Norway’s Historic Bond Dump Exposes the Stock Market Bubble Created by the Fed

Posted in: Market NewsOp-ed
May 13, 2020 4:37 PM UTC

Norway plans to sell bonds to create a large cash reserve, and fund managers warn it may precede a stock market downturn.

  • Norway is set to withdraw $37 billion from its sovereign wealth fund.
  • The Government Pension Fund, also known as Oil Fund, must hold 70% of its portfolio in stocks.
  • The fund’s move to expand its cash reserve suggests it foresees a stock market downturn.

Norway will withdraw $37 billion from the Government Pension Fund, the largest sovereign wealth fund in the world, and begin selling bonds to create a large cash reserve. Fund managers warn it may precede a stock market downturn.

The dire economic consequences of the coronavirus pandemic made asset liquidations a possibility for even large funds and investment firms.

The unprecedented move by Norway to cash out more than the fund generates is a hint of what is to come in the stock market.

Norway’s sovereign wealth fund manages $1.148 trillion in assets. | Source: nbim.io

World’s Biggest Fund is Selling, Why Are You Buying?

Many of the world’s billionaires and leading funds are implementing a similar strategy heading into the second half of 2020.

At the annual Berkshire Hathaway meeting, Warren Buffett dismissed any plans to use the firm’s $137 billion cash pile to invest in the stock market.

Buffett said that in this environment, even such a big cash reserve is not enough.

Norway and its sovereign fund are seemingly on the same page as Buffett and other cash-favoring billionaires like Mark Cuban.

As the U.S. stock market plunged in late March, the value of equities owned by Norway’s wealth fund dropped. The fund’s policy is to maintain a 70-30 ratio of stocks to other assets in the portfolio.

If stocks fall further, the fund will need additional cash to maintain a balanced portfolio. The $37 billion withdrawal sends a strong signal that another stock-market pullback is imminent.

Norway also predicts a 62% drop in oil-related activities in the near-term after crude prices plunged globally.

Initially, the oil war between Saudi Arabia and Russian led the commodity’s price to drop sub-zero. As CCN.com reported, Mizuho Bank analyst Paul Sankey predicted the oil price to drop by an additional 150% in May.

The oil slump continued as demand for energy continued to fall in light of government lockdown orders. Fewer people have driven cars since March, causing oil ships to line up near the coast of California.

Oil tankers line up near the coast of California. | Source: CNBC

Falling oil demand, uncertainty around stocks, and a volatile bond market are what led Norway’s fund to withdraw a record amount of cash.

A Bond Market Selloff Will Be Followed by a Stock Market Correction

Portfolio manager Michael Gayed, who predicted an overreaction in the stock market by as early as February, said that the bond market would correct first in the near-term.

Then, Gayed suggested a stock market pullback will swiftly follow.

Prediction of a stock market pullback in early March. | Source: Michael Gayed

In times of wild volatility and uncertainty, bonds typically serve as a safe investment vehicle to store value.

But, when the yield of government bonds yields continue to fall toward zero, it indicates investors are concerned about the short-term outlook of stocks and the economy.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.

This article was edited by Sam Bourgi.

Last modified: May 13, 2020 4:39 PM UTC

Joseph Young @iamjosephyoung

Financial analyst based in Seoul, South Korea. Contributing regularly to CCN and Forbes. I have covered the stock market and bitcoin since 2013.

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