Three years ago, Columbus Day 2008, the S&P 500 soared 11% on hope that the global financial system had been bailed out. Stocks then declined 34% within five months.
George Santayana – “Those who cannot remember the past are condemned to repeat it.
US stocks went back into bear market mode in July. So the Fed and others sprung into action to stop the decline. Bernanke has done this repeatedly over the past few years. When stocks started to roll over in June 2009 after their initial rally off the crisis bottom, Bernanke started juicing stocks during expiration week by pouring huge amounts of reserves into the system. We documented this scheme several times. In 2010, when stocks started to head south with confirming technicals in the late summer, Bernanke announced QE 2.0. Recently Bernanke reintroduced Twist. The stated intention is to lower long-term rates but anyone that is paying attention realizes this is a canard because rates are already at all time lows and they are not boosting the economy. So either Ben is stupid or he has a different intention for his QE/Twist. The evidence suggests the real intention is to inflate stocks and other asset prices to prevent the dreaded debt deflation death spiral.
One week ago, major US stock indices had declined 20% from their peaks, which due to convoluting reasoning is now the conventional definition of bear market. Someone sprung into action and juiced stocks 4% in minutes. The Russell 2000 was manipulated 7% higher in minutes. This is not how markets behave. This is someone manipulating stocks higher to halt a bear market and bear market psychology. Perhaps the Fed and others are employing the strategy recommended by former Fed official Bob Heller in 1989 when he recommended buying S&P futures to support stock prices instead of pumping money. John Crudele highlighted this scheme in his August 9, 2011 column, How to ‘fix’ a market.
Relax, all Washington has to do is rig the stock market. Yes, you heard me right: rig the market — as in, make sure it doesn’t go any lower and scare the hell out of all the good, conscientious investors who once again trusted Wall Street to do what was right by them…
Word filtered out of Tokyo a few weeks ago that Japan had instituted what was being called a 1 percent rule. No government ever confirms this sort of thing (some still have their pride) but the rule is supposed to state that the Japanese government will prop up the stock market through the purchase of exchange traded funds if there is a 1 percent loss in a single trading session…
The blueprint for this sort of hocus-pocus came from — get really close to the page for this — the Federal Reserve. Back in October 1989, a guy named Robert Heller, who had just quit his post as a Fed governor, suggested that the government should purchase stock index futures contracts to calm the markets in times of distress.
“The Fed could support the stock market directly by buying market averages in the futures market, thus stabilizing the market as a whole,” Heller wrote in an op-ed piece in The Wall Street Journal after saying the same thing in a little-noticed speech. “The stock market is certainly not too big for the Fed to handle.”
The Fed has not, to our knowledge, ever bought equity futures. But they could instruct others to do so. What is occurring now is tantamount to what has occurred in US real estate and big banking over the past several years. Solons are trying one scheme after another to revive them.
People are again picking stock market bottoms due to these new schemes. Of course people have been picking bottoms in housing and big banking since 2007. But the fundamentals have not changed, even with the multitude of schemes to resurrect them.
The reason that the schemes don’t work and will not work is that they do not address the core problems in the US economy and financial system. Everything to date has been an attempt to paper over problems – an intensification of the past many decades of papering over problems.
So, we will continue to get manic rallies in stocks but the real US economy, personal income, has declined for over a decade and there is no end in sight because core issues, like too much debt and government, have not been remedied.
This is a very, very dangerous environment; so maximum care and safety is the prudent course. Please recall that when numerous pundits brayed that big bank stocks were a buy based on fundamentals in late 2008, WaMu sold for $2B when it sported a book value of $75B.
Pundits and analysts did not know the reality of WaMu but they foolishly saw ‘great value’ without knowing the facts. This is occurring now with banks and economies throughout the known world.
When we don’t know, we prefer to watch and wait. We also advocate patiently accumulating physical gold because there is a concerted world-wide effort to keep financial systems afloat by any means possible, with the possible exception of Germany. It’s desperate measures times for much of the world.