The price of excess: why the market might be heading for a new downturn
scotlandonsunday.com
I HAVE been told that there was a record level of intervention in the stock
market over the last few weeks. Normally, I would disregard this as a throwaway remark from a trader who had just sauntered into the dealing room and knows he is expected to come up with a plausible explanation for the recent rally.
Intervention, along with fund buying and delta hedging, is not easily verifiable and is a great way to fob off a client who insists on having the facts. The recent bout of intervention was, allegedly, the work of the improbably-named Plunge Protection Team (PPT) set up by presidential decree in the wake of the 1987 financial crisis.
There are few facts known about this team. Two key questions are: does it have a mandate to buy shares and prop up the Dow, and does it include private sector companies? Anecdotally, the team does include a couple of big Wall St players. The share futures, if there are any, are reportedly bought by these brokers, and guaranteed by the US Federal Reserve. I’m surprised that more questions aren’t asked. If I had a short position on one of the major world stock markets, which is perfectly legal, I would be very upset indeed if a government waded in to support the market.
The fact that market manipulation is undertaken by a government agency seems to make it acceptable, but I believe that these actions are just as self- interested as George Soros’s famous decision to sell sterling. Somehow, we seem to be prepared to believe that when governments intervene in markets, they do so out of a desire to act for the common good. In 2000, President Clinton claimed that his decision to release 30 million barrels of oil from the country’s reserves was taken to "head off a heating-oil shortage in the north- east".
Is it cynical to believe that it was a political gesture and that Clinton wanted the credit for driving down the oil price? Had it not been so close to an election, would Clinton’s sympathy for these poor American consumers have been so acute? Around the same time, the G7 nations which had bolstered the euro explained that they were acting to eliminate a temporary dislocation between the major trading blocs. The fact that some influential US companies, notably Intel, were bleating about the effect of the weak euro on their sales could perhaps be one of the reasons why the US decided to join in.
The Bank of Japan has brought the whole process of intervention into such disrepute that it has had to change its tactics. From the all-guns-blazing strategy of past years, it is now trying to support the yen in a more subtle fashion. But whatever the strategy, its intervention is a smokescreen with which it hopes to conceal the systemic problems and pretend that much bigger policy questions are being addressed - which they are not. Of course, the PPT may be nothing more than a conspiracy theory and there are quite a few good ones currently going the rounds in the financial world.
My favourite is the gold one - www.gata.org. The site looks disarmingly home- made, but the organisation recently launched a court action against the US Treasury Department and the Federal Reserve Board, among others, alleging illegal collusion to control the price and supply of gold.
The case, which it calls Howe vs All the Money in the World, was thrown out on a technicality. GATA claims that there are two reasons behind the efforts of the Wall St cabal to keep the gold price down. The first is the desire of the US government to keep interest rates low and the dollar strong since inward investment keeps the stock market buoyant and finances the trade deficit. The second reason is the fear of a collapse of the international banking system if the gold price were allowed to rise.
Central banks, bullion banks, Wall St traders and derivatives dealers are all short of gold and would buckle if the price went up. Interestingly, the margin requirements for those who have long positions in gold on US commodity exchanges were raised recently in an effort to curtail speculative buying and stop the market overheating. Even more interesting is the fact that no such action was taken to limit the purchase of share futures at the height of the dotcom boom. Shares can be as irrational as they like - as long as they are irrational in an upwardly mobile fashion. There’s no doubt that bull markets are good. They indicate economic strength, they keep everyone in work and off the government payroll.
They keep tax revenues rolling in and the business lobby happy. Above all, they make the government look good and this is the prime reason for intervention, not to allow the benefits of a steady stock market to filter down to widows and orphans. Although markets are self-regulating, they do not always perform in a time frame that suits government purposes - ie rarely in cycles which coincide with electoral initiatives. I am only too aware of the potential catastrophe if the stock market were allowed to go into free fall. But it strikes me as hypocrisy that the market is allowed to become unrealistically overbought, but has to be slapped back into line when it is, reputedly, critically oversold.
The stock market is only in today’s appalling condition because the excesses of the late 1990s were permitted. Governments should either impose boundaries which keep share prices linked to economic fundamentals, or they should leave them completely alone. If they are afraid of the effect of low share prices on pensions - and I would be too - then they should take the move which, to my mind, is long overdue and ban such crucial investments as pensions from being linked to the stock market.
Perhaps the most sensible thing for investors to do is to track the emergence of conspiracy theories and use them as leading indicators. Some analysts think it significant that the PPT theories are emerging now.
"Nobody believed or cared about market manipulations when the stocks were going up. In a bull market, investors want all the credit for their gains. In a bear market they want losses to be the object of forces that are beyond their control." (www.elliottwave.com).
So what does it all mean? According to the Elliott Wave theorists, the appearance of the PPT story is an indication that investors are complacent. And that, they believe, is a sure sign that the market is on the precipice of a third downwave. I agree. |
