Malt Liquidity 3
Disclaimer: Zero edginess present towards Central Banks
Market Investing
NASDAQ made news yesterday when it was reported that they were “trying” to make diversity on a board a requirement to list publicly, and, naturally, the peanut gallery was out in full force to warn us about the Faustian reality that forced diversity hires would lead to. However, I like to think of this more as lobbying, much like Larry Fink’s various attempts to use Blackrock’s mammoth ETF business to modify corporate governance (some of which flat out encroached on “government” territory and was slapped down). After all, it’s not NASDAQ that decides whether a company fits the requirements to go public - it’s the SEC. NASDAQ makes its profits by providing data for the stocks and indices listed on the exchange, along with various other clearinghouse revenue streams. So you could argue that, though NASDAQ is not directly invested in the market, they really are wholly dependent on more companies going public in the future and listing on NASDAQ. Blackrock and NASDAQ are two of these quasi-market-long companies that depend on the overall market doing well in some way to increase their business - in this case, market performance perhaps incentivizing companies to go public - rather than specific things going their way as a whole - therefore, it’d be natural to try and influence certain behaviors that might improve companies’ performances in the long run. While the report certainly appears obtuse - upwards of 70% of companies wouldn’t be in compliance if this was a requirement already - the closest way they can make known this notion of “Hey, we think this is good for your companies and therefore us in the long run” is going to the SEC and making their desires known.
“Passive” Investing
A couple days ago, I mentioned how if a “market index” is picking stocks to add and remove to the index constantly, it resembles active management in some interesting ways. But what do we call it if the institution in charge of the money supply itself is picking stocks?
In March, [Mr. Kuroda] doubled the BOJ’s annual ceiling for its purchases of exchange-traded funds to the equivalent of $115 billion. That was the month the stock market began surging after a pandemic-induced dip. It closed Thursday at a 29-year high, up 60% from this year’s low.
… the market value of its holdings stood at the equivalent of nearly $400 billion as of Sept. 30, which represented an unrealized profit of $56 billion over what it paid.
According to the article, the Japan Central Bank now owns over 6% of the entire Tokyo market! I shudder to think at what would happen if the Fed tried to do this in the U.S.
For large equity positions, the same rule applies to valuing your position as it does for private equity positions. Your paper P/L assumes that there is enough liquidity at the current level for you to sell your position with zero slippage - this, naturally, is not the case. In the case of WeWork for example, Softbank found themselves at the top of a castle in the air with the $47 billion valuation their own purchases had assigned the company (and then proceeded to try and pawn that pile of shit on the public markets) - to cash out on the 11-12% profit the BoJ has made without losing any money on the execution, somehow 6% of the total market would need to eat this trade, a practical impossibility. But it’s even worse - when a central bank is buying, naturally, investors note that an institution with unlimited funds can endlessly purchase. Thus you will get a lot of piggy-backing, which purportedly was the intention of this program. However, who would buy if the central bank is selling? If the economy is strong and the market is going up, then the central bank has just as little incentive to sell as everyone else does - clearly, they are still trying to turn a profit, and selling into any rally with this sort of position size has a decent probability of killing the rally entirely - in effect, they have sort of become the market buy/sell indicator. This is why the Fed announces their purchasing programs loudly before acting - the weakness they see in the market just might resolve itself on the indication alone, which would avoid the entire issue of unwinding a position and perhaps revealing that it just sort of masqueraded the bland reality that the market followed the central bank.
Further Clarification
Have you ever sent a text immediately after seeing someone or getting off the phone with them to follow up on what you’re saying? Well, the European Central Bank decided it was necessary to follow up remarks with clarification to large banks and institutions (Blackrock makes an appearance again!) with private phone calls which, in my eyes, implored them to not take things the wrong way. While I get the rationale - say what you will about the desire for “a level playing field” in markets, size matters - in the midst of a pandemic, where your future outlooks are guaranteed to be cloaked in dense fog at best, it is practical to make sure that confusion doesn’t add more to the mess. However, I can’t help but find this line particularly amusing:
To get on Mr. Lane’s call list, the institution had to be a close follower of ECB policy, the spokesman said.
Brexit may go through, but never say English understatement is dead.
On that note…