I often speak of fundamental value as the tide that inexorably pulls prices toward it over longer time horizons, and waves as shorter-term developments that impact market and currency prices. One such wave is central bank activity (ultra-easy monetary policies), which has had a great influence on market and currency prices and should continue to do so.

Long before he was head of the U.S. Federal Reserve (Fed), Ben Bernanke determined that the best way to respond to a financial crisis is for central banks to expand their balance sheets. When he was Fed chairman, he followed that recipe step by step, to perfection. The United States was the world’s first central bank to expand its balance sheet aggressively.

Now, however, we’re seeing quantitative easing occurring not just in the United States, but across the world. The Bank of England (BOE), European Central Bank (ECB), and Bank of Japan (BOJ) have all taken on significantly stimulative monetary policies. Even the People’s Bank of China, through currency pegs, has done so too.

To give you a sense of what’s happening in these markets today, I’ve created a simple matrix that shows the four categories of securities that the big three developed central banks are buying or selling directly.

singer-das-post-2-what-banks-can-manipulate

Because the BOJ is buying short- and long-term sovereigns, credit, and equity, it is actively engaged in directly influencing the prices of nearly every Japanese investment to which investors have access.

The ECB is manipulating markets nearly as much as the BOJ. It is buying and selling (mostly buying) short-and long-term sovereigns (because it has bought so many short-term sovereigns it can’t buy any more), and credit (because it was running out of sovereigns). The ECB isn’t buying equity.

Lastly, the Fed is buying short- and long-term sovereigns, but not credit or equity. It is also buying agency paper, which are securities, usually bonds, issued by U.S.-government-sponsored agencies and backed, but not guaranteed, by the U.S. government. That’s interesting, but doesn’t warrant a separate discussion here.

This means that a huge chunk of the equity and bond indices in which investors consider investing is being directly manipulated. And, there’s also an indirect influence on the markets: Even though the ECB and the Fed are not buying equities, equity prices are indirectly influenced to a significant degree through these monetary policies.

A huge chunk of the equity and bond indices in which investors consider investing is being directly manipulated by central banks.

This central bank activity is creating some big waves, without much foresight. If you look at the Fed’s dot plot—the part of the projections released along with its policy decision statements, which show where each meeting participant thinks the federal funds rate should be at the end of the year for the next few years—you realize that the Fed has no idea where interest rates are going.

And if the Fed has no idea where interest rates are going, far be it for corporations to figure out how to make long-term investment decisions and capital expenditures. It’s difficult for almost every investor today. Moreover, none of the central banks know how they will actually unwind their balance sheets when the time comes.

In order to invest in the assets the central banks are buying and selling, we need to know what fundamental value is. Fundamental value stills exists, but to understand it, we have to understand what central banks are doing, and more importantly, how the market perceives what central banks are doing.

Because, as legendary hedge-fund manager Stanley Druckenmiller said, the central banks may not have an exit plan, but the markets sure do.

 

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus, which you may obtain by calling +1 800 742 7272. Read it carefully before you invest or send money. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This material is provided for informational purposes only and is not intended as investment advice or a recommendation to buy or sell a particular security. Any investment or strategy mentioned herein may not be suitable for every investor.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

Copyright © 2017 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus, which you may obtain by calling +1 800 742 7272. Read it carefully before you invest or send money. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This material is provided for informational purposes only and is not intended as investment advice or a recommendation to buy or sell a particular security. Any investment or strategy mentioned herein may not be suitable for every investor.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

Copyright © 2017 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

Statement of Financial Condition | NMS Rule 605 & 606 | Business Continuity Plan | UK Stewardship Code
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