Why Is The Swiss National Bank Buying US Stocks?

It’s not the easiest time for investors. On one hand the mainstream media is giddy on a daily basis about new all-time highs in the stock market. Yet others warn of bubbles and a day of reckoning to come. So which side is right?

Perhaps the two aren’t mutually exclusive. Stocks are reaching all new time highs and I do believe the market is in a bubble. Perhaps the simplest way of thinking about it is that the stock market has tripled since the money printing went into overdrive in 2009, and if this were a true economic recovery, why are the ultra-low interest rates still necessary even 8 years later? There’s also a recent news story that helps put things in perspective.

Consider that the Swiss National Bank has been buying U.S. stocks with money that it prints or digitally creates out of thin air. Which leads to a whole new level of market distortion.

Traditionally we were led to believe that the stock market reflects the profitability of the companies it represents. If these firms make more money the companies are thought to be more valuable, and if they unexpectedly lose money they would trade lower. Unfortunately that’s not exactly how it works in today’s markets.

When the central banks have the ability to print money and then use it to buy financial assets, you no longer have a free market. 10 years ago many of the housing bonds were essentially worthless. Yet the Federal Reserve printed money to prop them up.

So if something is worthless, just because artificial money is created to boost the trading level, does that change anything about the underlying asset? Of course not, but market investors are left with a pricing metric that doesn’t truly reflect reality.

According to Business Insider the Swiss National Bank has purchased $80 billion worth of U.S. stocks (and they likely aren’t the only central bank to do so). Put another way, that’s $80 billion that’s entered the stock market out of thin air. Without that $80 billion it’s likely the market wouldn’t be as high as it is today. Factor in the activity of the Fed and the other central banks and you start to see why stocks are trading at an all time high that doesn’t seem to match real life.

Whether the bubble gets inflated more or reaches its bursting point soon is never easy to tell, which is what makes this such a challenging trading environment.

But at least by understanding some of the reasons why stocks are so high, you can be prepared for what’s coming and avoid being a victim to the next market crash.

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