The Central Banks “Discover” Equities

Drama. The world’s central banks, of which The U.S. Federal Reserve Bank (The Fed) and the Bank of Canada are most familiar to us, are discovering “equities” as investments for all that paper money that they have, in the multiple trillions, because they want, and might need, better risk-adjusted returns than the government bonds and reserve currencies that they are usually constrained to hold (Reuters, April 7, 2013, Low bond yields luring global central banks into equities: survey).

Better means (we hope) that their capital should be 100% Safe – 100% Capital Safety – and that they should receive a hopeful return above the rate of inflation.

But that’s what we do, and we have a “lock” on it:

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

And it gets much more complicated – and is possibly a conundrum – because the central banks are expected to use monetary policy to raise or lower the rate of inflation in their countries (not ours) and, therefore, the levels of employment and the economic activity of businesses; for example, from Uncertainty, Unemployment, and Inflation by Sylvain Leduc and Zheng Liu, Federal Reserve Bank of San Francisco, September 2012:

Heightened uncertainty acts like a decline in aggregate demand because it depresses economic activity and holds down inflation. Policy makers typically try to counter uncertainty’s economic effects by easing the stance of monetary policy. But, in the recent recession and recovery, nominal interest rates have been near zero and couldn’t be lowered further. Consequently, uncertainty has reduced economic activity more than in previous recessions. Higher uncertainty is estimated to have lifted the U.S. unemployment rate by at least one percentage point since early 2008. 

So we must try to imagine “elephants” in the room with multiple hundreds of billions of dollars to spend – which they have to spend if it’s going to make a difference – and who want to buy our stocks, and stocks from each other – U.S., Canada, Britain, France, China, Germany, and so forth – and cannot be relied upon to hold them for very long because they need their money, now. Alternatively, of course, they could meet their current expenses by simply printing more money backed by a new reserve currency – their investments.

What will they buy? An ETF? An Index? Big companies only? Emerging markets funds? Gold and silver? A mutual fund? Funds of funds? A hedge fund? Alternative investments? And one begins to realize that the “investment industry” has nothing to offer them.

For an inspiration of what can be done – and we’ll be watching this closely – please see our recent Posts, S&P TSX Winners & Losers, April 2013, The Dow Transports, March 2013, or The Wall Street Put, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, for real investments in real companies in real time,

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.