A key component to the surge in stock prices over the past several years has been the record high level of corporate stock buybacks. Corporations have been issuing trillions of dollars in debt in order to buy back shares of their stock. That boosts earnings per share, a key metric used to determine executive compensation. In that way corporate insiders can boost their compensation while still making it look like the company is in sound financial health (if you forget about all that debt). But while corporate buybacks may be the biggest game in town, they’re not the only game in town.
Central banks have also been purchasing stocks to add to their balance sheets. While traditionally central banks have stuck to buying government bonds, the sheer size of central bank monetary intervention and the occasional inability to find government debt available for sale has led some central banks to start purchasing stocks instead.
The Bank of Japan is one such bank that has done that, holding over $250 billion in stock assets, or almost 5% of the entire capitalization of the Tokyo Stock Exchange. The Swiss National Bank is another one, with the Swiss having gone on a spending spree this year and now holding over $94 billion in US stocks. That brings up an interesting question.
If corporations begin to pare back their stock buybacks, that’s widely expected to signal the end of the stock market boom. When stock prices then begin to drop, will central banks step in to make stock purchases to keep markets propped up? That may sound like an absolutely crazy scheme, but so did a $700 billion bailout of the financial system and an increase in the Federal Reserve’s balance sheet from $800 billion to $4.5 trillion. Can we really say that there’s something so crazy that central banks won’t try it?
That’s certainly something for investors to watch out for. And if central banks begin to signal their willingness to purchase stocks, or if the Fed starts to pressure Congress for the ability to buy stocks, those should be huge warning signs to investors that the economy is in deep trouble. An economy that has to be propped up by central bank asset purchases is an economy that’s in a bubble that’s ready to burst.
If there weren’t enough warning signs already of an impending bursting of the bubble, further central bank stock purchases would be a definite red flag. Investors who have already protected their retirement portfolios by investing in gold have taken the necessary steps to safeguard their assets from an impending bubble. But if you haven’t invested in gold already, what are you waiting for?