In the four-day “week” to November 23, global equity funds logged a small outflow.
The $2.7 billion redemption was only the second of 2021. The total haul is loitering just below $900 billion (figure below).
Investors’ rapacious grab for equities this year was anomalous — another distortion brought about by the pandemic or, more to the point, another aberration engendered by the policy response to the worst public health crisis in a century.
But to the extent it’s a product of abundant liquidity and central bank accommodation, perhaps it’ll become less exception and more norm going forward.
That’s not to say global equity funds will take in $1 trillion every, single year. It’s just to reiterate that the “state of exception,” as Deutsche Bank’s Aleksandar Kocic dubbed the post-financial crisis policy environment, has become at least semi-permanent. As such, we shouldn’t be entirely surprised if the side effects of ultra-accommodative policy manifest in perpetuity.
The muscle memory and Pavlovian response function which finds expression in dip-buying and the tendency for vol-sellers to reengage at the first opportunity, is indicative. Soon enough, it could be that central banks simply decide that equities are a public good of sorts and that ensuring they don’t fall “too much” is paramount.
You’ll quip that central banks have pursued a shadow equities mandate for years, and you’ll be correct. But what I mean is a more literal, explicit policy akin to the Bank of Japan’s ETF purchases, only with a redistribution kicker.
Currently, the problem with viewing stocks as a public good is that the “public” doesn’t own
many. In order for the benefits of such an equities-focused mandate to accrue to the public, you’d need to change the distribution of stock ownership. Happily, distributing equities to households would be one way for central banks to solve the most vexing logistical quandary associated with stock-buying — namely, how to unwind a portfolio of equities.
Unlike bonds, stocks don’t mature. They won’t “roll off” the balance sheet. But they could be handed out to the masses. And then central banks could buy more to ensure they keep rising.
Folks will scoff. And that’s fine. Do note, though, that the same folks who deride such ideas as madness often argue that the current conjuncture, in which central bank accommodation enriches the already rich, widening the wealth gap on the way to stoking social unrest, is wholly unsustainable and inherently unjust. Their solution is to restore “normal” market functioning and allow price discovery to reassert itself. But they know full well that isn’t a viable option. It would likely result in a dramatic collapse across assets with unavoidable spillover into the real economy. Because the whole point of such a “purge” would be to emancipate markets from central banks, policymakers wouldn’t be able to intervene — that would defeat the whole purpose.
Further, the idea of a “grand reset” is predicated in the first instance on the assumption that “the market” should be allowed to dictate outcomes, free from any policymaker tinkering. We know where that leads. Capitalism unfettered — capitalism without guardrails — leads to massive inequality. It’s far from clear that the situation would turn out any better for the downtrodden masses absent central bank intervention in capital markets. Would survival of the fittest, higher risk-free rates and the absence of zombie companies invariably lead to a more equitable society than what we have now? Maybe. Maybe not.
How would corporate management teams deal with a scenario where central banks accumulate giant equity stakes and then transfer those stakes to households? How would it change the decision calculus when it comes to issuing debt versus equity? Would the public become one giant activist hedge fund? I don’t know. I do know that we generally find it acceptable for giant asset managers to use the clout they wield to push social agendas. Should that not properly be the purview of the public? Why does Larry Fink get to decide how corporate America should act? Shouldn’t you have a say?
“When Mr. Fink makes what sounds like a request, in truth it is much more than that,” Andrew Ross Sorkin wrote earlier this year. “BlackRock’s size gives it enormous influence: Mr. Fink can seek to oust directors of companies that he doesn’t believe are heeding his call, and he can dump the shares of companies owned by the firm’s actively managed funds,” Sorkin added, noting that in 2020, “the firm voted against 69 companies and against 64 directors for climate-related reasons, while putting 191 companies ‘on watch.'”
Would it be such a bad thing if the Fed held trillions in corporate equities on the public’s behalf and then let the public “vote” with those shares on what kinds of corporate initiatives are in the best interests of the polity?
Whatever the case, “permanent QE” is no longer a meme. It’s a reality. Or at least to the extent large-scale asset purchases will always be at the ready. As Bloomberg’s Ven Ram suggested Thursday, “QE has become the first resort of central banks to bad news of almost any kind.” “The failure to withdraw QE in the absence of bad news or even in response to good news” suggests that “what was once a novelty has now become a part of the central banking tool kit,” the same short blog post said.
Asset prices are increasingly administered. Directly in the case of government bonds. At arm’s length in the case of corporate credit. And indirectly, by extension and by default, in the case of equities. That characterization (“administered” markets) will only become more true over time.
On Wednesday, BofA’s Michael Hartnett once again conjured a familiar visual (figure below) meant to highlight just how voracious investors’ appetite for equities has been in 2021.
The net inflow to global equities sat at $893 billion as of this week. That “exceeds the combined $785 billion inflow of the past 19 years,” Hartnett noted.
Just wait until central banks start buying in bulk. Then the charts will really be something.