sandy, the New York Fed moved part of its markets group to Chicago where the CME is located. The Fed reported that the move was being done as a safety precaution so that all US central-banking operations would not be on a hurricane-prone coast. The move received very little coverage. (Only MSM organization reporting it was Reuters.)

Besides selling commodities and derivatives that central banks might naturally want to trade in (such as gold by which they manipulate the price of gold in order to secure their proprietary product — money), the CME sells futures on US stocks. The algorithms used by the bots that now do 80% of the driving in the US stock market peer into futures like a fortune teller looking into her crystal ball. So, the CME offers a lot of leverage for moving stock prices by steering the bots.

The largest investors the CME markets its operations to are central banks. The CME has a program specifically designed to entice central banks and to facilitate their purchases through discounted fees. That program doesn’t even try to hide its purpose as it is called the “Central Bank Incentive Program.” Incentive programs are reserved for the CMEs highest volume traders.

This past January, the CME wrote the following marketing summary of its Central Bank Incentive Program:

The Central Bank Incentive Program (“CBIP”) allows Qualified Participants [notice the caps, indicating the term has a legal definition] to receive discounted fees for their proprietary trading of CME Group Products. (CME Group)

They legally define “Qualified Participants” as

non-US central bank, multilateral development bank, multilateral financial institution … or an international organization of central banks. [Said institutions must] execute all trades in the Qualified Participants name.

After all, you wouldn’t want a proxy using the name of the ultimate money source if that were the Fed or if it were acting on behalf of the Fed. You wouldn’t want the Fed’s name in any way associated with the trade.

Did the Fed move its markets group to the same place as the CME in order to develop proxy trading relationships with all of the central banks in the world that use the CME for trading in oil and stock futures? Strangely, not a single central bank on earth shows any CME products on its balance sheet; but surely the CME does not have this dedicated program for the sake of serving no one. Since CME incentive programs are reserved for the CME’s highest-volume traders (basically offering a bulk discount), central banks must be purchasing CME products and not disclosing so on their balance sheets. Why the apparent secrecy on the part of central banks as to their participation?

Not long after the Fed’s move to CME Land, Zero Hedge reported finding this little tidbit in one of the job descriptions at the Fed’s new market trading office: “Perform account services to foreign central banks, international agencies, and U.S. government agencies.”

Hmm. The CME group requires that central banks open accounts in their own name but that those accounts must be managed by a …

CME Group clearing firm or FCM (Futures Commission Merchant) for their proprietary trades and/or trades done on their behalf by an asset manager.

I wonder if people working in the Federal Reserves “markets group” engaged in “account services to foreign central banks” could serve as asset managers for a central bank with an account at the CME.” Just wondering. In which case, might they not help manage those central banks’ purchases in a manner that serves the aims of the Federal Reserve? Just a thought.

Maybe the Fed is just nearby to counsel them or urge them or provide incentives to make certain stock trades at certain times. Maybe the Fed’s move to the place where central banks of the world trade at a time when central banks buying stocks in the US has become a new phenomenon is all one big coincidence. Regardless, central banks are clearly engaged in massive US stock trades. You don’t get those bulk fee discounts any other way.

According to the Reuters article above,

The satellite office in the Midwest readies the New York Fed for perhaps the most delicate U.S. interest-rate hike ever. With rates having been near zero for more than six years, and markets flooded with reserves, the Fed will rely on an array of new tools to help it tighten policy, likely later this year.

MAYBE the move had less to do with fear created by Hurricane Sandy than it had to do with establishing the new tools that would help the New York Fed achieve intervention readiness for managing its first interest-rate increase without crashing stocks. I suppose one way to safely avoid a market crash when making your much-feared first interest-rate increase would be to get other central banks to jump in with rescue stock purchases if the stock market dared to respond negatively. Remember how the market leaped upward for a few days after the first increase? Was that the central banks jumping in before their new machine was fully calibrated or maybe giving a more-than-necessary boost just to err’ on the safe side?

We may never know, but we now certainly do know that central banks trade US stocks and a lot of it. We also know the CME’s “incentive” program for facilitating central bank stock futures trades (and other kinds of trade) was created in July of 2013, so it, too, is a recent innovation. Interestingly, the program lists one of its core principles as “Prevention of Market Disruption.” (“Plunge Protection Team,” anyone?)

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Disclosure: None.

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