History tells us manipulation fails, eventually. I've known
it exists for a while, since the evidence has been there
probably since 2002, the infamous Bernanke "suggestion" to
manipulate markets other than short-term interest rates.
You can see it in bonds, as when bonds start to break, securities
lending and coupon passes (direct Fed buying of LT bonds) spike
up, as they did since mid-June. Excessive liquidity from the Fed
drives it, and more and more liquidity is required to sustain it.
Computer models that sell spikes in short term volativity do
the rest.
If the Fed does not provide enough liquidity to sustain and
expand various bubbles it created, we will be looking for these
markets to crash. Yes, I think a crash is very, very likely as
the "end game" scenario. The reason is positive feedback effect -
lack of liquidity causing more lack of liquidity. Options
market expanded a lot in recent years. It is absolutely
equivalent to "portfolio insurance" that existed prior to
1987 crash. As the market blows through put strikes and
volativity spikes, derivative models will require the
option sellers to hedge and short the market. This is
the positive feedback, as selling will cause more selling.
However, nobody has a clue when. Could
be this year, could be 2007, 2008, etc. I think this year is
quite likely, since we have a new Fed chairman, and are
due for a 4-year cycle low. |
