Central Banks Creating Global Stock Market Bubbles

Central banksIrrationality prevails in global stock markets and I believe it’s because of the actions of central banks. What’s happening with central banks and their involvement with equity markets not only is unprecedented, but it also will not end well.

Japanese Stock Market Topping 20,000

Just look at the chart below of the Tokyo Nikkei Average—a key measure of Japanese stocks.

Tokyo Nikkei Average Index

‘Tokyo Nikkei Average Index, 1996-2015,’
Chart courtesy of StockCharts.com

The Japanese stock market has seen a nearly vertical move since 2013—it’s increased well over 100% and is currently trading at a 15-year high.

With this, one may say that maybe the Japanese economy is booming. Sadly, this isn’t the case. Saying the very least, the Japanese economy is in a rut. Growth rates are dismal and economic conditions in the country are gruesome.

The real reason Japan’s key stock indices are skyrocketing: the Bank of Japan has become a major buyer of stocks. According to an analysis by The Wall Street Journal, in the past two years, the Bank of Japan has entered into the market to buy stocks almost every three days. It has bought exchange-traded funds (ETFs) worth 2.8 trillion yen in that time frame! (Source: The Wall Street Journal, March 11, 2015.)

Eurozone Equities Soaring

It’s not only Japan where key stock indices are skyrocketing on poor economic fundamentals. Consider the stock market in Germany, too. It’s up more than 25% year-to-date, as the chart below shows.

German DAX Composite

‘German DAX Composite Index, Apr. 2011-Apr. 2015,’
Chart courtesy of StockCharts.com

Since the beginning of 2015, the stock market in Germany has seen a violent move to the upside. Other stock markets, like the one in France, are showing similar price action as well.

Has anything changed with the economies in the eurozone? The answer is no; the eurozone continues to struggle. In fact, there’s more news about the region breaking apart than ever before.

The reason I believe equity prices are rising in the eurozone: the European Central Bank (ECB) is printing money, and that money is making its way into the stock market just like it did in the U.S., when the Federal Reserve printed trillions of dollars in new money. Investors are throwing their money into stocks in Europe because yields on other assets are dismal. In Germany, some bonds are selling at negative yields!

Central Banks’ Reckless Behavior to End Badly?

In Japan, the central bank is pushing equity prices up by directly buying securities. In the eurozone, the printing press is encouraging investors to buy more stocks. And now we hear the Chinese central bank is also looking to add stimulus to its economy. Chinese markets are already rising in anticipation.

Dear reader, I believe investors buying stocks right now are setting themselves up for a very big disappointment.