‘We have almost no exposure to countries with big problems. We constantly examine where we invest the foreign currency reserves, and I can promise you that you can relax.’
So said Governor of the Bank of Israel, Professor Stanley Fischer, in mid-January.
Apparently the Bank of Israel has just started to invest a few of its foreign exchange reserves in US equities. As they say, no one rings a bell at the top, but…
According to this Bloomberg article, ‘the (Israeli) central bank decided to add equities to its investment portfolio in order to diversify, reduce risk and give better performance.’ Apparently Apple is one of the companies set to receive the Bank of Israel’s money. We can’t see how that will reduce risk OR give better performance.
Check out Apple’s share price performance over the past three years. Just about every hedge fund manager in the world has jumped onto this bandwagon.
We’ve circled the momentum indicators in red. RSI (the relative strength index) at the top of the chart is well into ‘overbought’ territory. And the MACD index (another momentum indicator) below has gone nearly vertical since bottoming in late November 2011.
Apple – Liquidity Driven Share Price Surge
In fact, Apple’s share price has gone from around $360 in late November to nearly $550 now. That’s a gain of more than 50 per cent in about three months. How much of this is due to the latest liquidity gush from the ECB, as well as the promise of low interest rates ’til 2014 from Ben Bernanke?
We would think a lot. It’s no coincidence that Apple’s share price took off around the time of ECB Governor Mario Draghi’s cash for trash deal in December 2011.
The point is, when central bankers get conned into investing in equity markets by investment bankers, you know you’re close to a top. And if Apple is a decent proxy for the equity market liquidity play, as the momentum indicators clearly demonstrate, we’re close to a top.
But this isn’t the consensus view – of the markets or Apple. According to Thompson Reuters data, 30 analysts have a buy recommendation on Apple. There are three holds and only one sell.
The herd is running, dear reader…swept up in a torrent of central bank liquidity. After bringing the global economy to its knees just a few short years ago, central bankers are now back in control. They have the full faith of the speculating community.
We take the opposite view. We think central bankers – in the long term – are about as impotent as a rubber toy…but nowhere near as harmless. The constant meddling and provision of short-term stimulus merely creates more distortions and structural problems.
The credit crisis of 2008 didn’t just materialise out of thin air. It was a product of a 40-year credit bubble, made possible by letting the Fed and other such organisations manipulate the market rate of interest to suit their and their political masters’ needs.
But in 2008 the ‘long term’ arrived. All the problems associated with decades of bad policy and easy money culminated in a crash of epic proportions.
Yet here we are four years later and the policies that led to the crash are again in the ascendant. We’ve been seduced into thinking a durable recovery is here. It’s not. If you look through the blast of liquidity you’ll see a global economy limping along. The recovery from the crash – and we mean a sustainable recovery – will take perhaps a decade or more.
But here’s the main problem. Because central bankers have no clue how the REAL economy works, their policies will cause constant market volatility. When they see the inflationary impact of their money printing, they’ll take the foot off the pedal. Markets will panic at the loss of liquidity and deflation will again be on the agenda.
Richard Bernstein wrote about this in a recent article in the Financial Times.
The recent rally in global markets has been led by what most investors are now calling “risk-on” assets. Their counterparts, risk-off assets, have lagged. We question the longevity of this risk-on trade. Indeed, we believe that the secular investment theme remains risk-off.
Investors use the hackneyed term risk-on to refer to assets that have tended to outperform when investors are bullish. Commodities, real estate and emerging markets would be prime examples. Risk-off assets are perceived haven assets such as US Treasuries, German Bunds, the US dollar and even US stocks.
…we expect risk-on assets’ outperformance to be periodic when policymakers attempt to reinflate the global credit bubble. Risk-on assets outperformed subsequent to the Federal Reserve’s attempts to stymie US financial sector consolidation, and they have been outperforming more recently as the European Central Bank made moves to thwart European bank consolidation.
The question is whether policymakers can fully alleviate the effects of a deflating global credit bubble. Longer-term investors should be sceptical.
While we would question whether US stocks are ‘risk-on’ assets, we think Bernstein has it pretty much spot on. It’s too easy just to throw your money in the market and expect the Fed’s to take care of you. The world doesn’t work like that. You can’t have reward without risk.
And in investment markets, risk is ALWAYS highest when is seems the lowest and ALWAYS lowest when it seems the highest.
As far as we can tell, the concept of risk at the moment is not one many investors are giving too much thought to. Along with Apple’s share price, that is a dangerous sign.
for Markets and Money