Can
Central Banks Change the Stock Markets Primary Trend?
By the Curmudgeon
with Victor Sperandeo
Introduction:
According to Dow Theory, neither a
central bank nor any other entity can manipulate the stock market such as to
change the Primary Trend. The Primary trend
usually lasts more than one year and may last for several years. If the market
is making successive higher-highs and higher-lows the primary trend is up. If
the market is making successive lower-highs and lower-lows, the primary trend
is down. [There are also Secondary
trends, and Minor trends, but they are not the subject of this article.]
However, we currently are in the longest bull
market in history which will be 11 years old this March. During that time the Primary trend has been
up, despite three corrections that
mysteriously ended (October 4, 2011 intra-day, February 11, 2016, and December
24, 2018).
Could such a long uptrend in stock prices have
happened without the Fed and other global central banks manipulating the
market?
Dow Theory - No One Can Manipulate the Primary Trend:
In his iconic Dow Theory Letters, the late
Richard Russell unequivocally stated that the Fed could not change the markets
Primary trend. A
tenant of Dow Theory is that stock market manipulation is possible day-to-day but the Primary trend cannot be
manipulated. That hypothesis was
largely based on Robert Rheas interpretation of Dow Theory (Russell was so
enamored with him that he once wrote he was the reincarnation of Robert
Rhea).
The following text on stock market manipulation
was taken directly from Robert Rheas book, The Dow Theory:
Manipulation is possible in the day to day
movement of the averages, and secondary reactions are subject to such an
influence on a more limited degree, but, the primary trend can never be
manipulated.
Hamilton frequently discussed the subject of
stock market manipulation. There are many who will disagree with his belief
that manipulation is a negligible factor in primary movements, but it should
always be remembered that he had, as a background for his opinions, a most
intimate acquaintance with the veterans of Wall Street, and the advantage of
having spent his life in accumulating facts pertaining to financial
matters. Hamilton wrote:
'A limited number of stocks may be manipulated at
one time and may give an entirely false view of the situation. It is
impossible, however, to manipulate the whole list so that the average price of
20 active stocks will show changes sufficiently important to draw market
deductions from them. (Nov. 29, 1908)
'Anybody will admit that while manipulation is
possible in the day-to-day market movement, and the short swing is subject to
such an influence in a more limited degree, the great market movement must be
beyond the manipulation of the combined financial interests of the world.
(Feb.26, 1909)
'
the market itself is bigger than all the
'pools' and 'insiders' put together.' (May 8, 1922)
'One of the greatest of misconceptions, that
which has militated most against the usefulness of the stock market barometer,
is the belief that manipulation can falsify stock market movements otherwise
authoritative and instructive.
no power, not the U. S. Treasury and the
Federal Reserve System combined, could usefully manipulate forty active stocks
or deflect their record to any but a negligible extent.' (April 27, 1923)
'It is true that a flurry in the price of wheat
or cotton may influence the day to day movement of stock prices. Moreover,
sometimes newspaper headlines contain news which is construed as bullish or
bearish by market dabblers, who collectively rush in to buy or sell, thus
influencing or 'manipulating' the market for a short period. The professional
speculator is always ready to help the movement along by 'placing his line'
while the little fellow timidly 'lays out' a few shares; then, when the little
fellow decides to increase his commitments, the professional begins to unload
and the reaction ends, and the primary movement is again resumed. It is
doubtful if many of these reactions would ever be caused by newspaper headlines
alone unless the market was either overbought or oversold at the time---the
'technical situation' so dear to the hearts of financial news reporters.'
'Those who believe the primary trend can be manipulated could, no doubt, study the subject for a few
days and be convinced that such a thing is impossible. For instance, on
September 1, 1929, the total market value of all stocks listed on the New York
Stock Exchange was reported to have amounted to more than $89 billion. Imagine
the money which would have been involved in depressing such a mass of values
even 10 per cent!'
..
Opinion: Fed produced Stock Market Bubble will end BADLY:
John Hussman, PhD and x-Stanford Finance
Professor who runs several mutual funds, has long said that the Fed has created a huge
stock market bubble. In December 2018 he wrote:
In the Federal Reserves attempt to bring the
U.S. out of the crisis of its own making, the Fed has produced conditions that
make another collapse inevitable. Unfortunately, the scale of the present
bubble is far grander, and the consequences are likely to be more severe. By
the completion of this cycle, I continue to expect the S&P 500 to lose
roughly two-thirds of the market capitalization it reached at its September 20
peak. Mountains of covenant-lite debt and leveraged loans, this cycles version
of sub-prime mortgages, will go into default. Worse, covenant-lite means
that lenders have much less protection in the event of defaults, so recovery
rates will plunge to levels that investors have never experienced.
On January 3, 2019 Hussman tweeted
this ominous warning:
Yesterday, U.S. stock & bond market
valuations pushed to extremes that now imply total returns of just 0.25% on a
passive asset mix (60% stocks, 30% bonds, 10% T-bills), for over a decade. The
glorious "passive" returns you see in hindsight now rest on an
extreme worse than 1929.
Dow Theory is no more; Central Banks Rule (Victor):
Yes, Central banks have changed the markets
Primary trend. This has been
demonstrated since late 1987 - from the creation of the (former Fed Chair)
Greenspan put to the Feds rescuing the stock market repeatedly over the last
11 years. After Greenspan was knighted and called The Maestro, every large
global Central Bank began using the printing press [1] more and
more to beyond anything in the historical past to achieve Greenspan God-like
status.
Curmudgeon Note 1. The printing press in this context
refers to the Fed and other global central banks (ECB, Bank of Japan, Bank of
England, Swiss National Bank, etc.) buying securities (bonds and stocks) with
money created out of thin air. No new money is actually
printed as the transactions are done electronically.
When the Fed uses open market operations or
quantitative easing (QE) to purchase U.S. treasuries and/or mortgage securities
from banks or private bond dealers, people call this printing money, but the
Fed is instead creating funds electronically from its infinite credit account
to buy the aforementioned securities.
The proceeds are then deposited at Federal Reserve member banks and add
to their bank reserves. Such
reserves which are over and above the minimum requirement banks have to hold are called excess reserves.
..
The Fed propping up the stock market has been
done through ultra- easy monetary policy and moral suasion. By controlling
inflation, the Fed was able to keep interest rates very low (or zero). The result was negative real interest rates
across the yield curve (even before taxes). That provided investors a huge
incentive to go long stocks and led to the TINA mentality: There Is No
Alternative (to buying stocks when real yields are negative).
The magic of artificially low inflation was
primarily accomplished by the Federal Reserve enabling Fed member banks to not
loan money by paying them interest on excess reserves (see Note 1.
above) they held as a result of QE.
Therefore, most of the money created at the Fed stayed there, rather
than being used to grow the real economy which would have increased inflation
pressures.
Also, the U.S. Bureau of Labor Statistics
(BLS) changed the way inflation (i.e. Consumer Price Index or CPI) is
calculated so that it is understated and sure to stay low. Over the years, the methodology used to
calculate the CPI has undergone numerous revisions. According to the BLS, the
changes removed biases that caused the CPI to overstate the inflation
rate. However, critics view the
methodological changes and the switch from a cost of goods index (COGI) to a
cost of living index (COLI) as a purposeful
manipulation that allows the U.S. government to report a lower CPI.
An example of moral suasion was the July
26th 2012 declaration by Mario Draghi, President of the European Central
Bank (ECB) at the time:
Within our mandate, the ECB
is ready to do whatever it takes to preserve the euro. And believe me, it will
be enough.
The key to this statement is the implication that
the ECB will create an infinite amount of fiat currency and with that paper
currency, buy enough bonds to lower interest rates and flood the financial
system with liquidity to spur economic growth (instead it artificially inflated
stock and bond prices). And that would
be done on an unlimited basis, until the goal of keeping the financial system
afloat was accomplished.
Meanwhile, the U.S. Federal Reserve has shown
over the last 11 years that it can rule financial markets with the printing
press, ZIRP or negative real interest rates, and fix any domestic economic
problem with newly created fiat paper currency.
Therefore, the Fed has been able to control the
long-term trend of the financial markets.
That is, until an event occurs
(e.g. war) which the Fed cant control.
..
Closing Quote:
From Sir Josiah C. Stamp, a director of
the Bank of England from 1928-1941:
The modern banking system manufactures money out
of nothing. The process is perhaps the most astounding piece of sleight-of-hand
that was ever invented.
Bankers own the earth. Take it away from them,
but leave them the power to create money and control credit, and with a flick
of a pen they will create enough to buy it back...Take this great power away
from them and all the great fortunes like mine will disappear and they ought to
disappear, for then this would be a better and happier world to live in... But,
if you want to continue to be a slave of the bankers and pay the cost of your
own slavery, then let the bankers continue to create money and control credit.
AMEN!
Good luck and till next time
.
The Curmudgeon
ajwdct@gmail.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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