What if Governments Are Directly Buying Stock ETFs?

The U.S. spent approximately $13,000,000,000,000 so far to re-inflate the domestic economy. That’s not far from the $14 trillion estimate of total economic output for all of 2008. Ouch!

Yet stocks have soared on the recession rebound. Bernanke has been reappointed for the Fed Chairman role. And few seem to question why many are so quick to leave ”safer” assets (e.g., value stocks, bonds, etc.) in favor of ”riskier” assets (e.g., growth stocks, small caps, etc.).

We already know that the U.S. government has arranged a number of indirect deals for the acquisition of preferred and common shares of stock, particularly bank stock. But is it also possible that the U.S. government engaged (or is engaging) in the purchase of stocks on the exchanges?

We recognize that it is happening in the bond world as a part of “quantitative easing.” The Federal Reserve has bought copious amounts of long-term U.S. treasuries. The result? We’ve watched as the artificial creation of bond demand has kept yields near historic lows and provided confidence to prospective homebuyers.

So why wouldn’t the powers that exist in government be direct buyers of stock in an effort to boost investor confidence? In late February, 2009, when the world was near complete pandemonium, a Nikkei newspaper reported that the Japanese government was planning to make direct purchases of stock. The markets rose 2.7% on the news.

Moreover, it’s happened in other markets throughout the world. In frontier markets like Georgia to quasi-emergers like Taiwan, governments have often engaged in propping up their markets to restore confidence.

I’m not one for conspiracy theories; that said, it was estimated that it would take $10 - $20 billion to move the Dow from 25 down to 50 points up in a span of just 7 minutes. That occurred near the closing bell on a Friday in early May, 2009. Some people wondered who (or what) in the world had that kind of money besides a government entity.

If the recession/depression and credit nightmare were as bad as described, wouldn’t it be reasonable to assume that a worldwide scramble for a solution might have included a government’s direct participation in stock purchases? If nothing else, if the idea had been floated around at the top levels of the 2nd largest economy (Japan), our leadership had to have discussed the pros and cons.

One might be inclined to think, so what? If the intent was to head off ongoing economic contraction, reinvigorate the global industrial cycle, and restore confidence in stocks… didn’t it work? Why would it matter if central banks worked in concert to print money and buy stock assets?

Well, the unintended consequences may be harsh. Granted, the Fed’s program to purchase long-term treasuries has boosted homebuyer confidence in the near-term. However, the program likely ensures a treasury bond selloff in the intermediate-term; both the U.S. government and foreign investors won’t “demand” low-yielding long treasuries, and an excess in supply should push yields up to undesirable levels.

If the U.S. government directly purchased stock assets like the S&P 500 SPDR Trust (SPY), the government would have to sell sooner or later; and, the selling would certainly depress prices in the future. Further, a rise in stock prices caused by government might foster greed on the part of momentum buyers, joining the market only as the party is nearing an end.

Here at the tail end of August, I don’t pretend to have the answers… I’m just raising the questions. My hope is that the world is responding to stimulus… and not to artificial stock manipulation.

Indeed, it’s troubling enough to know that the U.S. government’s purchase of long bonds (i.e. quantitative easing) is likely to result in inflation that is greater than the historical average. It follows that we ought to consider how a government’s purchase of stock assets may or may not adversely affect future stock prices.

Comments

[Steven Hansen:]

i have an article today with the same theme covering different ground.

it should be obvious that something more than the hand of God is impacting the value of assets.

Aug 30 03:40 AM

[Roger Knights:]

"it should be obvious that something more than the hand of God is impacting the value of assets."

There's an invisible THUMB (on the scales).

If "Da Boyz" got wind of governmental buying, they'd front-run it for sure. Hmm. Maybe the government only floated the rumor that it is doing so, and let that rumor alone do the pumping.

But, if there IS governmental buying, it is surely being done in a "deniable" manner. E.g., through proxies who have been assured informally that any losses they sustain will be made good in some roundabout manner. Uncle Sam will leave no fingerprints.

Aug 30 06:27 AM

[searcher:]

What foolery cannot be recommended by the laudable goal of promoting 'confidence;?

Aug 30 11:27 AM

[Nick Gogerty:]

I certainly hope govt's aren't buying shares. Buying extra tickets to the show, doesn't necessarily make the performance better.

Aug 30 12:23 PM

[TCK:]

I like the theory that Goldman or Bernanke are buying S&P futures.

Seeing a number of reports on blocks of 5000 contracts at critical times of day !

Aug 31 05:34 AM

[Rhunzzz:]

But what point would there be in buying stocks? Buying bonds directly affects treasury yields and credit markets. Buying stocks... has no direct, appreciable effects upon the operations or finances of the companies listed, let alone the wider economy.

There is this myopia common among stock market commentators, to believe that the stock market is somehow as important and deserving of attention as the real economy. Pfeh.

Sep 02 12:26 AM