I think it is safe to say most investors were not prepared for the manic rally in US equities. It is easy to forget, but at the end of last month most big name money managers were espousing the view rates would never go up and stocks were fully priced.
Here is one of my favourite excerpts from my October 31st piece QE Infinity is back on the table.
I don’t mean to pick on this 56 year old $200 billion fund manager, but this article sums up perfectly the attitude that prevailed only a few short weeks ago. Yet since then, investors have been scrambling to sell bonds and buy stocks.
To be fair to Krishna, almost no one was positioned for the monster rally in equities. Last month most hedge funds were busy issuing dire warnings about the coming apocalypse. Retail was hiding in “supposedly” safe defensive names priced for perfection. Fixed income managers like Bill Gross were selling volatility desperately trying to pick up a few extra basis points. Everyone was reaching for yield, convinced rates would stay low forever, and equities were the last thing on their minds.
In short, no one was overweight equities which is why this rally has been so ferocious. But wait… I am wrong. There was one group that owned more equities than usual. This group doesn’t get much attention, but it should.
I have long railed against Central Banks monetizing their balance sheets with equities. Bat shit crazy has been my favourite way to describe the practice of a Central Bank expanding their balance sheet by purchasing equities. Yet, look who’s having the last laugh now.
Let’s examine the poster child of Central Bank equity monetization - the Swiss National Bank. Since the 2008 credit crisis, the SNB has consistently expanded their balance sheet.
Whereas many Central Banks stick to buying fixed income for their quantitative easing programs, and most purchase only domestic sovereign bonds, the SNB has been at the forefront of purchasing riskier assets, and even more disturbingly, they don’t confine it to Swiss risk assets, but instead buy other country’s equities.
Here is the first page of the Bloomberg Holding screen for the SNB’s US equity holdings:
Somehow it is not a big deal that the Swiss National Bank is expanding their balance sheet to stuff it full of US equities. In what world does owning $1.7 billion of Apple (and all the other positions) make sense for a Central Bank? It’s not just bat shit crazy, but f’ng insane.
But as stupid as I think it is, the market is not punishing the Central Banks for their reckless behaviour. To the contrary, they are being rewarded for their ingenuity.
Here is the chart of the S&P 500 priced in Swiss Francs.
Yesterday it hit a new high! Every single purchase by the SNB is onside. Well f’ me.
So when I remarked earlier no one was overweight equities, I was wrong. The Swiss National Bank is overweight. And since I think their allocation should be zero, they are dramatically overweight.
If I were in charge of SNB policy I would be taking advantage of this rally to fill ‘em like a butter tart. Trading that sort of size means you sell when you can, not when you have to. I would be writing pink tickets into this euphoric short squeeze.
And for all those newly minted bulls that are busy chasing US equities up here, I get to say something you don’t hear very often - you have just been outsmarted by a Central Bank.
Thanks for reading,