Asset managers for the rich and super-rich around the world were keeping an especially watchful eye on Frankfurt as the governing council of the European Central Bank held its latest monthly meeting Thursday to decide on interest rates and monetary policy.
That’s because the rich and powerful are counting on the ECB to fill their coffers with fresh money, plugging a gap in the market that has been left by the exit of the U.S. Federal Reserve.
A global shift is underway in the world of central banking. Last week, the Fed decided to stop buying treasury bonds, which means that it will no longer be pumping additional liquidity into the financial markets. The end of “quantitative easing” in the United States marked a watershed moment in the six-year-old global financial crisis, and a sign that the U.S. economy has largely returned to health.
For asset managers and their clients – attention now turns elsewhere.
Because the ECB is much more worried about the economy than about new asset bubbles, they hardly have a choice but to intervene. Citigroup
If the ECB and other central banks around the world do not fill the gap, it could be bad news for those with substantial private assets. The Fed's bond purchases acted like a pump, inflating the prices of stocks, bonds and real estate around the world in a bid to keep the economy afloat.
Asset managers have become hooked on the free money, according to calculations made by Matt King, who manages investment strategy at Citigroup. He and his team have estimated that about $200 billion (€160 billion) in new central bank liquidity is needed every quarter to prevent securities markets from deflating.
According to Citigroup’s estimate, stocks will lose about 10 percent of their value without new liquidity.
The famed U.S. investor Carl Icahn agrees: "The S&P share index would be significantly lower without the Fed's actions," he said at a recent conference.
The wealthy have disproportionately profited, and were even counted on by central banks to revive the economy. The balance sheets of the rich "were an important transmission channel for this monetary policy," said Ajay Kapur, stock analyst for Bank of America. Conversely, their assets will lose significant value if quantitative easing ended.
Citigroup analysts are confident that the ECB and the Bank of Japan will more than offset the loss of the U.S. money pump in the coming months: "Because they are much more worried about the economy than about new asset bubbles, they hardly have a choice but to intervene."
Indeed, the Japanese have already delivered. Last Friday, they announced that they would ramp up their own existing plan for monthly government bond purchases. The level of purchases was raised from between $44 billion and $51 billion per month to a new level of $58 billion.
The markets reacted euphorically. According to the Forbes list, the world's five richest families saw the value of their assets increase by $3.8 billion from one day to the next.
Given the effect of Japan alone, the wealthy are justifiably pinning their next hopes on the ECB, which oversees the 18-nation euro zone, the world’s largest economic bloc.
The ECB has never quite played along with this game. It allowed its total assets to decline by a trillion euros from a record high in 2012 as worries of a euro-zone crisis have faded. That made it one of the few central banks around the world to actually shrink its balance sheet over the past year.
But now it looks like the ECB may intend to join the club, after all. This year, it introduced a series of new securities purchasing programs. New programs are being put on the table even before the old ones are fully underway – including the possibility of purchasing corporate bonds and – in the longer term – of government debt.
ECB President Mario Draghi has said he hopes to increase the central bank's total assets back to the level at the beginning of 2012. Analysts have interpreted this as a signal that the ECB intends to plug as much as €1 trillion into the euro zone economy.
Central banks are just making the rich richer with their policies. Meanwhile, ordinary workers are left to pay. Helge Peukert, Economics professor, Erfurt
A major decision on whether to launch such a large-scale government bond purchasing plan was not expected at Thursday’s ECB meeting. Indeed, Mr. Draghi may be having trouble getting his way on an increasingly unwieldy governing council.
Germany has strongly opposed such a large-scale government bond purchasing program, and according to the news agency Reuters, he has support from as many as 10 other euro zone central bankers that view the move as one too far for the central bank. Mr. Draghi’s increasingly go-it-alone style has drawn the ire of some other European central bankers.
“There is a criticism of Mr. Draghi’s style and monetary policy course, though there is no talk of a revolt,” said one central banking source who declined to be named.
Still, investment strategists at Morgan Stanley said the market believes there is an 80 to 100 percent chance that the ECB will begin buying government bonds at some point in the future. Most analysts are expecting such an announcement early next year at the latest.
ECB officials are aware of the growing inequality that accompanies asset price inflation. The central bank recently published a study by its economics department, which uses the Forbes list of the super-rich to generate better data on inequality, because many of the usual statistics do not include the wealthy. The Forbes list closes that gap.
ECB economist Philip Vermeulen found that of the 10 countries studied, Germany has the third-highest concentration of the rich and super-rich, behind the United States and Austria, which has often acted as a tax haven. The wealthiest one percent of Germans own a third of all assets in the country, while 95 percent of the population make do with less than half.
This concentration of assets in the hands of the wealthy is climbing sharply. According to a current study by Emmanuel Saez and Gabriel Zucman, 22.5 percent of wealth is now with the top 0.1% richest families in the United States, compared to 15 percent a decade ago. Three Berlin researchers arrived at very similar figures for Germany, using data from a list of Germany's wealthiest individuals compiled by Manager Magazin.
Other central bankers are also neither unaware nor indifferent to the growing inequality that their programs are causing.
U.S. Federal Reserve Chair Janet Yellen recently gave a passionate speech in which she criticized "wealth gains" for "those at the very top," while the standard of living for the majority is stagnating.
"The extent of and continuing increase in inequality in the United States greatly concern me," she said, although she did not draw a connection to her own institution’s monetary policy.
And yet, it is arguably the wealth that central bankers have been counting on to revive their respective economies.
The Bank of England frankly stated that the goal of its own "quantitative easing" policy is to push up asset prices. The expectation, or hope, is that this will indirectly benefit the real economy, because it will enable companies to refinance more cheaply on the capital market and encourage wealthier asset owners to consume more.
"It's important to be clear about this: Asset bubbles are not a side effect but an instrument of monetary policy," said Patrick Artus, chief economist with the French investment bank Natixis.
Helge Peukert, an economics professor in the eastern German city of Erfurt, is scandalized by the business-like analyses of Mr. Artus and the Bank of England. "Central banks are just making the rich richer with their policies. Meanwhile, ordinary workers are left to pay for the structural reforms, worry about their jobs and accept pay cuts," he said.
Mr. Häring covers monetary policy for Handelsblatt in Frankfurt and is a founder of a “Shadow Council” of analysts that deliberate on the ECB’s policies. Mr. Cermak has covered monetary policy and the economy in Frankfurt and is now an editor for the Handelsblatt Global Edition in Berlin. To contact the authors: [email protected] and [email protected]