the failure of markets and behaviors as speculators

2010.04.25

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“All truth passes through three stages.  First, it is ridiculed.  Second, it is violently opposed.  Third, it is accepted as self-evident” – Arthur Schopenhauer philosopher

The Federal Reserve Corporation (FED) today regularly intervenes in the currency markets via swaps, open market operations. etc. with other global central banks and other market participants.

The short term interest rate is regularly set and maintained by the FED and it’s open market operations.

The FED now also openly admits buying their own debt as quantitative easing. This serves to suppress long term interest rates thus, directly influencing the long term interest rate markets, and the real estate market.

Thus, the FED today manipulates the prices of assets from currencies to real assets.

In some circles (mostly only in the corporate media where board members are also wall street executives) it is still a subject of debate whether or not the FED and the Treasury have adopted a policy of intervening in the stock market to promote stability and market confidence.  From stories about the PPT,  to the FED stating that they would use “any means necessary” to stabilize the economy.  From huge market rebounds 5 minutes after a call from the Secretary of the Treasury to the people who profess to be doing gods work, to the CEO of trimtabs stating that he sees no other possibility than government intervention, people will still debate this topic, in the corporate media at least.

Out in the real world, “Don’t fight the FED” extends to market operations in any or all asset classes. The debate is confined only as to how much, when and who.  On the floor, the only entity who isn’t aware of anonymous accounts that can make the market turn at will in Chicago are the regulators. Then again, the regulators are the graduate alumni of the people who appear to need regulating.

The debate doesn’t stop at the share markets however. Recent on the record revelations from a metals trader allege what the so called conspiracy theorists have been saying all along, that there is a conspiracy among the centrals via their member banks to manipulate the price of gold and other metals.  The corporate media chose not to discuss the subject at all.

In looking at the markets as a speculator, the conclusion is that there is more than enough evidence that the FED, the Treasury and the large banks all operate with increasing influence and heavy handedness in all markets.

It has become required to stabilize an unstable system, first as an emergency measure then now as a matter of course and necessity. On the FED’s visible balance sheet there are toxic mortgages and on the invisible balance sheet it is impossible to ascertain what assets they own since they won’t say and have never been audited to force any disclosure.

A larger point, and the subject of this thought experiment is to think about the effects of managed or buffered markets on the psyche of the market participants.

The obvious reflexive idea at work here is that if the market participants believe the system is inherently stable or priced at a certain level on it’s own accord, then confidence in it would be far higher than if the participants believed that it needed intervention to keep it stable. This increased confidence could in itself affect the behavior of the markets when they are exposed to crisis or stress situations.

By reducing the interest rate to and below the real rate of increase in the cost of living, a negative savings rate discourages and even penalizes savings. It makes saving money a guaranteed loss and encourages speculative risk taking with non risk capital in search for a return.

If the market had dived during the 2008 period this could have permanently altered risk models and permissible leverage going forward. It could have reduced investor risk tolerance. It could have caused an even greater loss of confidence in the US capital markets resulting in unacceptable side effects from insolvency to failure of the entire system.

Knowing all this, is it possible that the FED or the Treasury have introduced a false sense of investor security by financing open market operations via a printing press? The implied assumption of course is that the printing press can run forever and as powerfully as necessary to fix any problem that might arise. The current FED chairman stated explicitly and now infamously that the FED could do just that by dropping money(debt)  out of helicopters if necessary.

The reality however is that the printing press cannot print more debt than the capacity to finance it.  We must recognize that reality in the same way that we recognize the FED and the banking system is not a goose that lays golden eggs.  In spite of what the FED chairman would have you believe, it cannot fix any problem by printing any necessary quantity of money, because that is the same as increasing the debt up to and infinitely beyond it’s ability to be repaid.

Because of these facts, it is arguable that both investor psychology as well as quantitative risk models have become skewed and are now RELIANT on the previously mentioned assumptions for it’s continued existence. The implication is that if investor psyche has been manipulated or altered along with the markets, it is not a reliable indicator of future market direction or market stability.  All forward looking indicators could be entirely wrong as a result of reflexive policies and it’s resultant social engineering.

The idea of markets that discount the future by a market consensus based on reliable information becomes flawed. Recognizing the markets are managed is no different than recognizing that investor psyche is also managed. One is a reflection and a reflexive view of the other.

In thinking about all of the above, the next obvious question is, how does an eventual convergence of reality (the FED cannot create an infinite amount of debt to fix any problem) with a belief in golden eggs (the belief that they can and enabled only by the illusions of manipulation) manifest itself?

The answer lies in this fact:

The amount of debt is continuously increased into a geometric progression of diminishing returns as the capacity to buy the ever increasing amount of debt moves ever smaller as a fraction of the debt required to maintain and inflate the balloon.

Thus it can be argued as it was in two possible paths with the same endpoint that we have an unstable and technically defunct system masquerading as a stable system. This current divergence can be reconciled either through asset value inflation, or through failure via mass insolvency. If it is reconciled through inflation it will appear as decay over a long period of time leading to chaos and civil instability due to a standard of living collapse. If it is reconciled through mass insolvency it will appear as a rapid onset of the same thing.

Filed under: markets

For nations living the good life, the party’s over, IMF says
By Howard Schneider
Washington Post Staff Writer
Saturday, April 24, 2010
Address

Greece hit by new riots as pressure grows to quit euro
By Christopher Leake
25th April 2010
Support for the bail-out of debt-ridden Greece was in doubt last night, leaving the country on the brink of financial meltdown as top German politicians said it  should be forced to quit the euro. Riots erupting during workers’ protests over planned public spending cuts, just hours after Greek Premier George Papandreou sought emergency £35billion of loans from eurozone countries and the International Monetary Fund. The Greek government was finally forced to ask for international help after the cost of its borrowing spiralled to a new high, making it prohibitively expensive to borrow money to service existing debts.
Address

Lawmakers: Military could quell Chicago violence
CHICAGO — Two Illinois lawmakers say violence has become so rampant in Chicago that the National Guard must be called in to help. Chicago Democratic Reps. John Fritchey and LaShawn Ford made a public plea to Gov. Pat Quinn on Sunday to deploy troops.
Address

From the Sky, Detroit Looks Like Sarajevo
Chris Hansen traveled to Detroit, Michigan for a Dateline special that aired tonight on the state of what is probably America’s most desolate city. And in aerial footage—devastation porn at its best—Detroit’s grim plight was revealed. Video inside. “Today, from the air, parts of Detroit look like a war zone,” Hansen said in a voiceover near the beginning of the special, before he listed some of the most shocking facts about the city’s current state—the population is less than half of what it was decades ago; there are 400 liquor stores there, but only eight supermarkets—all while panning shots of the consequences of its deterioration flashed on the screen.
Address

Marc Faber – Governments are Going Bust!
Address
Greenspan Wanted Housing-Bubble Dissent Kept Secret
05- 3-10
As top Federal Reserve officials debated whether there was a housing bubble and what to do about it, then-Chairman Alan Greenspan argued that dissent should be kept secret so that the Fed wouldn’t lose control of the debate to people less well-informed than themselves. “We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand,” Greenspan said, according to the transcripts of a March 2004 meeting.
Address

ECB President Favors Global Governance
April 29, 2010
The President of the European Central Bank, Jean-Claude Trichet, told Forbes that global governance is extremely necessary if we want to prevent another financial crisis. In his prepared printed and spoken remarks to the Council on Foreign Relations, Trichet emphasized that politicians, economists, and financiers must work across the Atlantic and collaborate on methods to create an international set of standards.
Address

Rigged-Market Theory Scores a Perfect Quarter: Jonathan Weil
by Jonathan Weil
May 13 (Bloomberg) — Score another triumph for the rigged- market theory. In a feat that would seem to defy the odds, Goldman Sachs, JPMorgan Chase and Bank of America this week each said its trading desk made money every day of the first quarter. Goldman said its daily net trading revenue topped $100 million 35 times last quarter out of 63 trading days. JPMorgan and Bank of America disclosed similar eye-popping stats. Citigroup, too, recorded a profit on each trading day, Bloomberg News reported, citing unnamed people who knew the results.
Address
Exclusive: The Bank Of England Engaged In Flagrant Gold Manipulation In The Interwar Period Via The New York Fed; Does History Repeat Itself?
Tyler Durden
02/13/2010
An article written by University of Tennessee professor John R Garrett, “Monetary Policy and Expectations: Market-Control Techniques and the Bank of England, 1925-1931″, which describes in exquisite detail the gold falsification measures undertaken by the Bank of England in the interwar period in order to impact interest rates in a favorable direction, performed with the full criminal complicity of the Federal Reserve Bank of New York, may mean paranoid “gold bugs” could soon be forever absolved of their “tin hat” wearing status as outright gold, and other data, manipulation by a major central bank is now proven beyond doubt. The implications regarding the possibility of comparable deceitful and treasonous acts by modern central bankers are staggering.
Address
German Economics Minister Confirms Fed Manipulates The FX Market
by Tyler Durden
ZeroHedge
05/28/2010
The German Economics Minister Rainer Bruederle has just confirmed precisely what many have known and said for years, namely that the US Federal Reserve is active in the secondary markets, in this particular case in FX.
Address

  1. SteveK
    April 27, 2010 at 11:45 am

    Great points about the psychology of market participants.

  2. CK
    April 27, 2010 at 1:35 pm

    It’s interesting that while we all know the FED is engaged in manipulation of debt markets and currency markets by their own admission, but then people will somehow still argue about intervention in other markets. I think it’s safe to say they use any means they feel necessary to push whatever policies they feel are necessary. Free markets are definitely a misnomer. It’s more like the free markets versus the FED.

    • April 27, 2010 at 5:04 pm

      Hi Ck.

      I think the three stages of truth offer an explanation for that.

  3. Trader
    April 27, 2010 at 1:40 pm

    The FED AND all the other central banks have their hands in everything. I agree with the first comment that you make good points about how market psychology is affected by this and how it may cause a failure or at least a skewing of indicators.

    I believe most serious market participants understand what we are really dealing with, it’s only the CNBC tards and their dwindling audience who are lost.

    • April 27, 2010 at 5:06 pm

      Thank you for the comment. I wrote about this subject in “the corporate media’s continued de legitimization of itself”. The link can be found to the right.

  4. Terry
    April 27, 2010 at 4:46 pm

    I would like to extend this discussion about market psyche in relation to the FED and the markets. The interesting to think about IMHO is how market management doesn’t stop with market management. It would extend into the attitudes of the participants, the press, and politics. It’s a very interesting topic to me.

    • April 27, 2010 at 5:07 pm

      Hi Terry.

      Do you have a particular question or topic to extend the discussion?

  5. Terry
    April 27, 2010 at 5:35 pm

    One subject is this. In your footnotes, you linked articles which already describe the results of the standard of living decline. In other words, it’s already happening with Detroit looking like Sarajevo and requests for troops to Chicago because of crime and violence.

    BUT

    At the same time, the stock market rallies like happy days are here again. Is this a consequence of not just the manipulation of markets, but manipulation of the psychology of the market players?

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