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Central Banks’ Plunge Into Stocks: A Flashing Warning Sign

Date: Tuesday, February 26, 2019 7:26 PM EDT

Once upon a time, central banks’ purchases of common stocks were non-existent. In recent times, however, a 2018 Reuters article observes that once stodgy central banks have moved into the fast lane of the investment world: “Lately, central banks have been doing the market equivalent of zipping around in a sporty convertible. In recent years, at least two large central banks have been snapping up large quantities of equities, typically considered a risky investment."         

The two most prominent "convertibles" are the Bank of Japan and the Bank of Switzerland. The Bank of Switzerland now owns $8.8 billion in U.S. technology stocks. The Bank of Japan’s voracious appetite for Japanese exchange-traded funds also did not abate with the Dow and the Nikkei’s October highs. In fact, the bank bought a record $7.68 billion in October, “apparently aiming to support equities.” Central banks obviously feel safe employing this policy, and the public finds a reason to feel safe because of it.

The Elliott Wave Theorist [EWT] puts the central bank equity plunge into historical perspective. Figure 1 shows stock purchases by the Bank of Japan and the Swiss National Bank back to 1949, when the Bank of Japan was restructured along current lines. Note that for half a century, central banks did not buy any stocks. Then, shortly after the peak in the S&P 500 in 2000, they revved their engines.

(Click on image to enlarge)

After half a century central banks become bullish on stocks

Wall Street on Parade estimates that more than a dozen central banks have begun buying publicly traded stocks in the last decade.

How have the banks fared so far? Not well, based on this Wall Street Journal headline from last month: "Riches to Rags: Swiss Central Bank Swings from Record Profit to Large Loss.” The Swiss National Bank itself is a publicly traded company, and the price of its stock (see Figure 2) has plummeted from just under 10,000 Swiss francs to 4000, a decline of nearly 60%. The stock of the Bank of Japan (see Figure 3) has done even worse. After peaking at ¥740,000 at the top of the Japanese bull market in late 1989, it has slumped to ¥37,000.

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