Investing Advice: Central Banks and Liquidity Issues

Posted On March 14, 2018 11:30 am

We all know that ever since the financial crisis, Central Banks have been taking unprecedented and unconventional actions to intervene in the financial market, employing everything from negative interest rates to various forms of quantitative easing. In all of these cases, the objective is to provide liquidity and prop up asset prices. Today’s investing advice will explore the shortcomings of these efforts.

No country has been more aggressive in their monetary approach than Japan, where the BOJ stepped directly into both the stock and bond market, and is now the largest holder of both.  It has become so extreme that Bloomberg reported not a single Japanese 10-Year Bond on Tuesday.

The Bank of Japan has vacuumed up so much of the government bond market — in excess of 40 percent — that it’s left fewer securities for others to buy and sell. Some other buyers, such as pension funds and life insurers, also tend to follow buy-and-hold strategies.

On the other hand, in the US, the Federal Reserve is beginning the process of curtailing its actions, and in the process removing liquidity.

 Related: Why Options Are the Best Way to Beat 2018 Volatility 

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Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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