The Fed’s chairwoman, Janet Yellen, confirmed last week the tapering of money injections into the economy. Quantitative easing has been tapered by $10 billion a month since December 2013, having gone from $85 billion last year to $35 billion in July, and should be totally extinguished come September, if things go as planned. This progressive QE tapering is justified, according to Yellen, by an economic recovery predicted for 2015-1016... while, at the same time, she revised on the downward side the growth previsions for 2014 (between 2.1 and 2.3%, instead of 3 and 3.5%). As a matter of fact, since the 2008 crisis, the Fed’s growth previsions are systematically revised to the downside, but this is not going to get in the way of the financial institution’s unreal optismism...
This anemic growth, this ever-delayed recovery and this QE tapering should normally be worrisome for the stock market, but things are staying put for now. How is that? An important element to that answer is brought to light by the Financial Times (quoted by Zero Hedge) that points to a study by the OMFIF (Official Monetary and Financial Institutions Forum). The information therein is astonishing : Central banks invest in the stock markets; they do it secretly and for amounts that place them among the principal global investors. This is absolutely not part of their functions and they are in the middle of a conflict of interest, since they take part in monetary policies, but who’s to say anything? On the other hand, they contribute to this artificial hike in the stock markets, and this is the desired goal.
Central banks do not always act in their own name, but rather do it through subsidiaries such as China’s « State Administration of Foreign Exchange », which is part of the Bank of China and has become the world’s most important public structure in the world owning stocks. Sometimes they do it in their own name, like central banks of Switzerland (allowed to invest up to 15% of its balance sheet in stocks) or of Denmark (holding $500 billion in stocks). The OMFIF has indentified 400 public investors spread throughout 162 countries that hold a total of $29 trillion in stocks... To have an idea of the size of it, this number roughly equates to twice the U.S. federal debt. At such a level, it is obvious that these interventions are pushing up stock prices... in other words, central banks contribute in creating an enormous bubble on the financial markets.
Manipulation, lies, dissimulation... words are missing, conspiracy theorists are overwhelmed! There is absolutely nothing that justifies the acquiring of stock shares by a central bank, and especially in such a quantity; this is not part of its mission, which is to ensure the stability of the money and the financial system. These actions, on the other hand, translate into a forward escape, the will to create an optimistic environment through the progression of stock indices, in the hope that households will pick up consumption and that businesses will invest, in order to jumpstart an economic recovery. But this recovery ain’t coming and, in the meantime, the stock market bubble continues to inflate... this will not end well.
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Philippe Herlin Finance Researcher / Doctor in Economics
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.