Market Manipulation and Related Thoughts
by Victor Sperandeo with the Curmudgeon
Disclosure: The views and opinions expressed herein are those of Victor Sperandeo and Michael E. Lewitt, Editor of The Credit Strategist.
The Fed & Stock Market 2012 to 2015:
On July 11, 2012, Zero Hedge
posted an article about the Fed's HUGE influence on the equity markets. It was titled: "Chart
of the year -- The Fed has Doubled the S&P Admits Fed.
Here's an excerpt:
Prepare to have your minds blown courtesy of what is easily the most astounding chart we have seen in a long, long time, prepared by the economists at the, drum roll, New York Fed, which finds that absent what the Fed calls "Pre-FOMC Announcement Drift," or the move in the S&P in the 24 hours preceding FOMC announcements, the S&P 500 would be at or below 600 points, compared to its current level over 1300. The reason for the divergence: the combined impact of cumulative returns of in the S&P on days before, of, and after FOMC announcements
We show that since 1994, more than 80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements (which occur only eight times a year)a phenomenon we call the pre-FOMC announcement drift.
Well that 80% equity premium is now 94%! An update of the above concept is titled: "What Hath the Fed Wrought."
The above chart implies that ~1,000 points of the actual S&P 500 price level came from the day of and the day before each of the FOMC meetings since mid-1997!
Absent the performance on FOMC days, the stock market has gone nowhere in 17 years. If you're a believer in capitalism and free markets, you sit back and think about that statistic for a moment and ask yourself - 'have I really made any money without The Fed?'
Put another way, Fed talk + unknown stock buying actions have doubled the S&P 500 from 1000 to 2000. That proves to me that the Fed directly manipulates the S&P both by words (what is seen), but also what is -not seen -buying stocks after the fact of their meetings.
[The same principle was applied to the Gold price from the top in 2011. The result was a (43%) actual decline turned into an (18%) decline when you subtract FOMC meeting days.]
Santiago Capital's Brent Johnson warns "never underestimate the power of The Fed" but in the long-run this is unsustainable as while The Fed has consistently forecast, promised, guaranteed that economic green shoots are showing up, they have been horribly wrong... and with December's meeting looming, their credibility is running on fumes.
A Recent Example of Fed Manipulation:
The latest egregious example of the Feds market manipulation was on 11/19/15...The stock market was up about 9 S&P points just before the October Fed meeting minutes were released. After the minutes revealed the Fed would likely raise rates at their December meeting the S&P spiked 12 more points! That implies that raising rates is bullish for stocks. But previously it was bearish?
I think it was Fed buying stock futures and/or ETFs (directly or through surrogates) to give confidence to market participants that what they are going to do is not only OK, but bullish for stocks!
The same thing happened when the Fed announced the end of QE3 while saying that it was not worried about global economic weakness, low inflation or a decline in the stock market.
This type of bogus and hyped Fed talk seems to be a hook to get more buyers into stocks. Let's look at the evidence:
· The FOMC has said 2015 would be a time to consider a gradual increase in the Fed Funds rate from ZIRP (0-25 bps) to 25-to-50 bps.
· The FOMC did not move on rates as expected at their September meeting citing "global factors."
· At their October meeting, the FOMC removed the key sentence citing global factors.
· The market based probabilities of a near term end to ZIRP have increased to almost a sure-thing. The CME Fed Watch Tool assigns a 73.6% probability of a 25 bps rate hike at the December FOMC meeting.
[That's subject to change, of course, based on new economic data or Janet Yellen being told to back off by Obama at their weekly meetings via the Secretary of the Treasury].
Sidebar: The Credit Strategist, Nov 15, 2015 by Michael E. Lewitt
It would be unusual for the Fed to raise rates with the manufacturing ISM hovering barely above 50, but these are unusual times and this Fed is unusually incompetent. In 2011, when the ISM hit 50 the Fed launched QE 3 and when it hit 50 again in 2012 the Fed launched QE 4. The Fed says it is data dependent but it doesnt know how to interpret the data on which it depends. It confuses structural employment trends with cyclical ones and is the only group of people in the country that doesnt realize that the prices of everyday goods and services are rising sharply (with the exception of energy-related items). It also hasnt figured out that low interest rates retard rather than stimulate economic growth because it doesnt understand the first thing about human nature or behavioral economics (and its Chair is married to one of the foremost behavioral economists in the world!).
The fact that inflation expectations are so low is not a sign that investors believe that the prices of goods and services are rising slowly or threatening to fall; rather, it is a sign that the world is threatened with a massive debt deflation caused by the accumulation of too much debt that can never be repaid except through currency devaluation, massive inflation or default. The Federal Reserve is, as I called them last month, a confederacy of dunces empowered to destroy the world. The only reason it gets away with it is that very few people even understand what it does, starting with the dunderheads in Congress.
Central Banks Rule Global Financial Markets & Economies:
Four central bankers (along with the Japanese Prime Minister) are now primarily controlling the global financial markets and world economy. They are: Janet Yellen (US), Mark Carney (UK), Haruhiko Kuroda along with Prime Minister Shinzō Abe-(Japan), and Mario Draghi (EU).
A world famous derivatives expert named "Satyajit Das" or "Das" for short (whom I know) recently wrote a provocative article titled: "Central Bank Lunacy-$26 Trillion Of Government Bonds Now Trading Below 1%."
"In Japan, for example, interest rates have been around zero for almost a decade. The Bank of Japan has undertaken nine rounds of QE. The central banks balance sheet is approaching 70% of GDP. It owns a significant proportion of the outstanding stock of government bonds and equities. But the policies have not restored growth."
Let me stress that 70% of GDP on the central banks balance sheet, coupled with a "stated" debt to GDP ratio of 2.30:1.00 (it's higher) makes Japan officially bankrupt. Japan is a dead nation, but still breathing.
Germany and the EU are following Japans lead. Germany is selling 2 year debt at -40 bps, while EU Central Bank President Mario Draghi wants more QE for the EU!
That won't work, as it didn't in Japan which is in yet another recession despite Abenomics.
So what will happen to the global economy? For a lesson in economic destruction, please consider the following:
In 1919, John Maynard Keynes, later an advisor to Franklin D. Roosevelt, wrote in his book The Economic Consequences of Peace:
Lenin is to have declared that the best way to destroy the capitalist system was to debauch the currency By a continuing process of inflation, governments can confiscate secretly and unobserved, an important part of the wealth of their citizens As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless
These men were truly knowledgeable in their observations of how the world works.
Good luck and till next time...
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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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