Is the Fed Buying the Stock Market?

If true, this would be an unprecedented market manipulation by the Fed. There is no free market left!

excerpt from Phoenix Capital Research via Zero Hedge:

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.

Market? What Free Market?

from Zero Hedge:

Anyone just waking up and noticing futures trading just barely below the closing print may get the impression that things are fine. They are not. Here is what has happened overnight as the global central planning cartel does everything in its power to prevent the global market rout, which has so far wiped out $7.8 trillion in market value around the world, from morphing into the catalyst that ends the status quo. To wit: ECB resumes buying Italian and Spanish bonds (UniCredit says the bank is losing a “game of chicken” with lawmakers by not holding out for budget cuts and higher taxes, and may eventually need to print money), the G-20 is prepared to take joint measures to stem a global crisis, Brazilian Finance Minister Guido Mantega said. Greece’s securities regulator banned all short-selling on the Athens exchange for two months starting today. Taiwan’s government bought stocks yesterday and this morning through four funds it controls. South Korea’s regulator asked pension funds, brokerages and asset-management companies to step up efforts to stabilize the market. South Korea also bans short selling for three months starting August 10. And lastly, rumors of an emergency Fed announcement are ripe. So... after all this global cartel intervention, is it any wonder that futures staged a near vertical move up overnight?

David Stockman: Fed Practices Chrony Capitalism

By David Stockman

This is part one of a two-part series by David Stockman.

GREENWICH, Conn. (MarketWatch) — Someone has to stop the Federal Reserve before it crushes what remains of America’s Main Street economy.

In the last few weeks alone, it launched two more financial sector pumping operations which will harm the real economy, even as these actions juice Wall Street’s speculative humors. 

First, joining the central banking cartels’ market rigging operation in support of the yen, the Fed helped bail-out carry traders from a savage short-covering squeeze. Then, green lighting the big banks for another go-round of the dividend and share-buyback scam, it handsomely rewarded options traders who had been front-running this announcement for weeks.

Indeed, this sort of action is so blatant that the Fed might as well just look for a financial vein in the vicinity of 200 West St., and proceed straight-away to mainline the trading desks located there.

In any event, the yen intervention certainly had nothing to do with the evident distress of the Japanese people. What happened is that one of the potent engines of the global carry-trade — the massive use of the yen as a zero cost funding currency — backfired violently in response to the unexpected disasters in Japan.

Accordingly, this should have been a moment of condign punishment — wiping out years of speculative gains in heavily leveraged commodity and emerging market currency and equity wagers, and putting two-way risk back into the markets for so-called risk assets.

Instead, once again, speculators were reassured that in the global financial casino operated by the world’s central bankers, the house is always there for them—this time with an exchange rate cap on what would otherwise have been a catastrophic surge in their yen funding costs.

Is it any wonder, then, that the global economy is being pummeled by one speculative tsunami after the next? Ever since the latest surge was trigged last summer by the Jackson Hole smoke signals about QE2, the violence of the price action in the risk asset flavor of late — cotton, met coal, sugar, oil, coffee, copper, rice, corn, heating oil and the rest — has been stunning, with moves of 10% a week or more. 

In the face of these ripping commodity index gains, the Fed’s argument that surging food costs are due to emerging market demand growth is just plain lame. Was there a worldwide fasting ritual going on during the months just before the August QE2 signals when food prices were much lower? And haven’t the EM economies been growing at their present pace for about the last 15 years now, not just the last seven months?

Similarly, the supply side has had its floods and droughts — like always. But these don’t explain the price action, either. Take Dr. Cooper’s own price chart during the past 12 months: last March the price was $3.60 per pound — after which it plummeted to $2.80 by July, rose to $4.60 by February and revisited $4.10 per pound.

That violent round trip does not chart Mr. Market’s considered assessment of long-term trends in mining capacity or end-use industrial consumption. Instead, it reflects central bank triggered speculative tides which begin on the futures exchanges and ripple out through inventory stocking and de-stocking actions all around the world — even reaching the speculative copper hoards maintained by Chinese pig farmers and the vandals who strip-mine copper from the abandoned tract homes in Phoenix.

The short-covering panic in the yen forex markets following Japan’s intervention, and the subsequent panicked response by the central banks, wasn’t just a low frequency outlier — the equivalent of an 8.9 event on the financial Richter scale. Rather, it is the predictable result of the lunatic ZIRP monetary policy which has been pursued by the Bank of Japan for more than a decade now--and with the Fed, BOE and ECB not far behind.

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Japan has been suffering from a real estate asset deflation which followed the collapse of its spectacular 1980’s financial bubble — but not price deflation on consumer goods and services. In fact, Japan’s headline CPI index was 94.1 in 1990 compared to 99.8 during the last quarter of 2010. Thus, during the past 20 years there has been a slight CPI inflation (0.3% annually) — notwithstanding the incessant deflation-fear mongering of the Keynesian commentariat. 

To be sure, Japan’s so-called “core” CPI is down several points during that long period, but by all accounts the Japanese people have been eating, driving and heating their homes for the past two decades on a regular basis. Accordingly, they have paid slightly more for mostly imported food and energy and slightly less for everything else. But the overall consumer price index has been flat, meaning that real interest rates have been zero for the better part of a decade now.

And that’s the evil. Free money has not reflated domestic real estate because Japan’s bubble era prices were absurdly high and can’t be regained, and because Japanese real estate — both residential and commercial — is still heavily burdened with debt which cannot be repaid. Yet market economies — even Japan’s cartelized kind — are not disposed to look a gift horse in the mouth. Free money always finds an outlet, and the pathway of choice has been the transformation of the yen into a global “funding” currency.

This sounds antiseptic enough, but it means that in its wisdom the BOJ has invited the whole world — everyone from Mr. and Mrs. Watanabe to state-of-the-art London hedge fund traders — to short the yen in order to finance speculations in the Aussie dollar, the big iron and copper miners, cotton futures, the Brent/WTI spread, and an endless procession of like and similar speculative cocktails. Yet as the speculators rotate endlessly from one risk asset class to the next they can remain supremely confident that their yen carry cost will remain virtually zero. Yen interest rates will not go up because the BOJ is intellectually addicted to ZIRP, and because, in any event, it dare not surprise the market with an interest rate hike, thereby triggering a violent unwind of the yen carry trades it has fostered

In short, the BOJ is sitting on a financial fault line. The post-intervention rip to 76 yen to the dollar was not the work of a fat finger; instead, it represented a real-time measure of the furies bottled up in the system due to Japan’s foolish rental of its “funding currency” to global speculators. Having long ago urged the BOJ to embrace this absurd monetary policy, it is not uprising that Bernanke and his confederates have come to the rescue—for the moment.

It is only a matter of time, however, before the yen explodes under the accumulated short seller’s pressure, and then the lights will really go out on Japan Inc. In the meanwhile, ordinary people the world around will get less food per dollar from Wal-Mart Stores Inc. (NYSE:WMT)  and speculators, basking in the wealth effect, will have even more dollars to spend at Tiffany & Co. (NYSE:TIF)  

In this context, there can also be little doubt that the Fed is trying really hard to transform the dollar into a funding currency, too. In the name of fighting a phantom deflation, the nation’s central bank has kept interest rates absurdly low—transforming the dollar into a weakling even against the misbegotten Euro, and therefore something which speculators can more safely short.

But just like the case of Japan, there is no sign of CPI deflation in the U.S. Our headline CPI index has gone from 130.7 in 1990 to 218.1 in 2010 — marking a 2.6% annual inflation over the past two decades. And, no, it hasn’t slowed down much during the Bernanke era of deflation phobia.

The headline CPI index has risen at a 2.4% rate in the last 10 years, hardly a measureable de-acceleration; and it has gained at a 2.2% rate in the last five years — a rate at which, as Paul Volcker right observed, the purchasing power of the dollar would be cut in half during the typical American’s working lifetime. Even since the alleged June 2009 recession bottom, the headline CPI has climbed at a 2.1% annual rate.

So there is no deflation — just a simulacrum of it based on the observation that the CPI less food and energy has randomly fluttered around the flat-line on several recent monthly readings. It is not obvious, of course, that the rise of this index at a 1.1% annual rate during the last 20 months of recovery is a bad thing — for at that rate we begin to approach the idea of honest money. But the spurious circular logic of the Fed’s focus on this inflationless inflation index is self-evident upon cursory examination of its internals.

Fully 40% of the CPI less food and energy is owner’s equivalent rent—the one price that is actually deflating and which is doing so precisely due to the Fed’s own policies. Residential rents are falling or flat because the market is being battered with a) millions of involuntary rental supply units owing to the wave of home mortgage foreclosures, and b) an extraordinary shrinkage in the number of rental units demanded due to the doubling-up, and even tripling-up, of destitute households.

Part two of this column will be published next week.

David Stockman is a former member of the House of Representatives and a member of the Reagan administration. He currently owns his private equity fund, Heartland Industrial Partners, L.P.

Fewer Businesses, Fewer Jobs

 Fewer new businesses are getting off the ground in the U.S., available data suggest, a development that could cloud the prospects for job growth and innovation.
In the early months of the economic recovery, start-ups of job-creating companies have failed to keep pace with closings, and even those concerns that do get launched are hiring less than in the past. The number of companies with at least one employee fell by 100,000, or 2%, in the year that ended March 31, the Labor Department reported Thursday.
That was the second worst performance in 18 years, the worst being the 3.4% drop in the previous year.
Newly opened companies created a seasonally adjusted total of 2.6 million jobs in the three quarters ended in March, 15% less than in the first three quarters of the last recovery, when investors and entrepreneurs were still digging their way out of the Internet bust.
Research shows that new businesses are the most important source of jobs and a key driver of the innovation and productivity gains that raise long-term living standards. Without them there would be no net job growth at all, say economists John Haltiwanger of the University of Maryland and Ron Jarmin and Javier Miranda of the Census Bureau.
"Historically, it's the young, small businesses that take off that add lots of jobs," says Mr. Haltiwanger. "That process isn't working very well now."
Ensconced in a strip mall behind a Carpeteria outlet, Derek Smith has been tinkering for two years with a wireless electrical system that he says can help schools and office buildings slash lighting bills. With his financing limited to what he earns as a wireless-technology consultant, he has yet to hire his first employee.

Todd Harrison: They've Declared War on Capitalism

NEW YORK (MarketWatch) -- The capital market machination cracked last week and stopped functioning in an orderly manner.

A few short sessions -- and $1 trillion dollars -- later, many in the mainstream media declared that all is well in the world.
While calmer heads are quick to put the panic into perspective -- the S&P 500 (MARKET:SPX) is a mere 5% from fresh 18-month highs -- the system broke, if only for a short period of time. That, by definition, is a crash.
As I wrote last week, there are a few ways to view what happened, ranging from the obvious to the conspiratorial to the nonsensical. At the end of the day -- and from this day forward -- the takeaway has little to do with the "why" and everything to do with the "what." Read Minyanville's "The 1000-point plunge."
Politicians were quick to declare war on the perceived culprits; German Chancellor Angela Merkel lashed out, saying "speculators are our adversaries" and she's "resolved to win the battle against markets." Senator Chris Dodd, chairman of the Senate Banking Committee, said on Sunday that high-frequency trading created a "casino environment" where "finance is getting detached from the real economy."
To be sure, there is plenty of blame to go around. As we've long posited in Minyanville, the spectrum of culpability stretches from over-extended consumers to institutions that financially engineered the markets to policymakers complicit by acceptance. While the system collapsed during the first phase of the financial crisis and snapped anew last week, those events were not the cause of concern -- they were simply the effect.
Long-time readers of Minyanville understand the causal elements of cumulative imbalances and the societal ramifications of percolating class wars, as well as the potential pitfalls inherent in a finance-based, derivative-laced global economy. Those are among the reasons why we warned of "a prolonged period of socioeconomic malaise entirely more depressing than a recession" in the summer of 2006.

Emergency measures; deja vu!

We've long drawn the distinction between drugs that mask the symptoms and medicine that cures the disease, as well as the difference between a legitimate economic recovery and debt-induced largess.
Over the weekend, taking a page from the stateside playbook, the European Union crafted a $962 billion emergency loan package with hopes of containing the contagion. Read Minyanville's "A Five-Step Guide to Contagion."
While these numbers are obscene -- by some accounts, ten-fold the size of what was expected -- the reality is that this has been the grand plan for nearly a decade, an attempt to buy time and push obligations out on the time continuum. The more things change the more they stay the same; the more they stay the same, the greater the forward risk. Read Minyanville's "Anatomy of a Recession."
Entering September 2008, with $871 billion in corporate debt coming due in the financial complex, we warned that one of two things would happen. Either markets would experience a cancer that spread through industry sectors or the system, as a whole, would experience a cataclysmic car crash.
The U.S. government took a wait-and-see approach before attempting to "buy the cancer" and "sell the car crash." When they finally bit the bullet, passing TARP on October 3rd, 2008, the S&P fell 500 points -- over 4,000 Dow points -- before finding it's footing five months later.
Last Wednesday, when the specter of "proactive" measures by the ECB kept a tentative bid under a very nervous market, we openly asked if the European Union would take the necessary steps to snuff out the fuse of contagion. Read Minyanville's "Will Europe Order a Code Red?"
The next morning, ECB President Jean-Claude Trichet effectively blew off percolating market concerns by adopting a "What, Me Worrry?" attitude at the ECB meeting and the stage was set for the global fret.
It remains to be seen if this new structural backstop will achieve the desired results -- or if it's logistically feasible -- given the European crisis is but one of many global concerns. Let's not forget that U.S. states are in a similarly dire financial condition, as are many of its citizens. And there's the matter of the crash itself.
The question we must wrestle with is one of psychology, which is "why" the events last Thursday pales in comparison to "what" actually transpired.

Unintended consequences

Faith in the system and the credibility of our leaders has long been fingered as the issue at hand for markets at large.
Decisions made in a state of panic tend to have serious repercussions. We witnessed this dynamic evolve during the last 18 months as the unintended consequences of government intervention manifested. From moral hazard to record profits -- and bonuses -- at financial institutions to the attendant class war and shifting social mood, risk wasn't destroyed; it simply changed shape.
What if high-frequency trading actually provides liquidity in the marketplace? It's conceivable that Thursday's 1,000-point swoon was triggered by computerized models "pulling bids" at precisely the same time. If that's the case -- I'm not saying it was, I'm simply posing the possibility -- banning the robots would lead to more, not less, market volatility.
What if "naked CDS" are banned, as we've long suspected might happen? The knee-jerk reaction would likely be a melt-up in the equity space, but we could then see "counter-party contagion" given the $500 trillion dollars of notional derivatives tying the world together.
If you think there was confusion Friday when Mom and Pop couldn't get a handle on their exposure, imagine the domino effect if J.P. Morgan Chase (NYSE:JPM) , Goldman Sachs Group (NYSE:GS) , Bank of America Corp. (NYSE:BAC) , Citigroup (NYSE:C) , and Morgan Stanley (NYSE:MS) suddenly have billions of dollars of unidentified risk.
And what if the reaction to last week's crash causes investors -- many of whom have been burned multiple times during the last decade -- to lose faith in the system, if only for a spell? While psychology can be manipulated for extended periods of time, free will can never be caged. If you doubt that for a moment, read Victor Frankl's "Man's Search for Meaning."
The reaction to the EU Emergency Fund will be entirely more telling than the Fund itself, and while markets feel euphoric thus far this week, there is cause for pause.
According to Jason Goepfert at Sentimentrader.com, there have been six other instances when the market gapped up more than 4%, as it did Monday.
In every single case, the "gap" was eventually filled, and usually very quickly. For purposes of clarity, the downside vacuum in the current marketplace resides under S&P 1,150 (which, if breached, "works" to S&P 1,110) and Nasdaq (NASDAQ:COMP) 1,925 (which, if breached, "works" to NDX 1,850).
While technical context could provide utility in the battle for the few percent, it pales in comparison to the war of words and the monetary mortars flying overhead. Make no mistake, in the eyes of our leaders, the stability and fragility of the global financial markets is a matter of national security and they'll fight to the end to defend their turf.
While speculators and hedge funds are currently in the political crosshairs, widely perceived to be acceptable casualties of the current conflict, the future of free-markets hangs in the balance. Let's just hope that in the quest to win the war on capitalism, we don't lose something entirely more profound in the process.