Are central banks manipulating asset prices?

That case still needs to be made, here is Cullen Roche:

1) Are Central Banks “pushing money” on people? 

The whole premise of the first paragraph is that Central Banks have implemented QE and forced money onto people which has resulted in a lot of asset chasing.¹ I’ve never understood this mentality to be honest. When the Fed engages in QE they expand their balance sheet and buy a bond from the private sector. In a low inflation environment bonds become increasingly similar to cash so these sellers of bonds are selling one cash-like instrument for another. As a result, the private sector ends up holding more low interest bearing cash-like instruments and the Fed holds higher interest bearing cash-like instruments. So the whole basis of this theory is that if someone who was already holding a risk averse asset then sells that risk averse asset for something very similar then they will suddenly become less risk averse and run out and drive up stocks? That doesn’t even make sense. If I have a moderate risk tolerance and hold a portfolio of 50% bonds and 50% stocks and I want to sell my bonds because I read a scary article about how bonds are super risky because interest rates are going to rise (more on this later) then I will swap out some part of my 50% bonds for cash or something else that’s relatively low risk (to maintain my moderate risk profile). I don’t swap out my whole bond position for a stock position or a role of the dice at the roulette wheel.

Anyhow, the evidence doesn’t even mesh with this. Global Central Banks have been implementing QE for 10 years now. The average annual return of the Vanguard Total World Index is 8.9% per year over that period. That is 0.02% higher than the average 35 year return. So, if investors are acting crazy today then they’ve been crazy for 35 years. Which might be true. It’s probably true. I actually think investors are usually kind of crazy. But they’re not any crazier today than they were 35 years ago.

Sensible throughout.

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Long-term interest rates in the US have been falling since 1982. The Fed has been engaged in a quixotic effort to boost rates for decades, but demography is destiny.

Interest rates are low because there is no need to spend worker savings on anything because there is way too much capital.

The water and sewer capital in the US and globally is over supplied in great excess so instead of building more, or even maintaining what exists, the need is for it to decay.

Ditto transportation. Let tunnels collapse, bridges fall, because those built 60 to 100 years ago are no longer needed. Not to mention paved roads.

People are objection to too much housing capital by choosing to be homeless leaving by some estimates 6 million housing units vacant, with first created destructors stripping them of assets like copper, then private (arsonists) and public (town governments) partnerships turning them into landfill and vacant lots, at substantial cost to taxpayers.

It's as Keynes described:

"If, in such circumstances, we start from a position of full employment, entrepreneurs will necessarily make losses if they continue to offer employment on a scale which will utilise the whole of the existing stock of capital. Hence the stock of capital and the level of employment will have to shrink until the community becomes so impoverished that the aggregate of saving has become zero, the positive saving of some individuals or groups being offset by the negative saving of others. Thus for a society such as we have supposed, the position of equilibrium, under conditions of laissez-faire, will be one in which employment is low enough and the standard of life sufficiently miserable to bring savings to zero. More probably there will be a cyclical movement round this equilibrium position. For if there is still room for uncertainty about the future, the marginal efficiency of capital will occasionally rise above zero leading to a “boom”, and in the succeeding “slump” the stock of capital may fall for a time below the level which will yield a marginal efficiency of zero in the long run. Assuming correct foresight, the equilibrium stock of capital which will have a marginal efficiency of precisely zero will, of course, be a smaller stock than would correspond to full employment of the available labour; for it will be the equipment which corresponds to that proportion of unemployment which ensures zero saving.

The only alternative position of equilibrium would be given by a situation in which a stock of capital sufficiently great to have a marginal efficiency of zero also represents an amount of wealth sufficiently great to satiate to the full the aggregate desire on the part of the public to make provision for the future, even with full employment, in circumstances where no bonus is obtainable in the form of interest. It would, however, be an unlikely coincidence that the propensity to save in conditions of full employment should become satisfied just at the point where the stock of capital reaches the level where its marginal efficiency is zero. If, therefore, this more favourable possibility comes to the rescue, it will probably take effect, not just at the point where the rate of interest is vanishing, but at some previous point during the gradual decline of the rate of interest.

We have assumed so far an institutional factor which prevents the rate of interest from being negative, in the shape of money which has negligible carrying costs. In fact, however, institutional and psychological factors are present which set a limit much above zero to the practicable decline in the rate of interest. In particular the costs of bringing borrowers and lenders together and uncertainty as to the future of the rate of interest, which we have examined above, set a lower limit, which in present circumstances may perhaps be as high as 2 or 2 1/2 per cent. on long term. If this should prove correct, the awkward possibilities of an increasing stock of wealth, in conditions where the rate of interest can fall no further under laissez-faire, may soon be realised in actual experience. Moreover if the minimum level to which it is practicable to bring the rate of interest is appreciably above zero, there is less likelihood of the aggregate desire to accumulate wealth being satiated before the rate of interest has reached its minimum level."
-- General Theory, ch 16.

Interest rates are very low and if you understand why you are very worried.

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If demography is destiny, and results in lower interest rates, the US should close off its borders and seek zero to negative population growth.

This will open up wide avenues for government through money financed fiscal programs, and very beneficial lower taxes.

Trump's walls are looking better and better!

PS: the average one-bedroom apartment in Sapporo Japan rents for $450. The average one-bedroom apartment in Los Angeles rents for $2,500. You can do a lot of hedonics, but basically life is better in Sapporo Japan.

Add on: Thanks to globalists, we have globalized capital markets. So a lone central bank, such as the Fed, operates inside a globalized capital market.

There are about $400 trillion of global assets (bonds, stocks, property) outstanding. What does $1 trillion of QE mean in such a market. No one knows.

But conducting QE in a globalized capital market seems like a peculiar way to stimulate the economy of a specific geographic area, such as the US.

Really, helicopter drops seem much more targeted and effective.

I prefer no more social welfare or military spending. Tax cuts on wage earners strikes me the right approach. A FICA tax holiday offset by the Fed buying bonds and placing them into the Social Security fund would probably work fine.

If you want more of something, tax it less--tax working less!

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It's the stocks, stupid! I'm with Ray Dalio. I often read Scott Sumner's blog, Sumner being the denier of asset bubbles. He's framing monetary policy based on business cycles that don't happen like they used to. Sumner doesn't appreciate my concern about reliance on rising asset prices as the path to prosperity, calls me "some random commenter", so what do I know. No, I wasn't insulted. Does Dalio know? He writes that asset prices are in for a big correction? Robert Shiller is concerned too. Dalio and Shiller are not "some random commenter".

Unless you think the actual earnings of actual companies are bogus or unsustainable, it's almost impossible to say that stocks are overvalued right now. The dividend yield on the S&P 500 is 1.9%, while the yield on 30-year Treasuries is 2.25%. In order to facilitate this comparison, you should be aware that average earnings growth for S&P 500 companies has been about 5.5% per year over the past 31 years.

If you think stocks are overpriced, what does that say about bonds?

If you think bonds are overpriced, you think long-term interest rates should be higher, so you implicitly assume someone nefarious is "holding down" long-term rates.

This is not a power possessed by the Fed or any Central Bank. Once you realize that low long-term interest rates reflect a demographic reality, your confusion should abate.

"your confusion should abate"

That's not happening. rayward has 3-4 identical posts that he selects from every day in every thread. This one about 'rising asset prices as the path to prosperity' is particularly interesting, as even a high schooler can understand that asset prices rise as a result of prosperity, not the other way around.

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meanwhile speaking of crazy,
did you see on the cnn.com where nancy pelosi wants the donald to take "the oath of office" before testifying to congress!
hey nancy the oath of office is done at inauguration not at show trials!

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35 years of crazy is about right. That is the time from FDR shock to Nixon shock. I think we are slightly better this time and can go 45 yeas.

But it is not QE, per se, it is primary dealers planning debt ex ante, and that dictates loan demand which the fed then knows ex ante. That makes the excess reserves have additional inertia, they are hedged, ex ante. With reserves having more inertia, we get liquidity sloshing, generally in the stack market which is highly liquid.

The bond market want all this settled by having the peasants support a 50 year bond in Treasury, forcing the peasants into low wage labor for infinity as they price the future they vote for. It will not work, another year or two and we be shocking, but This time will be slightly different than next time.

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Janet Yellen, in a 2015 letter to Ralph Nader, acknowledged that the Fed was supporting asset prices. Was she just confused about that? https://www.federalreserve.gov/foia/files/nader-vidal-letter-20151123.pdf

Low Treasury rates support assets prices, high government interest payments support low rates, by Law, actually. The primary dealers have a 14th Amendment duty to see that interest payments will be made. They are legally bound by contract, one that you and I vote for every year. An actual federal law.

We pay them in free liquidity, they plan the debt sequence, by Law, that is their charge. And they are allowed to front the market with that knowledge, by Law and agreement you likely sign each year.

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I don't see why average return would be relevant. I'd be more inclined to inspect the ratio of wealth:GDP. By that measure we are at (or near) record levels. Perhaps another measure would be portfolio allocations - you'll find the allocation to equities near record levels as well.

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"I don’t swap out my whole bond position for a stock position or a role of the dice at the roulette wheel."

Actually, that's what I and plenty of other investors I know have done as interest rates near zero while deficits are 5% of GDP (though it's equities and real estate, not roulette).

"So, if investors are acting crazy today then they’ve been crazy for 35 years."

No. We had real GDP growth then, and lower valuations. Now we just have no alternative.

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According to news reports, Mr. Orléans has officially denied any homosexual dealings whatsoever. His cousin, Mr. Órleans, has denied any knowledge of any knowledge of homosexual dealings.

According to news reports, Ms. Williams has officially denied having an affair with her supervisor, Mr. Garbers. Her sister, Ms. Williams, has denied any knowledge of any knowledge of the affair.

I think this is different. Mr. Orléans, as the name makes clear, is a member of Brazil's royal family. He is also an accomplished Congressman and, before having been brought down by unsubstantiated rumors, the favorite candidate to share the presidential ticked with the country's president, Captain Bolsonaro, in 2018. His cousin, Mr. Orléans, has said he has been shocked by gutter-like rumormongering directed against his cousin.

According to news reports, Mr. Jensen has officially denied any improper financial dealings whatsoever. His father, Mr. Jensen, has denied any knowledge of any knowledge of improper financial dealings.

My point is, that the man is royalty and could have been vice president of a country bigger than the Roman Wmpire at its height. I think it is news.

According to news reports, Mr. Carruthers has officially denied any improper political dealings whatsoever. His brother, Mr. Carruthers, has denied any knowledge of any knowledge of improper political dealings.

We are talking about a empire-sized country's political life.

According to news reports, Mr. Fink has officially denied any improper scientific dealings whatsoever. His brother, Mr. Fink, has denied any knowledge of any knowledge of improper scientific dealings.

I am not talking about some nobody in Polkadolka U. I am talking about the destiny of a great nation.

According to news reports, Mr. Thomas has officially denied any improper academic dealings whatsoever. His son, Mr. Fink, has denied any knowledge of any knowledge of improper academic dealings.

The destiny of the entire world hangs in thge balance and you choose to slander Brazil. You are a blackguard of the 50 Cent Party.

I think that is the impersonator.

Actually, THAT is the impersonator.

No, I am not.

Yes, you are.

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A major cause of the run-up in asset prices/decline in the equity risk premium has been public companies issuing bonds at low interest rates to buy back their own stock. Management teams at public companies are heavily incentivized to do this in order to increase the value of their stock options. No value is actually created when this happens - it's just an accumulation of debt on company balance sheets, and the piper will be paid some point in the not too distant future.

The CAPE of the S&P 500 is currently close to where it was just before the Great Depression (https://www.multpl.com/shiller-pe).

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I think where a lot of economists make a mistake is that they believe the interest rate is representative of the risk. The Greek 10-year yield is now sitting at 1.4% - less then the US 10 year - does that mean investing in Greece is less risky then the US? Come on, you have to be a fool to believe that QE is not manipulative...

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A bit of sleight of hand there. What "cash" will he be holding instead of bonds? Money market funds are not cash, they hold bonds. Physical cash - sure, one person can hold it, but not everyone. This kind of individual investor thinking does not scale to economy level.

I do agree though that bond-holders will not necessarily go into stocks - many of them are not allowed to to begin with. They will keep looking for yield into riskier and riskier debt (see Europe for a vivid demo - Greece is selling debt at negative yield).

Indeed. Structural holders like banks and pension funds are required to hold bonds.

But to argue that many marginal investors haven't been pushed to go heavier into risk assets flies in the face of all theory, empirical evidence, and explicit Fed and market participant statements.

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A bit late to the comment party here, but this just seems confused on a first-year econ level. If you want to sell bonds because you read a scary article, that's a decrease in bond demand. If the Fed is looking to buy more bonds, that's an increase in bond demand. Different things, different implications.

Of course, basic supply and demand is just the starting point, but if the author (and Tyler!) can't keep that straight, what's the point of following into the details.

Or, if I'm missing something this basic myself, also not much sense in digging into the details, but maybe someone would be willing to set me straight.

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If central banks are encouraging people to go out and asset chase then why not (Tyler)? It is a great way for individuals to grow their net worth. Quantitative easing is a new monetary policy tool that allows more money in the economy and look at the effects since the last recession. The stock market is as high as it has ever been and UE is at an all time low. The middle class can afford to take out cheap mortgages and businesses are thriving.

And, although stocks are a great asset to include in your portfolio, stocks are more volatile than bonds, and therefore riskier. (Tyler) With that being said, I would agree that if you wanted to maintain a moderate risk profile, it would not make sense to get rid of your bonds for stocks. Also, there are ways to minimize risk on company stocks if you keep up with company profits, rate of growth, and cost of capital. Doing the research, or investing into companies or projects that you are actually passionate about and believe can make a difference in society are all great ways to decrease the risk on your investments.

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