Last week, we highlighted a troubling Reuters article, which we classified as a quiet “trial balloon” to set the stage for an ECB launch of stock purchases. As Reuters put it, the ECB may soon be forced to follow the Bank of Japan’s example and buy equities as part of any expanded stimulus programme. Reuters recapped the familiar problem: “The European Central Bank could run out of eligible bonds for its 1.7 trillion euro bond-buying scheme, meaning alternative options are on the table should it decide to loosen policy further to lift growth and inflation across the bloc. Analysts say these could include large-scale share buying, a policy that the BOJ has already adopted after it started purchasing equity exchange traded funds (ETFs) for its own quantitative easing scheme six years ago.”
Overnight, the WSJ doubled down on this “warning”, writing that central banks have become some of the biggest investors in bond markets. Now some in the financial markets think stocks should benefit more from their largess. The amusing spin came when the WSJ cited “some economists” who say the European Central Bank, which meets Thursday to decide if it should expand its current bond-buying program, should invest in equities. The reason – one we have discussed for years, and which Reuters touched upon last week – “It is running out of bonds to buy.”
While certainly redundant, the WSJ observes that “a move by the ECB into equities would have big implications for Europe’s stock markets.” Well yeah: with equities becoming risk-free, it would mean prompt all time highs as a completely price-indescriminate buyer would now be on the verge of nationalizing yet another market, and crushing all the fundamental signals that link corporate health, the economy, or underlying industry dynamics with risk asset prices.
This post was published at Zero Hedge on Sep 6, 2016.