STAFF NEWS & ANALYSIS
U.S. Fed Rigs Stock Market
By Staff News & Analysis - January 11, 2010

The unusual circumstances that led the U.S. market to rally powerfully in 2009 might be explained by secret government moves to buy stocks, according to Charles Biderman, the founder and chief executive of TrimTabs, a research firm that tracks liquidity flows in the market. "We cannot identify the source of the new money that pushed stock prices up so far so fast," Biderman said in a statement Tuesday. The source of approximately $600 billion net new cash necessary to lift the market's overall capitalization by $6 trillion last year could not be identified by TrimTabs, Biderman said. The money, he said, didn't come from traditional players such as companies, retail investors, foreign investors, hedge funds or pension funds. "We know that the U.S. government has spent hundreds of billions of dollars to support the auto industry, the housing market, and the banks and brokers. Why not support the stock market as well?" The Federal Reserve or the Treasury, Biderman said, could have easily manipulated the stock market by purchasing $60 to $70 billion worth of futures of the S&P 500 Index (SPX 1,140, -1.20, -0.11%) on a monthly basis. – WSJ MarketWatch

Dominant Social Theme: More conspiracy theories!

Free-Market Analysis: So now the whispers about government intervention into the world's largest stock market have reached the point where the mainstream press is writing about them. Way back in 1987, during the Crash, it was common knowledge – or at least a common rumor – that Alan Greenspan had demanded that commercial banks buy stocks directly to help stabilize the market, and had provided funds for that purpose.

The Plunge Protection Team set up back then still exists today and there are plenty of rumors swirling about its activities on a regular basis. You would think the US government would have disbanded a group with such a provocative name, but perhaps the idea is to signal to the markets that the US government will ultimately stand behind the stock market. If so, the Feds are creating the largest moral hazard ever – and we have no doubt that the brainiacs in DC wouldn't think twice about it.

In fact the way the stock market has come back from the virtual ruination of the fiat money system gives rise to the idea that there is already some level of moral hazard at work. We've gone from a situation where the entire Western central-banking-based economy was flat on its back and on life-support to what many financiers and regulators would like to characterize as business as usual. Here's some more from the article:

"The idea that this is magic is nonsense," said Barry Ritholtz, market strategist at Fusion IQ and a market veteran. "This was a normal behavior in a recessionary bear market. We saw the Dow plunge 5,000 points in 6 months, which had never happened before and created a dramatically oversold market."

Yes, the Federal Reserve slashed interest rates to near zero and Congress allowed banks to keep their bad loans off their books, allowing them to pretend they were solvent, he said.

But "you can't short stocks when the Fed is at zero," Ritholtz said. "Our own institutional clients came on board" as did other big institutional investors, he said.

Conspiracy theories about the so-called "plunge protection team," or PPT, have been on the rise ever since the U.S. government started to bail out financial institutions in late 2008 under the administration of then-President George W. Bush, according to Dan Greenhaus, market strategist at Miller Tabak.

The PPT is a nickname given by some to a group established by President Ronald Reagan in 1988 after the 1987 stock crash to coordinate governmental response to market meltdowns.

Noting that the Fed has been buying Treasurys and mortgage-backed securities to keep interest rates low and support the economy, even firms such as Sprott Asset Management have started to accuse the U.S. government of running a Ponzi scheme.

"There's a lot of backlash against the government right now and the hate for the Fed has gone into overdrive" in some corners, Greenhaus said. "The fact that the government stepped into the abyss [angered] a lot of people, and the fact that things are better a year later flies in the face of some long-held beliefs about free markets."

Notice, the article making its way back to free-market arguments in order to rebut the idea that economies can be entirely free-market based. The idea being put forth by government apologists these days is that the Western governments with their activism salvaged Western economies and that these economies are irretrievably mixed.

However, the reality in our opinion is a good deal more complex. True, the American stock market is the furthest advanced when it comes to public participation but this participation has come as the result of a determined effort on the part of the power elite. European markets, even British markets, have remained resolutely in the hands of the professional classes but in America, the buying public for stocks has been broad and deep. It is the public participation in this supposedly free-market environment that the American government seeks to sustain.

It wasn't always so. Until the Civil War, or War Between the States, there was no great public participation in stock markets which were often auction based and traded once or twice a day. But after the war, in America anyway, power consolidated in the hands of Northern banks and New York City (and the NYSE) began building the kind of stock market that we know today.

It is no coincidence that stock trading for the masses began to build after the war – for it takes a good deal of manipulation and order-flow concentration to create the kind of critical mass that created the building blocks for the modern stock market in the late 1800s. The market staggered in 1907 and then crashed in 1929. It took a concerted effort by the NYSE to re-involve the consumer in the market after the Second World War. The effort was quite deliberate, and of a piece with the rest of the efforts by Wall Street to involve the American consumer in the stock market.

The stock market was never what it was portrayed to be. It was always a manipulated entity, prone to booms and busts that correlated to the monetary inflation of central banking itself. In fact, one could make the argument that the modern American stock market is a product of the Federal Reserve. Without the great waves of greed that are generated by monetary stimulation – the great buying booms that give rise to slews of instant millionaires – the American stock market would not have the fascination it does.

And yet, with the advent of the Internet and the ability of the average consumer to see behind the curtain, one wonders if the "dream time" of the 20th century monetary stimulation will continue to exist. More and more the Misesian model of boom/bust hyper-stimulation seems valid and the buy-and-hold and technocratic/graphical number-crunching strategies that have long been propounded for the masses seem out-of-date and even beside-the-point.

In this environment comes the last gasp of this particular promotion. What promotion is that? Anyone-can-be-a-millionaire-through-proper-stock-investing. This is another key item in the power elite promotional arsenal. It is not enough of course to distort the employment economy and make one's job dependent on monetary stimulation. The idea has been to involve individuals in the stock market in such a way as to involve the average American in the full spectrum of central banking monetary inflation. As we pointed out just yesterday, much employment in America and Europe is stitched to central banking booms and busts.

The idea of the stock market promotion is to capture citizens' free-income and savings as well – and make it subject to the same monetary inflation. Ideally, bands of investors will spend their evenings discussing central banking monetary policy and speculating on currency flows. In fact, this kind of buy-in took place in the 20th century when American media was filled with letters to the editor speculating learnedly on Federal Reserve monetary policy. Today, feedback pages remain clogged with speculations about the Fed – but the sentiment has turned markedly (rancerous), and not for the better from the point of view of the powers-that-be.

We don't know if the American FedGov has been intervening aggressively in the markets to push the stock averages up. We do know that public participation the stock markets is a power-elite gauge of the buy-in that the public has with the system. And thus if one looks at any queue in any major mainstream publication that allows feedbacks, the observation one comes away with is of a screaming frustration. Never in the modern history of the republic (or so it would seem) has there been such a growing disconnect between the citizens and the democratic process – and this is on both sides of the aisle, Republicans and Democrats. Within this context, purported federal manipulation of the stock market becomes merely one more element of controversy and distrust.

After Thoughts

When the painfully erected promotional supports of the modern Western state (especially in America) are coming into this much disrepute, the power elite has a lot more to worry about than the degradation of its stock-market promotion. It ought to be worried about the legitimacy of its larger operation. From global warming, to mass vaccination to fiat money, people are turning away from fear-based promotions. We think this is one reason why gold and silver have run up and have further to go. We think this is why we may even see a reversion to a private gold-and-silver standard during our lifetimes.

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