“Maybe central banks should buy the stock market,” writes Citi global equity strategist Robert Buckland.In a note published on November 21, Buckland notes that central banks’ current low interest rate policy is encouraging the wrong kind of corporate behaviour.
“If anything, low interest rates are increasingly part of the problem rather than the solution,” he writes. “Perversely, they may be turning the world’s largest companies into capital distributors rather than investors.”
In other words, corporations are using low interest rates to just borrow money to buyback stock, rather than invest in growth through capital expenditures. We’ve seen plenty of evidence of this.
To turn them off to this behaviour, Buckland suggests allowing rates to rise to make bonds more attractive:
Perhaps rates should be allowed to rise back to more natural levels. This might be painful at first, but it could stop equity investors being so income-obsessed.
The more radical solution would be to intervene in the stock markets, and cause prices to rise, which could discourage buybacks:
Or maybe the real problem here is depressed equity valuations. Low PEs and high dividend yields reflect the long slow death of the equity cult. At the margin, current valuations encourage CEOs to distribute through buybacks or dividends. They discourage capex and job creation. Perhaps instead of buying government bonds, the next round of freshly minted QE cash should be used to buy the stock market instead.
In reality, Buckland thinks it’s a longshot. But not unprecedented:
This still seems a very long way off. The Bank Of Japan has bought ETFs and J- Reits but not in a significant way. The ideological barriers to direct intervention in the equity market seem insurmountable. It looks too much like nationalization. Despite our misgivings outlined in this report, for now it seems that policy will remain focused on keeping rates low. Purchases of riskier assets will remain confined to the fixed income markets in our view.
This whole thought experiment echoes the frustration that companies aren’t employing cash formore productive purposes.
The Federal Open Market Committe releases their latest monetary policy statement today. According to the consensus, the Fed is expected to embark on more easy monetary policy via QE4.
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