No “Poloz Put?” Ignore BoC Warning At Your Peril
Governor Stephen Poloz’s warning last week that the Bank of Canada wouldn’t backstop fluctuating stock markets drew little attention.
“Is there a Poloz Put?” the central bank head asked rhetorically. “No.”
At first glance, the fact that only one BNN Bloomberg producer and a few smaller media picked up the story is hardly surprising.
Canada is a mere bit player in global central banking and financial markets, and the opinions of any Canadian official generally carry little weight outside of local circles.
However, in December 2017 Poloz provided investors a similar warning about Bitcoin, then trading near its all-time high, but which subsequently fell by more than 80%.
Investors would thus be foolish to ignore him now.
Consider:
One of the Fed’s main policy tools
First, a little background. The idea that governments are key drivers of stock prices may appear ludicrous to those who believe that Western economies are free markets.
However, as Moody Analytics notes, higher asset prices and resulting wealth effects are one of the Federal Reserve’s main policy tools for achieving its inflation and economic growth targets.
For U.S. stock traders operating today, most of whom have never seen a crisis that government hasn’t bailed them out of, the Fed’s most important manipulation is the existence of a tacit “put,” which ensures that asset prices won’t fall too far.
Former Federal Reserve Chairman Alan Greenspan, Ben Bernanke and Janet Yellen all intervened to boost asset prices at key points when the heavily-indebted U.S. economy appeared set to implode.
The Bank of Canada’s policies are less overt. While the central bank claims that it “does not target asset prices,” asset price manipulation is clearly direct “collateral damage” resulting from its other policy objectives.
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