Feds
Market Manipulation and Related Thoughts
by Victor Sperandeo with the Curmudgeon
Disclosure: The views and opinions expressed herein are
those of Victor Sperandeo and Michael E. Lewitt, Editor of The Credit Strategist.
The Fed & Stock Market 2012 to 2015:
On July 11, 2012, Zero Hedge
posted an article about the Fed's HUGE influence on the equity markets. It was titled: "Chart
of the year -- The Fed has Doubled the S&P Admits Fed.
Here's an excerpt:
Prepare to have your minds
blown courtesy of what is easily the most astounding chart we have seen in a
long, long time, prepared by the economists at the, drum roll, New York Fed,
which finds that absent what the Fed calls "Pre-FOMC Announcement
Drift," or the move in the S&P in the 24 hours preceding FOMC
announcements, the S&P 500 would be at or below 600 points, compared to its
current level over 1300. The reason for the divergence: the combined impact of
cumulative returns of in the S&P on days before, of, and after FOMC
announcements
We show that since 1994, more
than 80 percent of the equity premium on U.S. stocks has been earned over the
twenty-four hours preceding scheduled Federal Open Market Committee (FOMC)
announcements (which occur only eight times a year)a phenomenon we call the
pre-FOMC announcement drift.
Well that 80% equity premium
is now 94%! An update of the above concept is titled: "What Hath
the Fed Wrought."
The above chart implies that
~1,000 points of the actual S&P 500 price level came from the day of and
the day before each of the FOMC meetings since mid-1997!
Absent the performance on
FOMC days, the stock market has gone nowhere in 17 years. If you're a believer
in capitalism and free markets, you sit back and think about that statistic for
a moment and ask yourself - 'have I really made any money without The Fed?'
Put another way, Fed talk
+ unknown stock buying actions have doubled the S&P 500 from 1000 to
2000. That
proves to me that the Fed directly manipulates the S&P both by words (what
is seen), but also what is -not seen -buying stocks after the fact of their
meetings.
[The same principle was
applied to the Gold price from the top in 2011.
The result was a (43%) actual decline turned into an (18%) decline when
you subtract FOMC meeting days.]
Santiago Capital's Brent
Johnson warns "never underestimate the power of The Fed" but in the
long-run this is unsustainable as while The Fed has consistently forecast,
promised, guaranteed that economic green shoots are showing up, they have been
horribly wrong... and with December's meeting looming, their credibility is
running on fumes.
A Recent Example of Fed Manipulation:
The latest egregious example
of the Feds market manipulation was on 11/19/15...The stock market was up
about 9 S&P points just before the October Fed meeting minutes were
released. After the minutes revealed the
Fed would likely raise rates at their December meeting the S&P spiked 12 more
points! That implies that raising rates
is bullish for stocks. But previously it was bearish?
I think it was Fed buying
stock futures and/or ETFs (directly or through surrogates) to give confidence
to market participants that what they are going to do is not only OK, but
bullish for stocks!
The same thing happened when
the Fed announced
the end of QE3 while saying that it was not worried about global economic
weakness, low inflation or a decline in the stock market.
This type of bogus and hyped
Fed talk seems to be a hook to get more buyers into stocks. Let's look at the evidence:
· The FOMC has said 2015 would be a time to consider a
gradual increase in the Fed Funds rate from ZIRP (0-25 bps) to 25-to-50 bps.
· The FOMC did not move on rates as expected at their
September meeting citing "global factors."
· At their October meeting, the FOMC removed the key
sentence citing global factors.
· The market based probabilities of a near term end to
ZIRP have increased to almost a sure-thing.
The CME
Fed Watch Tool assigns a 73.6%
probability of a 25 bps rate hike at the December FOMC meeting.
[That's subject to change, of
course, based on new economic data or
Janet Yellen being told to back off by Obama at their weekly meetings via the
Secretary of the Treasury].
Sidebar: The
Credit Strategist, Nov 15, 2015 by Michael E. Lewitt
It would be unusual for the
Fed to raise rates with the manufacturing ISM hovering barely above 50, but
these are unusual times and this Fed is unusually incompetent. In 2011, when the ISM hit 50 the Fed launched
QE 3 and when it hit 50 again in 2012 the Fed launched QE 4. The Fed says it is data dependent but it
doesnt know how to interpret the data on which it depends. It confuses
structural employment trends with cyclical ones and is the only group of people
in the country that doesnt realize that the prices of everyday goods and
services are rising sharply (with the exception of energy-related items). It also hasnt figured out that low interest
rates retard rather than stimulate economic growth because it doesnt
understand the first thing about human nature or behavioral economics (and its
Chair is married to one of the foremost behavioral economists in the world!).
The fact that inflation
expectations are so low is not a sign that investors believe that the prices of
goods and services are rising slowly or threatening to fall; rather, it is a
sign that the world is threatened with a
massive debt deflation caused by the accumulation of too much debt that can
never be repaid except through currency devaluation, massive inflation or
default. The Federal Reserve is, as
I called them last month, a confederacy of dunces empowered to destroy the
world. The only reason it gets away with
it is that very few people even understand what it does, starting with the
dunderheads in Congress.
..
Central Banks Rule Global Financial
Markets & Economies:
Four central bankers (along
with the Japanese Prime Minister) are now primarily controlling the global
financial markets and world economy.
They are: Janet Yellen (US), Mark Carney (UK), Haruhiko Kuroda along
with Prime Minister Shinzō Abe-(Japan), and
Mario Draghi (EU).
A world famous derivatives
expert named "Satyajit Das" or
"Das" for short (whom I know) recently wrote a provocative article
titled: "Central
Bank Lunacy-$26 Trillion Of Government Bonds Now Trading Below 1%."
"In Japan, for example,
interest rates have been around zero for almost a decade. The Bank of Japan has
undertaken nine rounds of QE. The central banks balance sheet is approaching
70% of GDP. It owns a significant proportion of the outstanding stock of
government bonds and equities. But the policies have not restored growth."
Let me stress that 70% of
GDP on the central banks balance sheet, coupled with a "stated" debt
to GDP ratio of 2.30:1.00 (it's higher)
makes Japan officially bankrupt. Japan is a dead nation, but still breathing.
Germany and the EU are
following Japans lead. Germany is
selling 2 year debt at -40 bps, while EU Central Bank President Mario
Draghi wants more QE for the EU!
That won't work, as it didn't
in Japan which is in yet another
recession despite Abenomics.
Conclusions:
So what will happen to the
global economy? For a lesson in economic
destruction, please consider the following:
In 1919, John Maynard Keynes,
later an advisor to Franklin D. Roosevelt, wrote
in his book The Economic Consequences of
Peace:
Lenin is to have declared
that the best way to destroy the capitalist system was to debauch the currency
By a continuing process of inflation, governments can confiscate secretly and
unobserved, an important part of the wealth of their citizens
As the
inflation proceeds and the real value of the currency fluctuates wildly from
month to month, all permanent relations between debtors and creditors, which
form the ultimate foundation of capitalism, become so utterly disordered as to
be almost meaningless
These men were truly knowledgeable in their
observations of how the world works.
Good luck and till next
time...
The
Curmudgeon
ajwdct@sbumail.com
Follow the
Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has
been involved in financial markets since 1968 (yes, he cut his teeth on the
1968-1974 bear market), became an SEC Registered Investment Advisor in 1995,
and received the Chartered Financial Analyst designation from AIMR (now CFA
Institute) in 1996. He managed hedged equity and alternative (non-correlated)
investment accounts for clients from 1992-2005.
Victor Sperandeo is a
historian, economist and financial innovator who has re-invented himself and
the companies he's owned (since 1971) to profit in the ever changing and arcane
world of markets, economies and government policies. Victor started his Wall Street career in 1966
and began trading for a living in 1968. As President and CEO of Alpha Financial
Technologies LLC, Sperandeo oversees the firm's research and development
platform, which is used to create innovative solutions for different futures
markets, risk parameters and other factors.
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