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[ThatHawaiiGuy]

WHO NEEDS A PLUNGE PROTECTION TEAM ANYWAY?


Chris Temple, Editor
The National Investor
www.nationalinvestor.com

As the current rally on Wall Street has continued to make ground meat out of the market's bears (including Yours Truly to some extent) some particularly ornery bears are blaming the Fed's "rigging" of the market to force it higher. Specifically, some have pointed to what has been dubbed the "Plunge Protection Team" as a significant source of the market's recent behavior. Far from acting to support a declining market, they say, the PPT has itself been buying stocks to force them higher and, inevitably, pull in unsuspecting investors who are buying again, and chasing stocks higher still.

There may be some small grain of truth to these allegations. However, much more at work is the age-old tool of propaganda.

The official name of what many have labeled the "Plunge Protection Team" is the President's Working Group on Financial Markets. It was created by former President Reagan's Executive Order 12631, which he signed on March 3, 1988. This followed the October, 1987 Crash of the stock market, and was ostensibly designed to keep similar, sudden plunges from happening again.

The members of this group include the President, the Secretary of the Treasury, the Chairman of the Federal Reserve, the Chairman of the Securities and Exchange Commission, and the Chairman of the Commodity Futures Trading Commission.

Together with the institution of so-called "circuit breakers" on Wall Street-where program trading is either limited or suspended if the market moves up or down by a certain amount-the PPT's goal is to keep huge, short-term swings from happening. You may recall that the technical reasons given for the 1987 Crash were that there were no such mechanisms in place to support stocks; when everyone ran for the exit doors at once, there was simply no viable floor to stabilize the market. I doubt the PPT thinks that it can thwart trends in the markets; and that is evident given the stock market's nearly three year decline since early 2000. Among other things, I think that they hope "smoothing out" trends will cause less trouble for markets than if they were allowed to follow their natural course and unravel (or soar higher) all at once.

Just as important (if not more) is what is called the Exchange Stabilization Fund. This is essentially a fund authorized years ago by Congress over which the Treasury Department exercises ultimate authority, though I believe hand-in-hand with the Federal Reserve. Though I have no ready facts on which to base this, my impression is that, over the last several years, the ESF has been regularly employed where the value of the dollar and the level of Treasury securities is concerned. As its name implies, the ESF is intended to keep similarly sharp swings in the dollar's exchange rate from upsetting markets one way or another, just as the PPT supposedly does where stocks are concerned.

There are some in Congress who have sought to shed light on the actual transactions that the ESF has engaged in from time to time. Specifically (though this is not the only example) some think that the Fed's intervention in late September-early October, 1999 to cap a soaring gold price was done via the ESF. As you know, however, neither Treasury nor the Fed have never been forthcoming about this. Without a large enough number of Members of Congress pressing the issue, it's gone away.

In talking about whether the Fed (after all, it is the entity of all these which has in the past, and would in the future, orchestrate such endeavors) "rigs" the markets in any way, I often refer to Japan. That nation's central banking authorities have never made any secret of the fact that they actively intervene in supporting their markets, including the Nikkei. It's become a common ritual each Spring, for example, to hear that Japan has bought truckloads of shares on the Nikkei in order to goose it to a higher level for the end of the country's fiscal year. That allows a variety of institutions (especially banks) to record higher year-end values for their portfolios, and postpone the day when many of them have to inform the world that, yes, they are insolvent.

The Fed has never admitted to this; however, several months ago, it did hold out the possibility that it could intervene even in the stock market if it saw fit.

To some extent, I think the PPT has received more credit (or, if you prefer, scorn) than is warranted. Sure, I believe it has acted from time to time; those days even recently when a directionless market trading on relatively low volume suddenly saw buy orders relating to indexes come out of nowhere to push things higher. But let's think about all this for a minute, and in the context of the current behavior of the stock market and its legions of adherents.

I tend to think that the Establishment's overall propaganda machine is far more effective in getting investors themselves to do the Fed's bidding. Look at the economic backdrop currently. A good portion of the "growth" in the economy is courtesy of soaring government spending (and debt) which can only be bad news longer-term. Nearly three million jobs have been lost since 2001. Corporate America has made it clear that millions more will be shed over the next decade as white collar, technology, financial and similar positions are outsourced to countries like India. Consumers are in debt up to their eyeballs. The staples of life-such as food, energy, health care, local taxes-are rising in cost far more rapidly than the government's published inflation rate. Long term interest rates have seemingly bottomed, and their recent rise has squashed new mortgage and refinancing application rates. Last but not least, the world has become an increasingly dangerous place, perhaps even more so now by our occupation of Afghanistan and the Middle East.

Little of this matters to investors, however. Their cheerleaders on CNBC and elsewhere have seemingly convinced a growing number that good times are about to roll again. The Fed has made clear that it will keep monetary policy accommodative for virtually the rest of our natural life spans. Stocks are going up; and for this reason alone, they must go higher! Heck, if they have to, the Fed will shower each household in America with extra cash for the explicit purpose of buying stocks.

One of these days investors will again magically wake up to the fact that one or more of these dangers I've mentioned argue against the bullish tenor on Wall Street. For now, however, many have again been hypnotized by the Establishment's soothing refrain that all is well with the economy again. With Wall Street's shills so successful currently in convincing investors that none of these worrisome developments matter, who needs a Plunge Protection Team?



-Chris Temple
www.nationalinvestor.com
September 3, 2003

(NOTE: Chris has just completed a comprehensive update on the gold sector which, among other things, includes a look at gold’s fundamentals, investment demand, the future monetary role of gold, how to select viable gold companies for investment/trading purposes and more. As an introduction to The National Investor, he’s offering a FREE COPY to our readers; to get yours, send a request via e-mail to [e-mail].)


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