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Did the Fed Buy the Market to Stop the Collapse?
Now that the market has rolled over and erased most of the gains from last week, I can’t help but wonder just why the market rallied at all. True, it was oversold… but the FOMC announcement wasn’t exactly bullish (Seriously… ZIRP for another year was reason for an 8% rally in four days?).
I found it interesting that the New York Post published a story containing the following quote just 3 hours before the post-FOMC market ramp job started.
Back in October 1989, a guy named Robert Heller, who had just quit his post as a Fed governor, suggested that the government should purchase stock index futures contracts to calm the markets in times of distress.
"The Fed could support the stock market directly by buying market averages in the futures market, thus stabilizing the market as a whole," Heller wrote in an op-ed piece in The Wall Street Journal after saying the same thing in a little-noticed speech. "The stock market is certainly not too big for the Fed to handle."…
This is a rather odd turn of events… a former Fed official urges the Fed to step in and buy the stock market… just three hours before the markets mysteriously reverses and rallies hard on no real news of note.
This begs the question… did the Fed buy the market to put a floor under the collapse? There’s no telling for sure. But it’s rather odd that this article came out just three hours before the market magically reversed and exploded higher
If the Fed did actively buy the stock market to try and put a floor under it, we can assume three things:
1) The Fed is becoming truly desperate
2) The Fed realizes QE isn’t helping
3) QE 3, if it arrives, will be coming later down the line
If the Fed did in fact buy the market two weeks ago, then the Fed is getting extremely desperate. We know the Fed has been supplying juice to key Wall Steet firms who then bought the market, but never before has it been so obvious that the Fed itself may have been buying the market.
Remember since March 2009, QE has been the primary tool the Fed used to deal with the Financial Crisis. QE 1 was something of a success in that in restored investor confidence in the system. However, as I’ve noted in previous articles, by the time we got to QE 2, the negative consequences of QE (inflation) far outweighed the positive consequences (stocks rising).
So the fact the Fed did not announce QE 3 two weeks ago but chose to buy the market (at least it looks that way), indicates then we’re are DEFCON 1 RED ALERT for the entire financial system as it indicates that the Fed is abandoning its more traditional monetary tools and simply trying to buy the market it means the Fed is losing control of the system in a big way.
It also indicates that the Fed realizes that the benefits of QE come at too high of a cost for it to engage in more of this for now. Instead, the Fed will save QE 3 for a little further down the road as a final Hail Mary pass.
Which brings me to the most important point from yesterday’s Fed FOMC: there were three dissenting votes (an 18 year high). This tells us that Bernanke’s “inflate or bust” mentality is coming up against serious friction at the Fed. And it also tells us that there will be fierce resistance to QE 3 if the Fed chooses to unveil it down the road.
The take home point here is that the Fed is not as market friendly as before. There is growing dissent amongst Fed officials. And we’re beginning to see signs of desperation.
In plain terms, the situation in the markets right now is very VERY dangerous. It is easily the most dangerous market I’ve ever seen. We are going to see greater losses and sharp rallies. But the overall trend is now down.
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The $15 trillion gain (or loss) is strictly theoretical. On any given day less than 1% of shares change hands. A rise or fall can be caused by a very small amount of cash flowing in or out of the market but when you multiply it by total shares outstanding you get a huge paper gain or loss.
It is true that a typical day churns one way a few points then the other next day and total trading tends to stay in a band within 800 or so points months, sometimes for years because the market is well priced for the economic climate. But then you get those days when you have a 5-7% drop in a day, and 5% of a market cap of 24 trillion is 1.2 trillion bucks. Between the peak at 14,200 and the bottom of a little under 7,000 more than half the total market cap was lost, mostly by sellers who sold far cheaper than they originally bought in for. That was in the hood of at least 10 trillion equity gone, in order for the market to return to the current 24-26 trillion market cap somebody had to plow in at least ten trillion dollars. With a recession that was the worst downturn since the depression and a quick loss in stocks as noted above who in their right mind would put at such risk such sums? Who even had those trillions to play with?
The only plausible answer of course is the Fed/Treasury who not only have that much and more thanks to their smoking hot presses (electronic or all inky) but they also knew there was zero risk for them in doing it because they and they alone could GUARANTEE the return to previous stock prices. Whispering to the bankers and the uber rich to do the same with a wink and a nod because TPTB are about to make all losses in equities vanish, everyone that had any money left after the wipe out and were in the loop piled in and made it that much easier to pull off, but without the Fed/Treasury there was not even enough liquidity out there to make it happen, not by a mile. Given the recent extraordinary volatility I would say that they are back at it too, little guys and more nervous banker types wanting to "take a breather from equities" one day, and the PPT piling in the next, in for a penny in for a pound. And I still maintain it is illegal activity by breaking dozens of fundamental securities laws. Not to mention that it is a very caustic commentary on the state of US business and capitalism in general, when these measures are resorted to in order to keep the Titanic afloat it really is time to get out, of every investment, buy arable acreage in the country that has good water rights.
Well, you're doped with the "wealth effect" of high stock values and bubbles.
The market cap has nothing to do with real money.
It just takes a single transaction to wipe that wealth effect.
If there is no bid, the ask will drop, until it finds a bid.
When the bid and ask match... well all other players holding stocks, which are not bidding and asking, automagically get vaporized their holdings value. Efficient markets my ass.
I can safely say that the stock market is a sophisticated gambling machine. Nothing more, nothing less.
Lets put our excess money into those shiny social internet IPOs and hopium for that "wealth effect".
HFT algos add more noise while they strip your pennies slowly, raking millions a day, just like the 1c slot machines at Vegas.
I have to conclude from your astute analysis:
And fucked we will die."
Tyler has reported continually on the Fed ramp, Bernank Put for years... So have commenters on ZH...
So let me ask... does this newsletter peddling guest poster ever READ Zero Hedge???
Until the great reset. The fed kept the market above the 4 week ema. Now they are doing all they can to get the dips near the 4 wk ema but we all see how that's going. Sell the 4 wk ema till it doesn't work
"Last week the California unemployment rate shot back up to 12 percent. Couple this with the underperformance of revenue for the state and we have heavy headwinds ahead. It will be a herculean effort for home prices to remain inflated in bubble markets as the economy and incomes slump. Part of what has held up the housing market in many areas is the building up of shadow inventory to control supply and try to increase home prices. This has been a dramatic failure and has cost the U.S. taxpayer trillions of dollars simply to keep the too big to fail banks afloat with financial swindles. There is no reason for this policy to continue unless we want to have another lost decade for our economy (this seems to be the path we are embarking on). "
http://www.doctorhousingbubble.com/prime-bel-air-zip-code-lists-only-1-f...
Doctor Housing Bubble is too much...
I enjoy his accurate analysis and check his blog right after ZH... "Real Home of Genius" segment is always good...
END THE FED.
FU BAR S.
"The financial system [...] has been turned over to the Federal Reserve Board. That board administers the finance system by authority of [...] a purely profiteering group. The system is private, conducted for the sole purpose of obtaining the greatest possible profits from the use of other people's money."[6]"
-Charles August Lindbergh
http://en.wikipedia.org/wiki/Charles_August_Lindbergh
Of course the Fed bought the market. They have been doing so at strategic times since March of 2009. Do you really think the rally that kiced off that month had anything to do ijvestors restored cofidence.
We had the BS leaked memo saying Citi's losses weren't going to be as big as everyone thought. (due to the prior knowledge that mark to market was going to be abandoned)
Obama gets on TV and tells people to buy stocks
A few select stocks go stratospheric. Diedrich Coffee went from $.35 to $30 in three days something like a 10,000% gain.
The FED doped the market and the investment banks have been hooked on the high ever since. Without the fix they are going through withdrawl that makes a crackhead in rehab look like a baby.
And everybody wonders why companies are sitting on tons of money when they havn't sold anything and are buying each other like crazy.
lol, the fed bought Diedrich Coffee... Maybe there is some secret fed deal, maybe they are long tons of futures... but whatever is going on, my guess is they don't give a toss about a dinky coffee company.
How hard is it to fathom. The Fed bought every branch of the government
Rather.
What Fed wants, Fed gets, Fed help us all.
The Fed is like Oprah, without the diet or the new cars
Reminds me of those History Channel shows - Coming at 9/8 central, "Could Aliens have Vistied Ancient Earth"? Huge build up then a show with lots of hand-waving and no real proof and in the end, "Could Aliens have visited Ancient Earth, we'll never know!"
Anyone can say "Fed can buy the market" but saying and proving are two different matters. What's the mechanism for the Fed buying the market? Who funnels the money to whom? Is there a big single-source for the uptick? If there really was a direct Fed intervention in the market, there should have been fingerprints big as Paul Bunyon!
The rest of the article is fluff and speculation based on an unproven premise.
(That's not to say that there's not negative market indicators like EU liquidity issues.)
The new game...knowing when the Fed is buying the market and then sell
pulling a reverse nicholas bittle absolutely hilarious....Well not really scary actually...Oh, the american people are going to LOVE THIS, not only are we going to steal grandmas money through zirp we are going to invest it for her too trust us.. so the fed is now doing the cost averaging for everyone else? Now what happens when the boat floats the other way.or are they going to just play it like the government with gm and never sell (like all of their balance sheet)..talk about playing a high stakes game of chicken...
http://en.wikipedia.org/wiki/Nicholas_Biddle_%28banker%29
I'm sure he'll end up the same as bittle did in the end...at least one would hope...
If it's true good for another dead cat bounce till europe implodes...
So just when we are told that we will not have QE3, this is what we get. Fund managers are out of money. So, now the FED is buying stocks.
When will they sell, if ever. Hmmmmm.
When will they sell those assets from the banks back to the banks, never? Hmmmm.
"I will not Monetize", good old Ben in front of Congress. Hmmmmm.
Saddam Hussein would have pulled out a gun and shot the little rat in the head right there!
I bet *that* would regulate the market.
Won't be the first time we lose everything.
Ho hum...
"We will be back after a word from our sponsors"
Which is worse?
The public's belief that the Federal Reserve is a government body, so the government is buying stocks with no plans to unwind.
OR
The truth that the Federal Reserve is a collection of bankers, so a dummy body is buying up stocks with no plans to unwind.
the anti-christ sure don't mess around, eh?
The nuclear chain reaction started by the Fed and other fiat money players is now out of control and is headed for a melt through situation.
Melt through is a condition when the fuel mixture in a nuclear reactor gets so hot that it melts the reactor floor. It is not visible from outside. All is well till earless rabbits show up suddenly.
Best. Phoenix Capital Research. Article. Ever.
I never heard of a correction before. It must be the fed playing games.
Graham Summers SUCKS. Unless this article is sarcastic. He gets caught on the wrong side, and it couldn't be a mistake. No -- it must be manipulaiton. Genius!