Last year I came up with a theory, might as well call it a conspiracy theory.

I was wondering, if the Federal Reserve wanted to drive up equity prices, what would be the most effective way to do so?

At the time, Apple was trading north of $600 and accounted for 20% of the Nasdaq-100 and 5% for the S&P 500 Index. Buying Apple shares would deliver the most bang for their buck (buying IBM may have a similar effect).

Well, there is no evidence that the Federal Reserve actually bought Apple (or IBM), but a recent Bloomberg article revealed that central banks are actively buying stocks and exchange traded funds (ETFs) in record amounts.

A survey of 60 central banks by Central Banking Publications and the Royal Bank of Scotland showed that 23% of the polled central banks own stocks/ETFs or intend to buy stocks/ETFs.

The Bank of Japan said that it will more than double its investment in ETFs to $35 billion by 2014. The Czech National Bank, Swiss National Bank and Bank of Israel all boosted their stock holdings to 10% or more.

Why?

In terms of risk tolerance, central banks fall into the ‘conservative investor’ category. Why? Central banks need to be able to act quickly to counter a move in their currency. Only the safest assets can be liquidated at any given time without (sizeable) losses.

However, their own low interest policies are catching up with them. Central banks are being haunted by the monster they created and have to take the medicine they’ve prescribed to many retirees – take more risk to get more income.

Consumer prices are rising somewhere around 1.5%. The average yield to maturity of the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index is at 1.34% (an all-time low). Central banks too are ‘losing’ money on their balance sheet.

How Much?

Central banks’ currently hold $10.9 trillion of currency reserves, that’s about 20% of the $55 trillion market value of global stocks.

Although buying stocks or ETFs is gaining popularity with central banks, about 70% of the surveyed central banks still consider buying equities tabu.

What Does it Mean?

Central banks fell in love with other asset classes before. Starting in 2010 until this day it was gold. Gold prices continued to rise for well over a year after central banks started buying.

Today gold is trading 25% below its 2011 peak. This shows that even asset classes favored by central banks don’t have to rise forever.