U.S. credit outlook -- yields may keep parachuting lowergreenspun.com : LUSENET : Unk's Wild Wild West : One Thread |
http://biz.yahoo.com/rf/001129/n29572904.htmlWednesday November 29, 4:30 pm Eastern Time US CREDIT OUTLOOK-Yields may keep parachuting lower By Eric Burroughs NEW YORK, Nov 29 (Reuters) - Even with U.S. Treasury yields at lows not seen since before the Federal Reserve began raising interest rates in June 1999, analysts said more stock weakness and fresh evidence of a slowing economy could push yields still lower on Thursday. Reports on personal consumption and spending for October and manufacturing activity in the Chicago area for November are expected to show signs of an economy losing steam and boost bond prices, pushing yields lower. Yields on five- and ten-year Treasury notes have broken ground not seen since May 1999, a month before the Fed started a round of interest rate hikes aimed at braking red-hot economic growth. Mounting evidence that the hikes have begun to grind down growth, coupled with stark losses in the technology-rich Nasdaq stock index and anxiety over high levels of corporate debt, have caused investors to snap up Treasuries and toy with the prospects for a rate cut next year. ``The market can live with these yields as long as there are no signs the economy is bottoming and gaining momentum,'' said Brian Robinson, senior bond strategist at 4Cast Ltd. in New York. Just two weeks ago, Robinson said, investors were expecting the Fed to soften its warning that inflation risks may require more rate hikes, by moving to a neutral bias in which its policy leaned neither toward tightening credit nor easing it as its next move. ``Now all of a sudden people are starting to anticipate an easing. That's what's driving the market,'' Robinson added. The Commerce Department will release personal income and spending figures for October at 8:30 a.m. (1330 GMT). Economists polled by Reuters expect personal income to inch up 0.2 percent compared to a 1.1 percent jump in September. Spending is expected to rise 0.3 percent vs. a 0.8 percent gain a month earlier. Market participants will also get their first snapshot of November manufacturing activity in the Midwest on Thursday with the Chicago Purchasing Managers Index (PMI), which will be released at 10 a.m. (1500 GMT). Economists expect the index to rise to 48.9 from 48.7 a month earlier but remain below 50, indicating that manufacturing activity is still contracting in the region. Also due out is the latest government report on weekly jobless claims, which have been rising steadily over the past several weeks, suggesting that tight labor markets -- which have stirred Fed caution over wage inflation -- may be easing. The Fed's policymaking Federal Open Market Committee next meets on Dec. 19, and many on Wall Street now believe the central bank will shift to a neutral policy bias. Numerous economic reports have signaled that growth has been cooling. On Wednesday, the government reported a sharp deceleration in third quarter gross domestic product growth to its slowest pace in four years. The weaker data and tumbling technology stocks have pulled yields on the five-year note down by 39 basis points and on 10-year notes by 32 basis points since Nov. 7, when the drama over the unresolved U.S. presidential election began. A basis point is a hundredth of a percentage point. But some analysts contend the Fed may have little room to act with oil prices stuck above $30 a barrel and the unemployment level still at 30-year lows. That's why many market players are eyeing the next employment report, due out on Dec. 8, for confirmation that the slowdown is finally hitting tight labor markets. ``The employment report will help crystallize the market's opinion of monetary policy going ahead,'' said Anthony Karydakis, senior financial economist at Banc One Financial Markets in Chicago.
-- (M@rket.trends), November 29, 2000
http://biz.yahoo.com/rf/001129/n29393852_2.htmlWednesday November 29, 5:24 pm Eastern Time
Junk bond defaults at 9-yr peak, and going up-Fitch
By Jonathan Stempel
NEW YORK, Nov 29 (Reuters) - The junk bond default rate, the source of much commentary this year, is at its highest level in nine years and will remain ``above-average'' in 2001 as companies find it more difficult to raise the cash they need to survive, credit rating agency Fitch warned on Wednesday.
Steeply rising yields and the unwillingness of banks to offer credit, Fitch said, will put big pressure on companies with the lowest credit ratings, and those that need to refinance existing debt. That makes it imperative that investors be careful where they put their money, Fitch said.
``The drop in equity valuations and the reluctance of lenders to finance anything short of the best credit profiles has further eroded investor confidence and led to the richest credit premiums on high yield bonds since 1991,'' Fitch said.
``In this volatile environmemnt, Fitch believes that credit selection is critical,'' it added.
Fitch said between January and October, 83 issuers defaulted on 147 issues representing $21.1 billion of debt.
That corresponds to an annualized 4.6 percent default rate, above the 3.3 percent average from 1980 and 2000, which Fitch said covers the ``modern history'' of the junk bond market.
The bonds, also known as high-yield bonds, yield more than higher quality bonds to compensate investors for extra risk.
Transportation companies accounted for 15.8 percent of the defaulted debt in 2000, led by Canadian bus transportation company Laidlaw Inc. (Toronto:LDM.TO - news) (NYSE:LDW - news), the parent of Greyhound Lines Inc. It defaulted on $1.8 billion in May, the biggest default of the year.
Telecommunications companies were responsible for 13.4 percent of the debt, led by Alexandria, Va.-based Paging Network Inc. and Vancouver, Wash.-based GST Communications Inc. which both filed for bankruptcy protection.
Fitch, however, said that the telecom default rate was just 2.8 percent. It said the sector, as it defines it, accounts for 19.2 percent of all outstanding junk-rated debt.
Other junk bond and credit experts have reported similar default rates for the first nine months of the year. Another credit rating agency, Moody's Investors Service, forecast that the rate will surge to 8.4 percent by next September.
-- (M@rket.trends), November 29, 2000.
As I have already posted, the US Plunge Protection Team may not take aggressive action until 20 Jan 2001 (or after) to calm the US stock markets. I doubt there will be interest rate cuts at the next US Federal Reserve meeting, unless something goes terribly (more) wrong with equities before then. Perhaps there will be a move to a neutral bias; perhaps not.
-- rooter (skyroot@msn.com), November 29, 2000.
What I love about the Plunge Protection Team is, by deducing their existence ex post facto, they become effectively omnipotent. First, you wait to see what happens. NO MATTER WHAT that turns out to be, you credit the PPT for having engineered it, and dream up some motivation they could have had. But this is kind of like playing tennis with the net down and no sidelines. You can't miss, real thought is not required, nor is education or training in finance, economics, politics or anything else.Now, those who presume to *predict* what the mythical PPT might do have about the same accuracy as predicting coin flips. Bad form. No wonder we wait until after the fact to make our "prediction". Maybe our target audience will be too dumb to realize how stupid we look, you think?
-- Flint (flintc@mindspring.com), November 29, 2000.
in Guest AnalysisThe Black King by Sean Corrigan November 28, 2000
Sean Corrigan is publisher of The Capital Letter available from Capital Insight, www.capitalinsight.co.uk
Forget the FOMC and thinly-veiled promises of where the next 25bps is coming from on the Funds rate, the Fed has already embarked upon an easing. Since the week of the 26th October, when the Dollar had finally looked like topping out, driven from its DXY highs by a sharp reversal in UST prices, the Fed has been quietly expanding its balance sheet. Picking up a billion or two quietly in outright Treasury purchases and swelling repos by two thirds or nearly $8 billion, less a few diminishing factors, it has added a net $8.7 billion to the sum.
While that may not sound much, it does mean that anything between $80 - $100 billion of new bank credit has been given a base by this enlargement of the tip of the lowest of the inverted pyramids which comprise the monetary system. Occurring over 4 short weeks, this represents an annualized increase of 20% and is both the fastest gain and the highest end-total since late April-early May.
In addition, the ECB is still grinding its weekly way higher with its reserve provision, as it has since its inception, and seems to be foolishly sterilizing its interventions. The BOJ has positively exploded to mid-November with its forty day injection of Y15 trillion. The last week’s development of the Yen and the JGB market both, against a backdrop of official concern for plunging equities and banking stock weakness, can only suggest yet another slug of high-powered money will hit the numbers in the near future.
Forget CPI and its equivalents. The Central Banks have - as ever – gone back to protecting their cartel, the banking sector which they were all instituted to underwrite with government mandates and taxpayer’s money, from the consequences of its own follies.
To encapsulate those follies, let us look at one simple set of data. As the BIS Quarterly Review on International Banking and Financial Developments summarizes, net issuance of debt securities in Q3 was $259 billion, with US Dollars accounting for twice that in the Euro – a reversion to the pre-EMU pattern after a year of Euro predominance. Banking activity had also been expanding through the year across the BIS area, in particular in the syndicated loan market where Mar-Sept saw an enormous $654 billion of deals, nearly $4.5 billion per business day, largely reflecting Canal Boom borrowing for Telecoms and late cycle M&A activity. One quarter of all such borrowing this year has been for Telecoms, one quarter of that has been provided by US banks, with another 20% being sourced from the UK and Germany.
How much of that is still good debt? How much of that is parked in special-purpose funding vehicles away from regulatory scrutiny and mark-to-market discipline? How much has been repackaged into CLO’s and sold on to unsuspecting mutual funds? Who knows, but the erosion of collateral values has brought the monetary cavalry riding to the rescue once again, as it has roughly every six months in the last five years of the Bubble.
The Fed’s participation this time is an especially interesting escalation, since the Fed is still the only central bank which can gamble on strengthening its currency by providing reserves, rather than undermining it that way. It is still a gamble, though, and one which the Plunge Protection Team only rarely undertakes so openly. Matters are indeed serious.
Europe still fails badly on this count, of course, as the balance of payments figures once again illustrate. Year-to-date, Europe has suffered a portfolio outflow of EUR127.6 billion. However, this aggregate disguises the somewhat remarkable fact that Europe bought a net EUR243 billion in foreign equity in these nine months, of which up to EUR38 billion admittedly might represent a counterpart to stock-financed direct investment flows. Against that remaining balance of over EUR200 billion, the banking sector raised EUR155 billion abroad, EUR143.5 billion of that at short-term, while other money market instruments to the tune of EUR37.3 billion were sold to foreign holders.
Europe has effectively run a EUR200 billion margin trade this year – this most horrifyingly expensive of all years – the bulk of it has been financed through the monetary sector and the ECB has underwritten the trade in its weekly refinancing tenders. It is the combination of the two – not the first alone and not any uncritical Keynesian rubbish about growth differentials or official interest rate disparities - which has combined to send the Euro into its death spiral.
So why does this not apply to the Fed, when it starts printing money? Can Alan Greenspan alone make the difference in perception? Can Larry Summers bully the rest of the world into holding onto surplus dollars whatever the circumstances?
Here we must remember the old adage that if you owe the bank a hundred dollars, that’s your problem, while if you owe it a million, it’s the bank’s.
In 1989, the BIS estimates that it captured most extant foreign official exchange reserves in its $403 billion total of global official sector USD holdings. At end-1999, it thinks that the $993 billion it can easily identify understates the true sum of around $1.4 trillion in Uncle Sam’s costless IOUs, out of a $1.7 trillion worldwide pot.
In other words, a trillion dollars more of everyone else’s reserves are now dependent on Greenspan’s whim than at the peak of the last US cycle. It would not do to be too mechanistic, especially as some central banks sequester such holdings in reserve valuation accounts and since multpliers vary from country to country and from period to period, but after adding back in the Fed’s own $600 billion balance sheet, the two TRILLION US Dollars sitting in central banks around the globe could be the foundation of something of the order of $20-30 trillion in banking sector assets - a whole year’s reported national product for Planet Earth.
Imagine what would happen if those holdings were to lose 10-15% of their value as private sector holders lost faith in the worth of the substantial pile of the credit notes they have lodged with American consumers. We feel sure this is the bogeyman whose frightening visage the US Treasury describes for the rest of G7 at bedtime. The Euro, it seems, was launched too late to stand a chance of competing with the Almighty Dollar, a mere garage Dot.com against a monetary Cisco Systems.
The US Dollar - on the BOE index – last week nosed above its Summer peak and is threatening to make new 14-year highs. It has already staged a Fibonacci retracement of the 1985-1995 decline mapped out on the ebb from the highwater mark of Reaganomics.
If it were to sustain this move, any decent technician, blindfolded and led to an unmarked chart, would start from the behavioral shift in mid-1995 at 88.60, work via a high-volume area centrally-placed in the post-Asian crisis range at 108.80 (where the H2’2000 move also began) and project all the way up to 129.00 – almost another 10% from here.
To many, that would be unthinkable. To most it would be highly damaging. It is not what most would forecast using conventional 'wisdom’. However, it could be rationalized.
Imagine that, like some Sci-Fi conflict being fought out in the stupefying silence of the interstellar void, the world is noiselessly engaged on another struggle for supremacy between a potential debt deflation cycle, set in train as a vast raft of assets and the shaky enterprises behind them goes sour, and another wave of ‘financial stability’ activism from the BIS institutions.
To switch metaphors, in that battle, the Dollar plays the role of the Black King on the chessboard. It may be the weakest piece, but its survival is the paramount concern of all those around it, whether they will it or not. The Queen – Gold – has long since been sacrificed for position. It may be that to avoid a ‘defeat’ (in truth a painful transition to what may be a more stable system, though a vastly different political order) the Euro Bishops, the Sterling Knights and the Yen Rooks – not to mention the lesser currency pawns – will also be offered up in turn.
One of the reasons the USD has continually confounded its critics is that there is simply no consensus as to where to hide from its influence. All paper currencies are vulnerable, most equity markets are still historically rich, many societies have become overburdened with debt. The system has no anchor but the USD itself and the corruption of money per se means that ‘managed’ currencies are nothing but a euphemism for competitive devaluation by stealth, that the free riders end up driving the bus.
Against such a backdrop, it might require a series of major blunders on the part of the US authorities, or a series of misfortunes restricted to the American economy alone, to begin a fracture in the linchpin. It would need the bravery to accept an appreciation of one’s own exchange rate elsewhere to see the trend reversed. Do you think the British would not respond to a US-led slowdown by clamouring for monetary relaxation in the UK, that the Europeans would not switch to even more stimulus, that the Swiss would not go with the 'counter-cyclical’ tide?
Stay with major government bonds for now while the initial manoeuvres unfold and the troops are marshalled. If equities give way on a big scale, the need to bail out banks will reward you immensely. But, if lesser credits begin to stabilize and equity breaks the Bears’ hearts once more, be quick to shift. Your cheapest equity call is a put on bonds, financed out of your gains to date. Remember that resources are already scarce and wages and rents are rising along with fuel. Consumers’ psychology is shifting and if they are spared pain, they will spend the newly-minted cash quickly. Barring a recession, we will witness the Death of the Death of Inflation.
If central banks win once more, this time they are likely to deliver up the worth of fixed income assets to an inflationary aftermath whose flames will make the bond crash of 1999 look tame.
Sean Corrigan is publisher of The Capital Letter available from Capital Insight, www.capitalinsight.co.uk
-- Mrs. Cleaver (Mrs. Cleaver@LITBBB.xcom), November 29, 2000.
Although the "PPT" or Plunge Protection Team is more of a nickname for the actual organization, it is by no means "mythical". They are more properly known as The President's Working Group on Financial Markets, and they do in fact exist. They were organized shortly after the near meltdown in the markets in 1987, to prevent the possibilty of another such occurrence or even another close call. They have not been doing anything intentionally sinister, but anyone who knows what is going on in financial markets will tell you that they do indeed manipulate the markets. Very much so, much more than most outsiders would ever imagine. Hope this helps.
-- Seeker (searching@low.and.high), November 29, 2000.
seeker:Not being of a paranoid cast of mind, I have a hard time seeing what you see. What I do see is a presidential working group put together just after the LTCM debacle, to prepare a report as to how to prevent this sort of thing. They recommended more detailed public reporting by hedge and other funds, and tighter regulation of excessive leverage. There are in fact thousands of such working groups or committees nominally in existence, some of which meet every decade or so if there is a specific issue to be addressed and enough living members to form a quorum.
But I see no indicatation that they or any other government group is engaged in daily market manipulation. Regulation, yes. Jawboning, yes. Greenspan's oracular pronouncements are awaited by the market, and then puzzled over like tea leaves. But this is very much lower case manipulation. The government is NOT engaged in buying huge blocks of MSFT or the like. And if you want to consider activities like maintaining indexes "manipulation", then OK, fine. But I don't think the PPT has anything to do with such methods.
-- Flint (flintc@mindspring.com), November 29, 2000.
Flint says,"Not being of a paranoid cast of mind, I have a hard time seeing what you see."
Is this the way you respond to the truth, by calling the messenger paranoid? I see nothing paranoid in what I posted. This group operates within their legal limitations, and they do manipulate the markets. They do this to prevent a crash. Sheeesh, some people.
Plunge Protection Team
By Brett D. Fromson
Washington Post Staff Writer
Sunday, February 23, 1997; Page H01
The Washington Post
It is 2 o'clock on a hypothetical Monday afternoon, and the Dow Jones industrial average has plummeted 664 points, on top of a 847-point slide the previous week.
The chairman of the New York Stock Exchange has called the White House chief of staff and asked permission to close the world's most important stock market. By law, only the president can authorize a shutdown of U.S. financial markets.
In the Oval Office, the president confers with the members of his Working Group on Financial Markets -- the secretary of the treasury and the chairmen of the Federal Reserve Board, the Securities and Exchange Commission and the Commodity Futures Trading Commission.
The officials conclude that a presidential order to close the NYSE would only add to the market's panic, so they decide to ride out the storm. The Working Group struggles to keep financial markets open so that trading can continue. By the closing bell, a modest rally is underway.
This is one of the nightmare scenarios that Washington's top financial policymakers have reviewed since Oct. 19, 1987, when the Dow Jones industrial average dropped 508 points, or 22.6 percent, in the biggest one-day loss in history. Like defense planners in the Cold War period, central bankers and financial regulators have been thinking carefully about how they would respond to the unthinkable.
An outline of the government's plans emerges in interviews with more than a dozen current and former officials who have participated in meetings of the Working Group. The group, established after the 1987 stock drop, is the government's high-level forum for discussion of financial policy.
Just last Tuesday afternoon, for example, Working Group officials gathered in a conference room at the Treasury Building. They discussed, among other topics, the risks of a stock market decline in the wake of the Dow's sudden surge past 7000, according to sources familiar with the meeting. The officials pondered whether prices in the stock market reflect a greater appetite for risk-taking by investors. Some expressed concern that the higher the stock market goes, the closer it could be to a correction, according to the sources.
These quiet meetings of the Working Group are the financial world's equivalent of the war room. The officials gather regularly to discuss options and review crisis scenarios because they know that the government's reaction to a crumbling stock market would have a critical impact on investor confidence around the world.
"The government has a real role to play to make a 1987-style sudden market break less likely. That is an issue we all spent a lot of time thinking about and planning for," said a former government official who attended Working Group meetings. "You go through lots of fire drills and scenarios. You make sure you have thought ahead of time of what kind of information you will need and what you have the legal authority to do."
In the event of a financial crisis, each federal agency with a seat at the table of the Working Group has a confidential plan. At the SEC, for example, the plan is called the "red book" because of the color of its cover. It is officially known as the Executive Directory for Market Contingencies. The major U.S. stock markets have copies of the commission's plan as well as the CFTC's.
Going to Plan A
The red book is intended to make sure that no matter what the time of day, SEC officials can reach their opposite numbers at other agencies of the U.S. government, with foreign governments, at the various stock, bond and commodity futures and options exchanges, as well as executives of the many payment and settlement systems underlying the financial markets.
"We all have everybody's home and weekend numbers," said a former Working Group staff member.
The Working Group's main goal, officials say, would be to keep the markets operating in the event of a sudden, stomach-churning plunge in stock prices -- and to prevent a panicky run on banks, brokerage firms and mutual funds. Officials worry that if investors all tried to head for the exit at the same time, there wouldn't be enough room -- or in financial terms, liquidity -- for them all to get through. In that event, the smoothly running global financial machine would begin to lock up.
This sort of liquidity crisis could imperil even healthy financial institutions that are temporarily short of cash or tradable assets such as U.S. Treasury securities. And worries about the financial strength of a major trader could cascade and cause other players to stop making payments to one another, in which case the system would seize up like an engine without oil. Even a temporary loss of liquidity would intensify financial pressure on already stressed institutions. In the 1987 crash, government officials worked feverishly -- and, ultimately, successfully -- to avoid precisely that bleak scenario.
Officials say they are confident that the conditions that led to the slide a decade ago are not present today. They cite low interest rates and a healthy economy as key differences between now and 1987. Officials also point to SEC-approved "circuit breakers" that were introduced after 1987 to give investors timeouts to calm down.
Under the SEC's rules, a drop of 350 points in the Dow would bring a 30-minute halt in NYSE trading. If the Dow declined another 200 points, trading would cease for one hour. No additional circuit breakers would operate that day, but a new set would apply the next trading day.
Despite these precautions, today's high stock market worries officials such as Fed Chairman Alan Greenspan, who in a speech in early December raised questions about "irrational exuberance" in the markets. Because the market declined following Greenspan's speech, government officials have become even more reluctant to comment on these issues for fear of triggering the very event they wish to forestall, according to policymakers.
A Brewing Concern
Greenspan had expressed similar thoughts a year ago at a confidential meeting of the Working Group. Treasury Secretary Robert E. Rubin and SEC Chairman Arthur Levitt Jr. also are concerned about the stock market's vulnerability, according to sources familiar with their views.
The four principals of the group -- Rubin, Greenspan, Levitt and CFTC Chairwoman Brooksley Born -- meet every few months, and senior staff get together more often to work on specific agenda items.
In addition to the permanent members, the head of the President's National Economic Council, the chairman of his Council of Economic Advisers, the comptroller of the currency and the president of the New York Federal Reserve Bank frequently attend Working Group sessions.
The Working Group has studied a variety of possible threats to the financial system that could ensue if stock prices go into free fall. They include: a panicky flight by mutual fund shareholders; chaos in the global payment, settlement and clearance systems; and a breakdown in international coordination among central banks, finance ministries and securities regulators, the sources said.
As chairman of the Working Group, Rubin would have overall responsibility for the U.S. response, but Greenspan probably would be the government's most important player.
"In a crisis, a lot of deference is paid to the Fed," a former member of the Working Group said. "They are the only ones with any money."
"The first and most important question for the central bank is always, 'Do you have credit problems?' " said E. Gerald Corrigan, former president of the New York Federal Reserve Bank and now an executive at Goldman Sachs & Co. "The minute some bank or investment firm says, 'Hey, maybe I'm not going to get paid -- maybe I ought to wait before I transfer these securities or make that payment,' then things get tricky. The central bank has to sense that before it happens and take steps to prevent it."
1987: A Case Study
The Fed's reaction to the 1987 market slide, which Corrigan helped oversee, is a case study in how to do it right. The Fed kept the markets going by flooding the banking system with reserves and stating publicly that it was ready to extend loans to important financial institutions, if needed.
The Fed's actions in October 1987 read like a financial war story.
The morning after the 508-point drop on Black Monday, the market began another sickening slide. Corrigan and other Fed officials strongly discouraged New York Stock Exchange Chairman John Phelan from requesting government permission to close the market. Phelan was concerned that if the market continued to erode, the capital of the NYSE member firms would disappear. Corrigan feared a shutdown would cause more panic.
"It was extraordinarily difficult around 11 o'clock," Corrigan recalled. "The market was at one point down another 250 points, and that's when the debate with Phelan took place."
Simultaneously, Corrigan and other central bank officials spoke privately with the big banks and urged them not to call loans they had made to Wall Street houses, which were collateralized by securities that could no longer be traded and whose value was in question.
A final critical moment came that day when the Fed decided not to shut down a subsidiary of the Continental Illinois Bank that was the largest lender to the commodity futures and options trading houses in Chicago. The subsidiary had run out of capital to provide financing to that market.
"Closing it would have drained all the liquidity out of the futures and options markets," said one former top Fed official involved in the decision. Investors use stock futures and options to hedge positions in the underlying stock market.
Recognizing the crucial role of banks if another financial crisis should strike, the Office of the Comptroller recently conducted an internal study of what damage a market decline would inflict on U.S. banks. The OCC declined to discuss the study or its conclusions.
At the SEC, one big worry is how to cope with an international financial crisis that begins abroad but quickly rolls into U.S. markets.
"We worry about a U.S. brokerage firm that is dealing with a Japanese insurance company, where we don't know how they are run or regulated," a SEC source said. To improve its ability to react in a crisis, the SEC and the Fed have begun joint inspections with their British counterparts of U.S. and British financial institutions with global reach.
The most drastic -- and probably unlikely -- move the SEC could take in a crisis would be to propose a market shutdown to the president. That would require a majority vote of the commission. If a quorum couldn't be mustered, the chairman could designate himself "duty officer" and go to the president or his staff.
"Closing the market is, of course, the last thing the commission wants to do," said a source familiar with the SEC's planning. "During a time when people are extremely worried about their investments, you are cutting them off from taking any action. . . . The philosophy of the commission is that markets should stay open."
Just the Facts
Gathering accurate information would be the first order of business for federal regulators.
"Intelligence gathering is critical," Corrigan said. "It depends on the willingness of major market participants to volunteer problems when they see them and to respond honestly to central bank questions."
The SEC, CFTC and Treasury have market surveillance units. They monitor not only the overall markets, but also the cash positions of all the major stock and commodity brokerages and large traders.
The regulators also are hooked into the "hoot-and-holler" system used to notify participants in all financial markets of trading halts. The hoot-and-holler system alerts traders and regulators when a halt is coming.
Relying on Quick Action
In the event of a sharp market decline, the SEC and CFTC would be in constant contact with brokerage and commodity firms to spot early signs of financial failure. If they concluded that a firm was going down, they would try to move customer positions from that firm to solvent institutions.
At least this team of crisis managers already has been through the Wall Street wars. Greenspan was Fed chairman in October 1987. Rubin has served as the co-head of investment bank Goldman Sachs & Co. Levitt has been both a Wall Street executive and president of the American Stock Exchange.
"I think the government is in good shape to handle a crisis," said Scott Pardee, senior adviser to Yamaichi International (America) Inc., a Japanese brokerage subsidiary, and former senior vice president at the New York Fed. "A lot depends on personal relationships. You have a number of seasoned people who have gone through a number of crises. So if something happens, things can be handled quickly on the phone without having to introduce people to each other."
Consider what happened at 11:30 p.m. Dec. 5, when Greenspan made his comments about irrational exuberance. Alton Harvey, head of the SEC's Market Watch unit, was called at home by officials of Globex, a futures trading system owned by the Chicago Mercantile Exchange. U.S. stock futures trading in Asia had fallen to their 12-point limit, they said.
Harvey immediately alerted his direct superior as well as his opposite number at the CFTC. More senior SEC and CFTC officials were informed as well. But there wasn't much to be done until the morning. So Harvey went back to sleep.
REACTING TO A PLUNGE
After the market crashed on Oct. 29, 1929:
* The Federal Reserve provided loans and credit to financial systems.
* President Hoover met with business, labor and farm organizations to encourage capital spending and discourage layoffs; he also promised higher tariffs.
* Federal income taxes were reduced by 1 percent by the end of the year.
After the market dropped 22.6 percent on Oct. 19, 1987, the Federal Reserve:
* Encouraged the New York Stock Exchange to stay open.
* Encouraged big commercial banks not to pull loans to major Wall Street houses.
* Kept open a subsidiary of Continental Illinois Bank that was the largest lender to the commodity trading houses in Chicago.
* Flooded the banking system with money to meet financial obligations.
* Announced it was ready to extend loans to important financial institutions.
What would happen today during a stock drop would depend on the particulars. Here are current guidelines:
* If the Dow Jones industrial average falls 350 points within a trading day, NYSE trading would be halted for 30 minutes.
* If the DJIA falls another 200 points that day, trading would stop for one hour.
* If the market declines more than 550 points in a day, no further restrictions would be applied.
SOURCE: The New York Stock Exchange, "The Crash and the Aftermath" by Barrie A. Wigmore
© Copyright 1997 The Washington Post Company
http://www.washingtonpost.com/wp-srv/business/longterm/blackm/plunge.h
tm
-- Seeker (searching@low.and.high), November 29, 2000.
Economy May Be Headed Into a Slowdownhttp://www.abcnews.go.com/onair/WorldNewsTonight/wnt001129_slowdown_ec onomy_feature.html
-- (in@economic.news), November 30, 2000.
Flint,
You shouldn't be so arrogant. When you are correct, it makes you look like you are a pompass ass, and when you are wrong, it makes you look like you are a total ass.
Paranoia has nothing to do with what you can or can't see. Greenspan mobilized the troops back in October of 1987. If banks didn't keep the credit going to the brokers, and if the brokers didn't continue to settle trades, the whole system was going to seize up like an engine without oil.
Fast forward to LTCM. Slightly different picture, but similar risks. LTCM found themselves highly underwater, and one (or more) of their creditors was about to say, "no mas". This would have been like the banks in '87 saying no more credit to the brokers. Again, Greenspan organized a rescue party so that a wave of cross- defaults didn't ripple through the system as the LTCM portfolio was unwound.
As far as daily market manipulation, no, I don't think that the government is in the market every day. They are most certainly in the market from time to time buying huge dollar amounts of S & P 500 index futures (not blocks of MSFT) at critical points on sharply down days to try and stem a market collapse. Why? Because the Fed has printed money like at no other time in history. That credit has ballooned this market to incredible levels. If the balloon were to pop, then you would have the same sort of seizure that the other two situations threatened. That is something that the Fed, and the government, must try to avoid at all costs, including outright manipulation of the stock market.
The next time that there is bad news in the marketplace, and the DOW is starting to look really ugly, ask yourself which institution it is that comes flying into the S & P 500 futures pit buying up everything in sight, PURPOSEFULLY driving the price of those futures higher. Is it a large hedge fund trying to get the best price possible on their investment? Is it a large mutual fund trying to get the best price possible on their investment? Or is it some extraordinarily large institution that isn't interested at all in getting the best price possible on their investment? Is it an entity that just wants to turn the market at that point in time, regardless of the monetary cost? Think about it before you call someone else paranoid.
Not everything is a conspiracy, but not everything is as it seems, either.
-- J (Y2J@home.comm), November 30, 2000.
J:Look, I'm not saying the government has no interest in violent market drops -- clearly they do. I'm not saying they don't do things like prop up LTCM, because clearly they did. I'm not saying they don't have the power to close the market if things look bad enough, because they do. And I agree that there are those within the government whose job is to keep an eye on the market and on dangerous trends (like program selling and the snowball effect) and try to do something about them.
What I'm trying to say is that all these things are a matter of public record. Why should I need to "ask myself" who might be buying S&P 500 futures, with (of course) the predetermined answer that it MUST be the federal government acting in secret somehow.
Seeker has documented how the government reacts to a plunge. He cites procedures in place to handle this situation. And all of this is also a matter of public record. There is no reason to "ask yourself" anything at all. And to my knowledge there is NO record of the government ever having purchased large blocks of S&P 500 futures, secretly or otherwise.
You write [They are most certainly in the market from time to time buying huge dollar amounts of S & P 500 index futures]. OK, where is your evidence? Your entire last long paragraph is paranoia, whether you care to admit it, or whether you just want to insinuate that "nothing is really as it seems" and go on about your delusions comfortably.
At least seeker provides good evidence, and can support everything he writes. And I accept his definition of the PPT as a rather loose embodiment of general government efforts to encourage and preserve market stability as much as possible. This is market *regulation*. It is public and aboveboard. Once you start to wander over into market *manipulation* by forces we must guess at, you've gone too far. Sorry.
-- Flint (flintc@mindspring.com), November 30, 2000.
Flint,
So what you are saying is that because the government admits to a type of market intervention that you call "regulation", then it must not be involved in any other secretive market intervention that you call "manipulation".
First, I say that putting rules and procedures in place before hand is called regulation. Bailing out LTCM after the fact because the entire system is in jeopardy due to Meriwether & company's arrogance, and their bankers' ignorance, is called manipulation. The fact that most Americans feel that it is better to intervene to save the system rather than to let the chips fall where they may, allows for this type of manipulation to be made known.
I'd like to get back to your line of reasoning that the government can't be covertly manipulating the market in certain ways (which do not have public approval) because they admit to overtly manipulating the market in other ways (that do have public approval). To put it politely, that is some seriously flawed thinking. Do you also believe that if a thief admits to stealing your wallet, that he couldn't have stolen your car as well? LOL.
There is ample evidence that some very large entity comes into the S & P 500 futures pits on certain decidedly down days with the apparent attempt to reverse the market, not to quietly take up a position. Their modus operandi is to work through Merrill Lynch and Goldman Sachs, and when they come into the market, it is in huge size, and with no stealth. Because the brokers in the market have a fiduciary duty of client confidentiality, they are not going to say who that entity is. You may choose to disregard this evidence, or to try and twist it to fit some preconceived notion that you have of who it must be, but the most logical conclusion is that it is the government in some form. Your sweeping dismissal of covert government manipulation of the stock market rests on the sole "fact" that because they haven't admitted to it, they must not be doing it. Your sole refutation of evidence that points to covert government manipulation of the stock market is to label your debating foe as paranoid.
I am not impressed.
Market manipulation evidence:
www.mcalvany.com/specialreports/april/plunge.htm
-- J (Y2J@home.comm), November 30, 2000.
J:I agree one of us has some serious logic problems. I find your "evidence" unpersuasive, since you don't have a shred of concrete indication -- and if you were correct, there would have to be a small army of potential informants all of whom have kept absolute secrecy for years.
Even you should understand that when enough people are in on a big secret, it's not a secret for more than a few seconds. On the scale you are proposing, you'd have hundreds of people all competing to see who could call "60 minutes" first! Surely you realize this.
You write [the most logical conclusion is that it is the government in some form.] I disagree. This is the most paranoid conclusion, but not necessarily the most logical -- unless by "in some form" you are referring to extremely indirect effects like relative tax rates, etc. Could it be programmed trading? Could it be that this "manipulation" doesn't happen very often, so (remember y2k?) you just kind of tend to tune out all those times when it didn't occur?
Just as a mental exercise, could you dream up ANY explanation for what you think you see that does NOT involve secret government manipulation, that would impress you? Sounds to me like if it ain't a conspiracy, it ain't impressive. And saying "you can't prove it's NOT the government" isn't evidence either. YOU can't prove it's not the TOOTH FAIRY. QED, it must be the tooth fairy. See how easy this is?
And citing McAlvany? Are you kidding? This citation says that on ONE DAY the market bounced rapidly. From which (with numbing predictability) McAlvany says "they" stepped in, but that "they" are lying to us. And how do we know? Trust us, that's how! THAT'S your "evidence" -- that McAlvany was suspicious of the market patterns one day last April.
And how about all those days when the market dropped big time and did NOT bounce? Well, let's ignore those. And how about those days where the market rose, but made a big correction late in the day? Well, let's ignore those too. We only gather the data that *supports* our wacko theories, we ignore data that conflicts. Conflicting data may be overwhelmingly more common, but it's "not impressive". Duh!
By the way, your reference has a glaring error right in the title. It would really help if the author would *spell out* his contractions, and see that "The plunge protection team at it is finest" makes no sense.
-- Flint (flintc@mindspring.com), November 30, 2000.
Flint,
It is obvious that you put great stock in your ability to think. It is equally obvious that you don't know much at all about the stock market. You write, "Could it be programmed trading"? I almost fell out of my chair when I read that! Did you pick up the phrase "program trading" at the Fidelity website? Did you figure that you would impress me by dropping it into the argument? LOL. It was almost as stupid as your reference to relative tax rates. Do you really think that relative tax rates have anything to do with a major stock market reversal?
Apparently you don't have any use for McAlvany. Could you comprehend the fact that he was citing John Crudele of the New York Post, who was, in turn, citing Wall Street traders? I didn't think that you could.
Since I have put forth what I feel to be the most reasonable explanation of the reversal that happened in early April of this year (and at various other times over the past few years), even explaining in some detail the mechanics of how it was done, why don't you enlighten us with your best guess.
By the way, if you are going to drop market phrases into your explanation, please don't just throw them out in the form of a question. Use them in context that would indicate that you actually know what they mean and how they apply to the situation.
Relative tax rates, indeed! LOL.
-- J (Y2J@home.comm), December 01, 2000.
An article from last month about the Plunge Protection Team.Throwing a lifeline to sinking markets worked; here's proof
http://hv.greenspun.com/bboard/q-and-a-fetch-msg.tcl?msg_id=003xb2
-- (also@see.this), December 01, 2000.
Flint, how many hours ago did your wife go to bed?Point???????????????????
-- troll (addie@addie.com), December 01, 2000.
http://www.google.com/search?q=cache:www.trail.com/~ami/free.htm+plung e+protection+team&hl=en
-- (also@see.this), December 01, 2000.
WOW!
-- name (addie@addie.com), December 01, 2000.
Also,................................................................. ...................................................................... ...................................................................... ...................................................................... ................... What!?
-- name (fake@fake.com), December 01, 2000.
http://biz.yahoo.com/rf/001130/l30354488.htmlThursday November 30, 1:44 pm Eastern Time
Fed's Poole backs Fed action if mkt slide hits economy
FRANKFURT, Nov 30 (Reuters) - William Poole, President of the Federal Reserve Bank of St. Louis, said on Thursday he would be in favour of the Federal Reserve taking action if a stock market slide threatened to hurt the real economy.
Poole told reporters on the sidelines of a conference in Frankfurt that the Federal Reserve had acted in 1998 in response to market volatility and that he would be in favour of the Fed taking action in future if circumstances required it.
The Federal Reserve cut interest rates in 1998 after stock markets fell in the wake of an emerging markets crisis in Asia and Russia.
``I would want to respond if it looked like financial market events are feeding in to affect the real economy in an adverse way,'' he said, stressing that he was voicing his personal opinion and could not speak for the Federal Reserve.
Poole will be a voting member of the U.S. Fed's rate-setting Federal Open Market Committee next year.
Poole also said that experience showed that energy price increases tended to have a temporary effect on headline inflation.
Asked whether the current slide in U.S. equity markets and especially in the tech-rich Nasdaq, was threatening to force the U.S. economy into a hard landing, Poole said it was the job of a central bank to prevent market volatility from spilling over into the real economy.
-- How's that for (a@timely.article), December 01, 2000.
Wow. This is *exactly* like trying to talk sense into creationists or tax protesters. Their minds are made up a priori, and they select facts to fit, or reject facts that don't, NOT based on the evidence, but based on the preconceptions that the evidence *must be made to fit*, regardless of how much it resists. We're talking brick wall here, I see.First, let's get one thing as clear as possible. Citing the opinions of people who agree with you does NOT constitute "evidence" in any way, shape or form. I could provide links to articles from people who believe the earth is flat and resting on turtles, which is just as strong "evidence" that the earth is flat -- namely, NONE. If you can't do better than that, you can't do anything.
So OK, other than dementia, just what might this conviction rest on, that the government has some secret organization that anonymously buys futures (but apparently never sells them!)? From what you've presented, my best guess is based on the observation that the market has been quite volatile the last few years, especially in the tech sector. Sharp rises and falls in short periods of time (less than 2 days, often) have been extremely common.
This pattern cannot help but provide us with LOTS of instances of sudden reversals of fortune. Sudden rises punctuating sharp falls, sudden corrections punctuating sharp rises. Nothing surprising here, this is the nature of a volatile market. And there have been periods of little net movement as well. From these raw data, it's possible to select out essentially ANY pattern, ignore the rest, and claim that what we filtered out is *so unusual* that some nefarious secret "force" must be responsible. What's REALLY responsible, of course, is that our "pattern" is an artifact of our failure to consider everything that didn't FIT the pattern. Duh!
Market movements, of course, are not totally random, for several reasons. One is the aforementioned program trading. When computer programs decide that the pattern they see calls for buying or selling (because of past market experience), and too many large players are running the same program, we get a snowball effect. Since the 1987 crash, we've taken steps to prevent this kind of runaway situation. We haven't been entirely successfull, since there really are historical patterns, and it really is legal to take advantage of them. And these programs are all based on the same historical and current data. If enough of them decide we are at a relative high or low, big money cuts in or out.
However, there's nothing we can do about peoples' desire to buy on dips and sell on peaks. Sharp drops soon enough start people thinking it's time to buy at bargain prices, and sharp rises start them thinking it's time to take their profit and run. This is a normal negative feedback loop that tends to make market levels look jagged over the short run.
So saying "Gee, look at all the money that comes in after a big drop" WITHOUT saying "Gee, look at all the selling after a big rise" is another case of filtering out everything you don't want to see and saying that what's left is the WHOLE PICTURE. And then, of course, ringing in the "secret conspiracy" conviction that caused you to do this filtering in the first place.
Now, let's consider this article about Poole. He says that, in his opinion, "he would be in favour (sic) of the Federal Reserve taking action if a stock market slide threatened to hurt the real economy." Poole is president of the Federal Reserve Bank of St. Louis. Great.
Now, do you suppose if the Fed were involved in infusing massive sums of money into the market, Poole might know about it? Where might all this money come from, that his bank is not involved? And if he DOES know, why would he propose something that's already happening? Except if you read this article carefully, you find that Poole never says *what* action the Fed should take. He just vaguely talks about "responding" and "preventing", but doesn't suggest how this might be done. It sounds like Poole thinks the Fed might, somehow, reduce market volatility (which is of course a bad thing for everyone) but hasn't really thought it through.
Meanwhile, the NASDAQ has lost half its value since April. This is a plunge by nearly any definition, and nobody has "protected" us from it, though the investing public has lost trillions. I guess the ol' PPT doesn't work that way, right? Or will you claim the plunge would otherwise have been much worse? Hey, you can argue ANYTHING ex post facto.
Anyway, your "most reasonable explanation of the reversal that happened in early April of this year" is nonsense. It's the logical equivalent of saying that because the number of different places you might be standing is infinite, the probability of standing where you ARE is infinitely small, and THEREFORE a miracle! Give me the stock market data, and I can damn accurately predict the frequency of EVERY pattern you see, ALL of which are inevitable. Just picking one single pattern out of the whole picture and attributing it to a secret conspiracy is idiotic.
The market is an extremely complex complex adaptive system embedded in *another* extremely complex adaptive system (the economy). The number of variables is unimaginably large and essential ingredients (like people's gut feelings) are not quantifiable. Looking at a tiny corner of this picture and postulating a conspiracy is like primitive people looking at wind and postulating wind gods, because chaos theory is beyond them and they don't understand air convection on a spinning ball. The advantage of superstition is, it's simple enough for simpletons to understand and believe in with all their heart. The disadvantage is, it's wrong.
-- Flint (flintc@mindspring.com), December 01, 2000.
Flint,
I asked you to give us your best guess of an explanation as to why the market reversed itself in such dramatic fashion in early April this year, and you give us TWELVE paragraphs of basically nothing.
It is not completely nothing, as you do give us a circularly reasoned, "because the market has been volatile, we have had volatile reversals". Care to enlighten us on the specifics of what has caused this volatility?
You also throw in an allusion to the infamous "program trading". What you fail to understand about program trading is that it almost always works in the opposite fashion of what has happened at these unnatural reversals. Sell programs beget more selling as the markets move lower. It was a nice try though. Even if you were right about the program trading, you have failed to tell us specifically who it would be. Your naming of the parties responsible as "big money" doesn't count.
Finally, I was really hoping that you would enlighten us on relative tax rates. LOL.
-- J (Y2J@home.comm), December 01, 2000.
J:[I asked you to give us your best guess of an explanation as to why the market reversed itself in such dramatic fashion in early April this year, and you give us TWELVE paragraphs of basically nothing.]
In other words, a statistical explanation escapes your comprehension. But this doesn't make it "basically nothing", it means that I have no superstitious villian to name, beyond the chimera of your own wishful thinking.
[It is not completely nothing, as you do give us a circularly reasoned, "because the market has been volatile, we have had volatile reversals".]
Try again. I argued that you are building an invalid case based on fortuitously selected time slices of that volatility, and ignoring all the times that contradict or fail to support your delusions. You sound like Paul Milne, who trumpeted every market drop for 2 years, and was silent every time it rose. We lived through one of the largest 2-year runups in all history, and ALL Paul chose to mention was the few small down ticks during that time. Maybe I should link to a few dozen of his posts as "evidence" that the market "really" fell between 1998 and 2000?
[Care to enlighten us on the specifics of what has caused this volatility?]
I don't know, nor do you. Your claim is that the government is secretly stepping in to REDUCE volatility, whereas I contend that the near-random fluctuations of normal market forces is fully sufficient to explain all we've seen. I suspect that indirectly the volatility we've seen results from an expansion of the money supply during a period of very low unemployment. But at some point, I must admit an inability to explain something as complex as the market. Our best computer models can't do it either, nor can our best financiers or economists.
[What you fail to understand about program trading is that it almost always works in the opposite fashion of what has happened at these unnatural reversals. Sell programs beget more selling as the markets move lower. It was a nice try though.]
Your understanding is obsolete, although it was all too accurate back in 1987. These programs are considerably more sophisticated now, attempting to identify relative lows and highs (that is, predict up and down movements in real time) while including cutouts and safeguards against snowballing. Strong conformity (i.e. high correlations) between programs can cause sudden moves in any direction, but almost always in the direction of a reversal -- sharp upswings following sharp drops, and vice versa. In other words, today's smarter programs embody negative rather than positive feedback.
[Even if you were right about the program trading, you have failed to tell us specifically who it would be. Your naming of the parties responsible as "big money" doesn't count.]
Ah, this claim gives your little game away. You'd hardly demand I name a specific "who" unless you were convinced there IS one. How about thousands of sizeable players all running essentially similar programs, or following similar philosophies? This does NOT mean all these investors walk in lockstep all the time, but it means that by stochastic principles, every now and then most of them WILL do the same thing at the same time. Your conviction that there is ONE BIG player who decides to jerk the market around every now and then is a pure "wind god" argument. Again, normal statistical variation is fully sufficient to describe EVERYTHING we've seen. Why bother to look for something so unlikely as a major conspiracy ALL of whose members ALWAYS remain silent, that's a mystery to the likes of Poole, a necessary key player in this scheme?
[Finally, I was really hoping that you would enlighten us on relative tax rates. LOL.]
You said above that for you, the most logical conclusion was that this "manipulation" must be the government "in some form." Statistical variation seems beyond you, you need a "secret" actor of some kind. But we know the government controls the market "in some form" in many ways. We already spoke of regulation. Taxes also play a role, because capital gains are taxed. The trading programs must take this into account. If you change the capital gains tax rate, you change the point at which both buying and selling become profitable. This in turn affects the behavior of these programs, which in turn affect the behavior of the market. Remember this is a complex adaptive system, not static at all. I suspect lowering taxes reduces market volatility, because it makes markets more efficient. I wonder what the correlations would be, between measures of volatility and different tax rates. I suspect there are some strong correlations there somewhere, but I don't have the data to do the calculations.
What we have here is a case of a lot of people walking over a bridge. They are very nearly in step most of the time, and by chance, every now and then they all fall into step, and the bridge collapses. And here you are searching for the "invisible man who blew up the bridge", because you can't understand systematic processes or multiple actors or epiphenomena. You need a "wind god", and by golly you're going to FIND one. Why NOT learn about stochastic processes? You should understand that these processes are NOT simple no matter how desperately simple minds want simple answers.
-- Flint (flintc@mindspring.com), December 01, 2000.
Flint,
That was what you call a statistical explanation, was it? You can claim that your "explanation" was beyond my comprehension, but in reality it was miserably lacking.
You claim that I am arguing that the government is stepping in to REDUCE volatility. Your claim is wrong. I am arguing that the government is stepping in to try and prevent a crash. In actuality, this manipulation INCREASES volatility, it doesn't REDUCE it. Why is it that your "statistical explanation" couldn't see that? LOL.
Your belief that computer trading programs are the cause for unnatural market reversals is not correct. They do, indeed, tend to reinforce the reversal once it has been established back to the upside, but your assumption that they are highly correlated enough to produce the reversal itself is faulty. The faith that you put into a computer trading model would lead me to believe that you were a programmer. In fact, your blind arrogance of computer models must be very similar to that which undid John Meriwether and crew at LTCM. Of course, they had real life trading experience, and even success. I find it hard to believe that you have had either. Your words strike me as that of an academic who has spent his life reading about the market, but who has never ventured into it in real life.
You can blather on about stochastic processes and systematic processes as you try to bullshit people into believing how intelligent you are about the market. You may even be an accomplished professional in your own field, whatever it may be. You obviously, however, have limited knowledge when it comes to the real workings of the stock market. All of your verbose ramblings may show what a grand vocabulary you have, but they do nothing to show that you have anything more than a cursory knowledge of the market, and it is a cursory "book" knowledge at that.
-- J (Y2J@home.comm), December 02, 2000.
J:But your entire case appears to rest on the unusual behavior of the market on one single day last April, which is postulated to have resulted from the government buying huge quantities of S&P 500 index futures.
I asked why Poole seemed unaware of this secret process. You are silent. I ask how all the people who must be involved have been able to keep this so secret. You are silent. I ask where is you "evidence" that the government *sells* what they "buy", and you are silent.I ask why you feel the need to ring in something so unlikely (and undocumentable) when the extremes of normal market variability explain it perfectly adequately. You are silent.
You have made an extraordinary claim, requiring extraordinary evidence. You have offered NONE. Meanwhile, the ups and downs of the market don't even require extraordinary claims. Why make them?
No, I'm not an experienced trader, and most of my learning has come from books and classrooms. I'm willing to consider anything that looks likely, and even anything that looks *unlikely* if the support is sufficient. Support for your claims is more than insufficient, it's missing altogether. If you were correct, this evidence would be common public record of long standing and frequent application, commented upon by the media, subject to lawsuits, you name it. And you have nothing but unsupported guesses instead.
At least I'm asking that you put up or shut up. Nobody else pays you the slightest attention. And for this you try to attack me? Hey, I'm holding your forum on my shoulders. This is your chance to shine. It only requires solid evidence, of which there should be mountains if you're right. Where is it?
-- Flint (flintc@mindspring.com), December 02, 2000.
The PPT has been doing a lot of manipulation recently, particularly in the last few years as bubble.com became a threat to the entire economy. Greenspan is a damn good economist and the most powerful man in the world, because he has his finger on the pulse of the American economy. His diagnosis is better than anyone else's, and he knows the best presription to use at any given time. He knew that the hysteria surrounding overinflated tech and net stocks was heating the economy to dangerous levels. Since his warnings of irrational exuberance were not heeded, he used interest rate hikes. While the obvious announced corrective actions were obvious to the public, the PPT group was operating behind the scenes in ways that few except insiders are aware of. There have been several occasions when bubble.com began to burst, and the PPT pumped it full of air again to prevent total disaster. Greenspan's goal has always been to slowly deflate the bubble with a soft landing. He does not want disaster to occur on his watch, and will do anything within his legal limits to prevent it. If it turns out that the Fed can benefit from increased interest rates while they are simultaneously pumping the markets to cushion an inevitable crash, so be it. This type of manipulation does not mean that Greenspan and the PPT have evil intentions, they are simply doing what is in the best interest of the Fed. No conspiracy, no illegal activity that we are aware of, no reason for paranoia, but it is manipulation, and it is done very secretively for the most part.
-- Seeker (searching@low.and.high), December 02, 2000.
I should probably add that I believe the reason we are not seeing a lot of the PPT coming to the rescue of the markets since the election is precisely for that reason. Greenspan wants to see the result of the election before he decides how to modify their approach. In fact if Bush gets in and goes through with huge tax cuts that he promised, I think Greenspan may resign. Most economists agree that those tax cuts would eventually cause inflation, and that might make it no longer possible for Greenspan to bring us to a soft landing without at least a recession. He may want to go out on a positive note rather than getting stuck in an impossible situation.
-- Seeker (searching@low.and.high), December 02, 2000.
seeker:Out of curiosity, how does the Fed "pump the market full of air"?
-- Flint (flintc@mindspring.com), December 02, 2000.
The word "air" may be misleading, but that is what it amounts to when you have investors buying inflated stocks on credit. I think the McAlvany article that J posted sums it up nicely. In addition, there have been a lot of quick maneuvers between the Fed and the banks in these situations, such as increasing credit to the banks so that they and their customers can buy more stocks rather than selling out. Basically, Greenspan and the PPT are experts at knowing how to move money from one place to another during critical times. They are not involved in manipulating stocks as much as they are in moving the sources of money that support the markets.
-- Seeker (searching@low.and.high), December 02, 2000.
Flint,
No, my entire case does not "rest on the unusual behavior of the market on one single day last April, which is postulated to have resulted from the government buying huge quantities of S&P 500 index futures". April 4th, 2000 was the most glaring instance of the manipulation, but it was by no means the only instance. October 18th, 2000 also had that peculiar smell to it. There have been others prior to those, as well.
The FACT is that someone (or ones) was in the S&P 500 index futures pits on those days, buying in such a way and in such size at a key moment as to reverse the market. Your best postulated guess so far has been that it was "big money" (I take this to refer to mutual funds, hedge funds, pension plans, et al.), whose computer aided trading programs are all so similar that said buy programs all kicked in at the same time to create a stunning reversal bottom. My theory is that it is the government in some form.
You wrote, "I asked why Poole seemed unaware of this secret process. You are silent".
Really, Flint, you are way too trusting. Not everyone in this world is truthful or forthcoming. If someone is privy to an ILLEGAL manipulation being carried out by their employer, why do you believe that said someone will necessarily come forward? Do you think that Betty Currie had a pretty good idea what Bill and Monica were up to? Why didn't she blow the whistle?
Further, your assumption that "all the people that must be involved have been able to keep this so secret", is faulty. Outside of the President, Secretary of Treasury, Alan Greenspan, and one person each at Merrill Lynch and Goldman Sachs, there needs to be not one more person involved to be able to accomplish this amazing feat. Do you think that it is possible that those five people could keep it under their hats?
You wrote, "I ask where is you (sic) "evidence" that the government *sells* what they "buy", and you are silent".
There is no specific reason to believe that they do sell everything that they buy. Another faulty assumption on your part.
Finally, you wrote, "I ask why you feel the need to ring in something so unlikely (and undocumentable) when the extremes of normal market variability explain it perfectly adequately. You are silent".
Yet another faulty assumption on your part. To paraphrase you, "the extremes of normal market variability DO NOT explain it perfectly adequately". If you had any real experience in the stock market, then you would know just how far outside of "normal market variability" these reversals have been.
My claim is supported by the FACT that huge activity has occurred in the S&P 500 index futures pits at the time of these reversals. This documented activity is inconsistent with normal market operations.
Your belief that, "if the government were manipulating the market, then there would be more evidence of the fact", is also wrong. You put way too much stock in your misguided assumption that something can't go on without the whole world finding out about it.
I first attacked you because of your arrogant, not so thinly veiled, attack/reply to seeker. If you would have civil discourse with others, I am quite sure that you would see the number of attacks that are aimed your way diminish considerably.
As far as you being the only one replying to me on this thread, I really could not care less if anyone replies or not. Since you are replying, I will continue to engage you assuming that the argument is proceeding at all.
In regards to your claim that my support for my position is missing altogether: it is not. I have documented some evidence of unnatural activity in the S&P 500 index futures pits at key moments in certain down days that have led to amazing reversals. Due to the anonymous nature of markets, it is not surprising that there are not reams of hard evidence supporting my claim. If you look closely at YOUR hypothesis that "big money" all came into the S&P 500 index futures pits at once, you will notice that there is no more, and quite possibly even less, evidence that this was the case.
Why is it that the evidence for my hypothesis is woefully inadequate for you, and therefore my hypothesis must be dismissed, while the evidence supporting YOUR hypothesis is no better, but you resolutely hold fast to it?
-- J (Y2J@home.comm), December 02, 2000.
J:[Why is it that the evidence for my hypothesis is woefully inadequate for you, and therefore my hypothesis must be dismissed, while the evidence supporting YOUR hypothesis is no better, but you resolutely hold fast to it?]
Because I am not making extraordinary claims, or at least I don't consider my claims extraordinary. I think that what you call "unnatural" market behavior on rare occasions is explainable by normal patterns of variation, some of which are infrequent. I think you are reading too much into a few events that might be rare, but are NOT impossible even at random.
Also, I think your claim that 5 people could do all this is a stretch. Five people might be involved in the decision making, but massive sales must be recorded to be real, and money must change hands to be real, and many people from secretaries to programmers to accountants to bankers to clerks get involved. At least that's MY experience. And if preventing plunges is in the public interest, why keep these efforts secret at all?
Now, seeker makes an altogether different claim, namely that nothing illegal is done, but no effort is made to publicize it either. Seeker says the Fed can make the kind of money infusions you see happening *attractive* to the key players by various indirect means, and then these key players actually make the transactions. This strikes me as feasible, though I would love to have an understanding of the mechanisms by which this is actually done. Do you have any suggestions that pass a basic sanity check?
-- Flint (flintc@mindspring.com), December 02, 2000.
Flint,
That is where we differ. My claims are as extraordinary to you as yours are to me.
I would even go so far as to say that if the event that occurred on April 4th, 2000 had happened in isolation, then I, too, would believe that it was a random market occurrence, and nothing else. The fact that this same, previously rarely (if ever) occurring phenomenon has happened repeatedly over the last few years, leads me to believe otherwise.
Real trades are made, and real money changes hands. I believe that the exact mechanism is such that the secretaries, programmers, accountants, bankers, and clerks are unaware of anything fishy going on. Well, except for the secretaries, as they always seem to know what is going on.
The argument that preventing plunges is in the public interest might not be sound. Especially if you are a short seller, or someone who lost their job because a dot.com start-up used their high flying stock as currency to purchase the building that your employer needed to buy to stay competitive. Or worst of all, if you are the one left holding the bag years from now when the government finally stops manipulating the game, like what happened in Japan.
How about something like this? Greenspan calls up the head honchos at Merrill and Goldman on one of these sharply down days, and says, "NOW"! They then call the head of their trading desks and tell them to buy S&P 500 index futures for their own account with both hands, knowing that:
A) Sufficient credit will be extended from the Fed if need be to cover the purchases.
B) That Mr. Greenspan has made clear beforehand that should the maneuver result in losses, the firms will be protected. Possibly by parking those trades in the ESF's account, possibly through some other way.
&C)That it hasn't failed to work yet.
This would jive with seeker's scenario except, I would be hard pressed to believe that it is legal. Maybe there is some other way that it happens so that it is legal, but I don't know how that would be.
-- J (Y2J@home.comm), December 02, 2000.
J:There might be something the Fed could do to make such purchases more attractive that wouldn't involve direct illegal intervention. I don't know what it might be. My feeling is that you are searching for a single simple explanation for a few unusual events, whereas I am more comfortable with the idea that a large number of factors can combine in unpredictable ways. Maybe this is because of my programming experience, where nearly every symptom I notice is the end result of something that happened much earlier, which triggered something else, which caused something else not to be done or done right, which something later on depended on to do *its* thing, etc.
I referred to your hypothesis as a "wind god" argument not to mock you, but to emphasize this different outlook. The wind on rare occasions does very unusual things -- hurricanes, tornados, microbursts. These can be viewed as "unnatural", demanding an unnatural explanation, and a *simple* one. Indeed, the exact mechanism causing tornados still isn't known, although we think we're pretty close. Certainly tornados take just the right combination of environmental conditions, temperature, pressure, gradients of these, the spin of the earth, and much more. Even time of day and regional terrain play a role. We've reached the point where we believe conditions are "just right" for a tornado, but we get one much less than half the time anyway. Why? We don't know yet.
So it is *much* easier to say, well, the wind god did it! This has the advantages of being simple to understand while being impossible to disprove. It has the disadvantage of discouraging us from looking for the much more complex causes that might actually be useful for public safety. After all, if the wind god did it, then that's the answer and looking further just might *displease* him! Also, people love to ascribe personal motivations behind impersonal phenomena.
I am suspicious of wind god arguments. Yes, sometimes they are right. But I believe that when we're looking for an answer, the wind god arguments should be the LAST resort, and not the first. And if you're right, I imagine there are those on Wall Street would be willing to offer that secretary some mighty attractive inducements to blow the whistle. Hard to believe she doesn't know this.
-- Flint (flintc@mindspring.com), December 03, 2000.
According to a source I found while searching on this topic, former Fed Governor Robert Heller made a bold proposal in a 1989 article in the Wall Street Journal.http://www.gata.org/graham.html
Have Fed Support Stock Market, Too
By Robert Heller
10/27/89
The Wall Street Journal
"The stock market correction of Oct. 13, 1989, was a grim reminder of the Oct. 19, 1987 market collapse. Since, like earthquakes, stock market disturbances will always be with us, it is prudent to take all possible precautions against another such market collapse.
In general, markets function well and adjust smoothly to changing economic and financial circumstances. But there are times when they seize up, and panicky sellers cannot find buyers. That's just what happened in the October 1987 crash. As the market tumbled, disorderly market conditions prevailed. The margins between buying bids and selling bids widened; trading in many stocks was suspended; orders took unduly long to be executed; and many specialists stopped trading altogether.
These failures in turn contributed to the fall in the market averages; Uncertainty extracted an extra risk premium and margin- calls triggered additional selling pressures.
The situation was like that of a skier who is thrown slightly off balance by an unexpected bump on the slope. His skis spread farther and farther apart-- just as buy-sell spreads widen during a financial panic--and soon he is out of control. Unable to stop his accelerating descent, he crashes.
After the 1987 crash, and as a result of the recommendations of many studies, "circuit breakers" were devised to allow market participants to regroup and restore orderly market conditions. It's doubtful, though, whether circuit breakers do any real good. In the additional time they provide even more order imbalances might pile up, as would- be sellers finally get their broker on the phone.
Instead, an appropriate institution should be charged with the job of preventing chaos in the market: the Federal Reserve. The availability of timely assistance--of a backstop--can help markets retain their resilience. The Fed already buys and sells foreign exchange to prevent disorderly conditions in foreign-exchange markets. The Fed has assumed a similar responsibility in the market for government securities. The stock market is the only market without a market- maker of unchallenged liquidity of last resort.
This does not mean that the Federal Reserve does not already play an important indirect role in the stock market. In 1987, it pumped billions into the markets through open market operations and the discount window. It lent money to banks and encouraged them to make funds available to brokerage houses. They, in turn, lent money to their customers--who were supposed to recognize the opportunity to make a profit in the turmoil and buy shares.
The Fed also has the power to set margin requirements. But wouldn't it be more efficient and effective to supply such support to the stock market directly? Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying averages in the futures markets, thus stabilizing the market as a whole.
The stock market is certainly not too big for the Fed to handle. The foreign-exchange and government securities markets are vastly larger. Daily trading volume in the New York foreign exchange market is $130 billion. The daily volume for Treasury Securities is about $110 billion.
The combined value of daily trading on the New York Exchange, the American Stock Exchange and the NASDAQ over-the-counter market ranges between $7 and $10 billion. The $13 billion the Fed injected into the money markets after the 1987 crash is more than enough to buy all the stocks traded on a typical day. More carefully targeted intervention might actually reduce the need for government action. And taking more direct action has the advantage of avoiding sharp increases in the money supply, such as happened in October 1987.
The Fed's stock market role ought not to be very ambitious. It should seek only to maintain the functioning of markets--not to prop up the Dow Jones or New York Stock Exchange averages at a particular level.
The Fed should guard against systemic risk, but not against the risks inherent in individual stocks. It would be inappropriate for the government or the central bank to buy or sell IBM or General Motors shares. Instead, the Fed could buy the broad market composites in the futures markets. The increased demand would normalize trading and stabilize prices. Stabilizing the derivative markets would tend to stabilize the primary market. The Fed would eliminate the cause of the potential panic rather than attempting to treat the symptom--the liquidity of the banks.
Disorderly market conditions could be observed quite frequently in foreign exchange markets in the 1960's and 1970's. But since the member countries of the International Monetary Fund agreed in the "Guidelines to Floating" in 1974, such difficulties have been avoided. I cannot recall any disorder in currency markets since the 1974 guidelines were adopted. Thus, the mere existence of a market- stabilizing agency helps to avoid panic in emergencies.
The old saying advises: "If it ain't broke, don't fix it." But this could be a case where we all might go broke if it isn't fixed." End.
-- (F@Y.I), December 03, 2000.
Flint,
This might be of some interest in regards to our conversation. It is a link to the reposting of a John Crudele article from the New York Post dated November 6th, 1998. In it he references a Wall Street Journal article from a few (I assume) days prior. I have been unable to dig up either the direct link to the New York Post article, nor to the Wall Street Journal article.
LINK
-- J (Y2J@home.comm), December 03, 2000.
J:I admit when I read Crudele, I see self-serving innuendo and insinuation, without anything more concrete than winks and nods, pandering to a special audience you should not be proud to be part of. This is straight financial demagaugery.
The content, when all the dressing is stripped away, consists of yet another Crudele repetition that he thinks the Fed is doing something "secret" with the market, but turns down his request for an interview. And of course, (wink, wink) they *surely* wouldn't do such a thing if they had nothing to hide, now would they? But we *know* they are hiding something, because someone we think is associated with the Fed actually *talks* to market people. More *proof!* What ELSE might they be talking about (wink wink)? And on and on along these same lines, making you wonder if Crudele is a fool himself, or simply knows his target audience so very well.
All in all, I think Gary North's editorial content made a far more plausible case for y2k meltdown. He cited things far beyond his own opinions, and had some real "evidence" because date bugs were very real. Crudele doesn't even have a *rumor* of a smoking gun, so has to start them himself. I am not impressed by this.
-- Flint (flintc@mindspring.com), December 03, 2000.
Crudele doesn't even have a *rumor* of a smoking gun, so has to start them himself. I am not impressed by this.As usual, Flint, you're more interested in the logic and process someone uses to come to an opinion than you are in the larger issue itself.
For the moment, let's put aside John Crudele and his logic or lack thereof. I'd like to hear your comments on Robert Heller's 1989 Wall Street Journal article. For example, is there anything that would impede the Fed from doing what Heller apparently suggested in the WSJ?
-- (long@time.lurker), December 03, 2000.
Lurker:I'd like to read that article, but I don't know where to find it. All I find in this link is Crudele saying that in 1989 Heller said something that Crudele interprets as a suggestion that the Fed "rig" the market. In might be *most* informative to see what Heller wrote, that Crudele thinks is "rigging". Crudele doesn't grace us with a single quote from that WSJ article, not even taken out of context!
Nonetheless, I've seen quite a few suggestions now, after some looking around, that the federal government take a more direct and active role in maintaining market stability, or preventing sudden crashes (they *have* tried to do something about those), while recognizing that the fed cannot do squat about a long, slow slide in market valuation -- that's more a matter of tax policy and even more indirect general government political direction over time.
And perhaps that's not a bad idea, but it certainly deserves a LOT of scrutiny, and careful safeguards, and a real review process built in, and so on. Government ownership of the economy has a really *lousy* track record worldwide, and ANY movement in that direction is scary.
-- Flint (flintc@mindspring.com), December 03, 2000.
Flint, someone has already posted the 1989 Heller article just a few messages before this one. Its title is"Have Fed Support Stock Market, Too"
-- (long@time.lurker), December 03, 2000.
lurker:Thanks. I didn't realize that was the article being referred to. It hardly sounds like Heller is suggesting "rigging" the market, but rather that the Fed play a more active role in preventing disaster, or perhaps recovering from disaster. Maybe when he talks about this not being very ambitious, he's thinking that disaster is less likely IF people believe the Fed will step in if required. And in the case of LTCM, they did just that.
It doesn't sound exactly like Heller is suggesting that the Fed start buying into the economy, or that they hold a large enough equity position in the economy to move the market at will. And as I said, I'm not real comfortable with this notion. But I'd need a concrete proposal to consider first. And in any case, this is a far cry from claiming that the Fed is actually making huge purchases on the quiet, solely on the grounds that it is one of many possible explanations for market behavior on one or two days, and not even the most likely explanation.
-- Flint (flintc@mindspring.com), December 03, 2000.