Regardless of what happens on inauguration day, there will be a huge effort to rally the stock market big time. That is the standard mode of operation with respect to potentially big days bad or good. Expect massive intervention. If prices ever decline, to a degree that can’t controlled, the entire system will collapse. Every event has a rally. There will be an time when a rally is attempted but fails. When that happens, the mob will cut and run. There will be hell to pay.
What do we know about big events with respect to the stock market? In this case we are not talking about a market as such. Stock prices have been managed to one degree or another by government since Ronald Reagan first intervened with the President’s Working Group on Financial Markets or plunge protection team. Since that time stock prices have been less and less indicative of economic considerations and more of a system of planned wealth creation. Today 10 percent of the our population owns 80 percent of all stock outstanding. This is by far the largest welfare system, in the history of the world. The one and only function our federal government serves today is providing enormous wealth and income benefits to its most powerful citizens.
The consortium that currently manages stock prices consists of the Federal Reserve Open Market Committee and privateer firms which participate in return for advance information and other trading advantages they are given. Corporations assist by buying up their own stock to degree the Federal Reserve can assure them of continued assistance.
Destroying a large economy takes decades. When the economy is indeed destroyed, the market will fall no matter what. Please understand, the destruction of the economy is not intentional. That is just what happens when a free market system is dismantled so as to give benefits to the politically powerful.
I started writing about organized support of the stock market as far back as October 2005. Back in 2006 Henry Paulson, as the county’s first activist Treasury Secretary, re-popularized the Plunge Protection Team concept but more than anything gave it respectability and normalized its practices. The Plunge Protection Team was organized by Ronald Reagan for the purpose of limiting the 1987 stock market crash.
Who are the members of the Plunge Protection? Who cares? All we have to do is observe trading patterns and be aware of its presence. There is no way to get honest answers about these kind of things anyway. When the stock market is being moved higher, it is like there is a cement floor under stock prices. There is always overnight communication and a unique plan for each trading day. Notice that when popular stocks correct intra day, there are typical levels where declines stop. For example, any stock than has been green gets support before it turns red. Stocks that are going to be used to support the averages are easy to spot. Anyone who follows a lot of stocks can see this easily. Suppose there is weakness on the opening. Out of 100 popular stocks you will notice a few that open weak will start popping in and out of green during the first hour. When this happens, there is about a 100% probability an intra day turn around is about to be engineered. High frequency trading firms are really good at keeping stock prices stabilized when downward momentum slows. In an honest market, about half the time, stocks going down will resume their decline after consolidating. When government, by way of the Plunge Protection Team, is managing stock prices, any consolidation pattern is actually a bullish formation. The consolidation pattern is kept stable until enough short sellers take positions so that they can be squeezed, moving the stock back up.
The Plunge Protection Team boils down to a number of organization with immunity from prosecution for violating securities laws. The get information from the Fed and others far before it is available to everyone else. They basically trade risk free for now, but possibly not any more. There is no way to tell when they can no longer profit from the advance information they are given. They are not going to buy and hold. When they can no longer trade risk free they will vacate the arena. The is still very little stock being sold off from long term holdings.
There will be no crash as long as the Plunge Protection Team can prevent one. So, far this fall, they are doing a good job. The market will crash when the Plunge Protection Team members start cutting and running. Some central banks are already buying and holding stock to support their national markets. There is no way to tell what and which heroic measures will be taken to prevent a reckoning.
For these reasons I have no advice on how to play global weakness with equities except not to own them. As it is there is little relationship between stock prices and the viability of corporations. Unless tons of stock start coming on the market, there is not much way for the market to break down through the Plunge Protection Team’s cement floor. It will happen but predicting when is not possible presently. My current thoughts will are that we will continue creep down for the foreseeable future. When we finally drift down 10% on the big cap averages there will probably be an orchestrated media campaign to the effect that, “There we had or correction. Everybody dive back in”
Still, all it would take for the bottom to drop would be for Trump to suddenly blurt our that government has been goosing stocks and that is why they are higher. Hillary Clinton is already talking about taxing high frequency traders. All parties are acting in their own interest and when is helpful to one politician or another they will break up the party.
I am the only economist in the world who treats the Federal Reserve strictly as a political body carrying out political agendas. The Federal Reserve Open Market Committee has decided for now not to raise interest rates. The Fed is charged with the responsibility of continually elevating asset prices. Market manipulation is often attributed to the mysterious group some call the Plunge Protection Team or the President’s Working Group on Capital Markets. The concept of a formal organization serves as a stalking horse and carries some credibility with it. The euphemistic mind has trouble conceiving of an unofficial group that moves the market up for their own benefit without any regard for the rest of the country. But, that is exactly the way it works.
What is called the Plunge Protection Team is actually a consortium of criminal enterprises working together to enrich themselves only. Any statute they violate is never noticed. Of course the day of the Fed’s interest rate decision was changed from Wednesday to Thursday so that it would receive no attention during the CNN Republican Debate. No questions were asked of the candidates that had anything to to with Federal Reserve policy or central economic planning. This is no accident.
The ideal circumstance for a criminal organization is simply to skim a little profit off of each transaction within the market they are exploiting. This is the basic goal of the high frequency trading firms. It is not the speed at which they operate that is directly harmful to investors. It is the speed that allows them to successfully compete with each other. The high frequency trading firms could operate a lot slower and still run stops and entice traders into unprofitable situations. The faster a firms operates, the more trades it can sabotage and exploit.
From my vantage point as an euphemism-free economist, it is clear that the criminals are not making the profit they need and expect any more. The advantages the Federal Reserve provides them may not be enough to guarantee their continued participation on the Fed’s behalf. The efforts to elevate equities this week have been enormous. Today, September 17, is what I call an up-no-matter-what day. On these days, prices are supported aggressively all day. The VIX gets hammered and no stock that has been green is allowed to go red. Today, The Dow 30 closed down anyway. Some indexes closed higher. The Russell 2000 is easy to control because the entire Russell 2000 has about the same capitalization as one Dow stock. The Russell 2000 closed higher.
The criminals prosper by getting exclusive information from the Federal Reserve. With that advantage, their profits have been guaranteed up to this point. The criminals may have actually taken a loss today. Probably they did. Even though I am playing it cautiously, I am completely sure the criminals will disappear from the long side of the market when the Federal Reserve’s information no longer guarantees a profit. When that happens, the market will crash because it is only by virtue of the criminals that the market is going up at all. That is why I keep 20% of capital on the bearish side.
What investing comes down to is knowing the economy is being destroyed by the Federal Reserve and central economic planning, while stocks are pushed higher for the profit of a few. One of two things will happen first. The nation’s economy will be gutted to the point where losses are so great that no organized effort is enough to prevent lower prices. Or, selling pressure will become so great that the high frequency trading firms can’t prevent a drop. Their algorithms may become unprofitable and they might exit the trading arena.
The failure of the economy and the financial markets is guaranteed.
Regardless of what happens on inauguration day, there will be a huge effort to rally the stock market big time. That is the standard mode of operation with respect to potentially big days bad or good. Expect massive intervention. If prices ever decline, to a degree that can’t controlled, the entire system will collapse. Every event has a rally. There will be an time when a rally is attempted but fails. When that happens, the mob will cut and run. There will be hell to pay.
