Last month we wrote about rising debt levels in the U.S. and worldwide. They are too high
to be paid now and will never be paid because they are rising faster
than incomes. And in July we wrote that central banks are buying not
only government debt—thereby increasing their money supplies—but
are buying common stocks in American companies, which has the same
effect. The leader in this has been the Swiss National Bank, which is
the Swiss central bank just as the Federal Reserve is the U.S.'s
central bank.
Four-fifths of the SNB's
reserves are in bonds. Euro denominated assets make up about 40% of
its reserves; dollar-denominated assets, 35%; with the rest being
yen, sterling and others. Japan's central bank buys government bonds,
common stocks, and even real estate to increase its money supply. It
owns 62 percent of the Japanese market in ETFs (exchange traded
funds).
Stock markets worldwide have
been on a tear, just like the rise in worldwide debt. In the last
eighteen months the increase in the market capitalization of global
stocks has been roughly equal to the entire value of world stocks in
2009. The Dow Jones Industrial average advanced a thousand points,
from 20,000 to 21,000, in just 24 days. The DJIA is composed of
large, profitable companies which are what is desired by central
banks—which helps to explain why the DJIA has been outperforming
smaller, less well known stocks. As we pointed out in a previous
posting, the SNB bought almost 4 million shares of Apple in the
first three months of this year and also has over $1 billion each in
the stocks of the giants Exxon Mobile and Johnson & Johnson,
which are in the DJIA.
Stock prices have been bid
up on the anticipation of rising earnings, but in the third quarter,
investors pulled $36 billion out of U.S. stock mutual and exchange
traded funds. Thus far in 2017 more money has flowed out than has
flowed in, and trading volumes have been collapsing. The stock
indexes have been going higher, but investors are trading them less
and less. Volumes and volatility go hand in hand. The CBOE
Volatility Index this month fell to its lowest level in over 20
years. The average daily trading volume this month across the NYSE,
Nasdaq, NYSE American, and NYSE Arca is 12% below below this year's
average and 22% below last year's average. MCSI Europe, which tracks
stocks across 15 developed European countries has fallen to its
lowest level in five years.
An inflow of money from
foreign investors and sovereign wealth funds helped to offset
outflows from U.S. stock funds. So far this year, foreign investors
have put $40 billion into U.S. stocks, compared to about $3.5 billion
in net outflows last year, according to Deutsche Bank. The foreign
inflow is unlikely to continue at the recent rate, according to some
analysts, because foreign opportunities are beginning to appear more
attractive due to the relative value of the dollar to other
currencies.
The decline in trading
volume isn't good news for banks that generate fees from investors
trading. At J.P. Morgan Chase & Co., third quarter equity
trading revenue fell 4% in the third quarter, and Goldman Sachs
reported 7% decline for that revenue over the same period.
We ended our posting last
month by noting that the Fed completely missed predicting the Great
Recession. So today's forecasts of continued good times—despite the
warning signs listed above—should perhaps be regarded with some
skepticism. Need another reminder? Here's a quote by Ben Bernanke
himself, when he was chairman of the Fed in 2007 before the collapse
of the economy:
