In a desperate search for yield, central banks, sovereign wealth funds, and public pension funds have been investing in corporate debt and equities on a scale we have never seen before, the OMFIF’s David Marsh told us in 2014 regarding their comprehensive Global Public Investor report.
“The move into equities has continued,” said Marsh, Co-Founder and Managing Director at the OMFIF, in today’s interview with Financial Sense.
Their 2016 report, which covers 500 official public institutions and roughly $30 trillion in investable funds, was just released (see here) and Marsh had some alarming remarks regarding the Bank of Japan and a recent U-turn by Jim Bullard at the St. Louis Fed.
He noted that many of the official institutions they monitor are making losses on their reserves since they are “investing in areas that yield very low or negative returns.”
As Martin Armstrong outlined on our show recently, Marsh believed this could lead to further overheating in the stock market and risk of a bubble as trillions in reserves diversify into “more risky instruments,” including stocks, corporate bonds, and real estate.
Since returns on government debt are now, in some cases, at the lowest levels in recorded history, bond prices are trading at record all-time highs. This makes large holders of government bonds highly vulnerable if interest rates begin to rise and/or bond prices fall.
Such investors “may have to go to their governments and ask to be bailed out,” Marsh said, which could be a problem since the “financial system is already pretty insecure.”
“The biggest central bank that could be affected by this,” he said, “is the Bank of Japan since it is the biggest creditor in the world.”
Marsh told listeners: “When interest rates eventually rise, as surely they will, the Bank of Japan stands to make enormous losses because they bought this debt at quite high prices.”
With a lot of this hinging on eventual rate hikes and bond investors demanding higher returns should inflation become more of a concern, Marsh related a recent meeting hosted by the OMFIF with James Bullard of the St. Louis Fed.
“Jim has been projecting, up until recently, several hikes in the federal funds rate over the next 18 months,” Marsh said. However, due to the lingering forces of low growth, low inflation, and low productivity, “he’s now done something of a U-turn…and thinks we are not going to have interest rate changes of any magnitude in the next two and half years.”
“Bullard’s ‘new narrative,’” writes Marsh, may be reflecting “deep-seated changes in the functioning of money and economics” and “could mark a revolution in monetary policy.”