Tuesday, January 01, 2013

Will the Next Bear Market be a Planned Event or a Failure of Central Planning?

Ironically, the very success of stock market manipulation only thins the market of legitimate participants and thus increases the probability that risk that has been suppressed for years will erupt uncontrollably.

Longtime correspondent B.C. recently shared some provocative thoughts on the nature of the next Bear Market. Bear markets are often defined as a decline of 20% or more from recent highs.

Alternatively, others look at long periods of subnormal returns as secular Bear Markets. For example, if officially measured inflation has reduced purchasing power by 35% since 2000, and total stock market returns (dividends plus appreciation) are 15%, then the real return of "buy and hold" is a negative 20%--a Bear Market by any reasonable metric.

That the stock market is manipulated is no longer in question. One explicit goal in the Fed's zero-interest rate policy (ZIRP) is to drive capital into risk assets such as stocks. That is a first-order, transparent policy of manipulation, i.e. a centrally managed policy aimed at managing markets to meet a key central-planning goal: creating an illusion of prosperity via an elevated stock market and the resultant "wealth effect" for the 10% who own enough stocks to matter.

Indirect manipulation is hidden from public view lest the rigging of the market taint the perception that a rising market is "proof" that Federal Reserve and Administration policies are "succeeding." Indirect manipulation is achieved via Federal Reserve quantitative easing operations, unlimited liquidity and lines of credit to fund bank speculations and masked buying of market futures.

This multilevel manipulation creates a Boolean either/or for any Bear market:either it is a planned "panic" that profits the banks or a systemic failure of the orchestrated campaign of market manipulation.

Here is B.C.'s commentary:
Consider the possibility that the banksters now effectively control the stock market in ways never before possible, using the NY Fed acting in concert with the dark pools, offshore shell companies and pass-through entities, PTFs, and high-frequency trading (HFT) via the for-profit exchanges.How much would it "cost" the primary dealers to manage the markets using leveraged derivatives, assuming a complicit counterparty or counterparties? 
Hypothetically, if the banks wanted to keep the SPX to no lower than, say, 3% to 7% of the 200 dynamic moving average (DMA) indefinitely, thereby keeping the 200 DMA in a steady uptrend, what would it cost? A few tens of billions at the margin?
If one or more parties could leverage 10:1 futures and then 10:1 again with options, it would cost a small fraction of banks' ~$13 trillion in assets and $1.7 trillion in cash assets. 
One can at least envision the possibility of banks continually leveraging of futures and options on futures, rolling the positions forward while keeping sufficient amount of incremental liquidity to further lever long as required. 
We can infer that if Wall Street banks wants the market to go down because it's the best opportunity for them to make money given the alternatives, a bear market will occur; but it will be blamed not on cyclical factors, overvaluation, etc., but on some other perceived "exogenous" factor, such as the "fiscal cliff", war, "policy mistakes", etc. 
Yet with the banksters having directed Bernanke to explicitly talk up the stock market for more than three years, even specifically referring to the Russell 2000 (small-cap stocks) as a benchmark, to expect that a bear market will occur is by definition to assume that (1) the banksters will act in some manner to allow, or cause, a bear market; or (2) their efforts will fail to prevent one, risking their credibility and legitimacy. Given the hyper-interventionism and expectations management, one is left to assume that the banksters have the capability to prevent a bear market until proven otherwise. 
But without a bear market, valuations will not improve enough to permit a future return that warrants the 35-50% cyclical drawdown risk in the meantime.
How does one trade, speculate, or allocate assets in an environment where one is like a conspicuous, slow-moving target in a shooting gallery for the HFT and PTF sharpshooters, or one's assets are hardly more than part of a slush fund for fee scalpers who add no value to the economy or society?
Thank you, B.C. for explicating the conundrum facing the manipulators: if they never let the market decline, the resultant modest appreciation and low yield does not provide an attractive risk/return given the possibility, however remote, that the market could escape the control of the Fed and banks and plummet by a third or a half.

The loss of credibility and legitimacy any serious decline would trigger could launch a positive feedback loop where buyers who have been trained by four long years of manipulation to "buy the dip" would lose faith if their buying was rewarded with sustained losses.

This means the manipulative Powers That Be must tread a precarious path between a Bear market sell-off that creates buying opportunities for themselves and a decline that escapes their grasp as a loss of faith in the manipulators' control triggers an avalanche of selling.

We can surmise that a manipulated sell-off will have a V-shape: a steep decline that triggers widespread stops and margin calls, followed by a sharp recovery as the manipulators buy the dip they enabled. Ideally, the sell-off would fail to reward buy-the-dip buyers, causing traders to sell to waiting hands. Perhaps the November sell-off was just such an orchestrated decline and recovery.

A sell-off that gets away from the manipulators would likely be characterized by failed rallies and high-volume selling as money managers bail on risk and the perception that the manipulators are not God-like in their powers.

If the markets are well and truly captured by the banks and officially sanctioned manipulation, then any sell-off will be limited. Ironically, the very success of the manipulation only thins the market of legitimate participants and thus increases the probability that risk that has been suppressed for years will erupt uncontrollably.

The after-effect of a Bear that escapes the Fed/bank Zoo is a market that has lost the legitimacy of a truly free market and the credibility of a centrally managed market. It will truly be a dead-zone market, abandoned by all but the bank/central planning manipulators and day-traders.

My new book Why Things Are Falling Apart and What We Can Do About It is now available in print and Kindle editions--10% to 20% discounts.

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

go to print edition1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economyComplex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).
We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

10% discount on the Kindle edition: $8.95(retail $9.95)       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)

Thank you, Robert P.($5/month), for your superbly generous subscription to this site -- I am greatly honored by your support and readership.Thank you, Cheryl & Jim S. ($5/month), for your wonderfully generous resubscription to this site --I am greatly honored by your ongoing support and readership.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.

Our Privacy Policy:
Correspondents' email is strictly confidential. The third-party advertising placed by Adsense, Investing Channel and/or other ad networks may collect information for ad targeting. Links for commercial sites are paid advertisements. Blog links on the site are posted at my discretion.

Our Commission Policy:
Though I earn a small commission on Amazon.com books and gift certificates purchased via links on my site, I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by Ourblogtemplates.com 2008

Back to TOP