``Looking back, policymakers of all stripes missed their opportunities to make tough but necessary decisions in 2009. And now 2010 just doesn’t have the feel of a year that will witness a lot of decisive policymaking. In Washington, the focus will turn to the 2010 elections. The Fed will worry about its reputation and independence. Fearing for their jobs and fearful of mistakes, timid will win over bold. Bubbles treasure timid.”-Doug Noland, Issues 2010
At the start of the year, a friend asked, where I thought the local stock market is headed for in 2010. When my reply wasn’t in a definitive, I was asked instead where I FELT the market would go. Not satisfied in dealing with matters most- an analysis of the risk reward tradeoffs-I was expected to reply in the reductio ad absurdum or a confirmation of a preconceived bias.
And this is why Warren Buffett’s pejorative of stock forecasters becomes a reality, ``We have long felt that the only value of stock forecasters is to make fortune-tellers look good”. That’s because it has been a propensity for the public to reduce the role of financial market investments into intuitive based pulsating adrenalin based fortune telling “punts”, i.e. the euphemism for gambling.
Well, in dealing with markets most people deserve their fate.
Making New Year’s projection would have been evident from our notes of late last year. You can check out Following The Money Trail: Inflation A Key Theme For 2010, where we argued that inflation will be a concern for the year or How The Surging Philippine Peso Reflects On Global Inflationism where we argued for the case of a stronger Peso and a higher Phisix.
Nevertheless while it is easy to say or to get wedded to the notion or be overwhelmed by the bias that the Phisix will likely be significantly higher and that the Peso might be materially stronger, we might fall into a Pollyannaish trap without taking into consideration of what might preclude this from happening.
Market Extraordinaire
For starters, one must realize that last year, hardly anything that operated in the markets seemed traditional or conventional. Said differently, the market sailed in uncharted waters.
The fundamental distinction from the tradition market behavior had been the extent of concerted and coordinated inflationism engaged by global governments.
Data provider and research outfit Trim Tabs recently decomposed the buyers of the latest rally in the US markets and found little proof of mass public participation (see figure 1).
Figure 1: Fool.com/Trim Tabs: Who’s Buying This Rally?
This is why the “desperately seeking normal” camp has utilized myriad justifications for declaring the market’s unsustainable trend, such as a low volume or sponsorship (John Hussman), low cash levels of mutual funds (Claus Vogt), or even worst cycle for dividends (Floyd Norris) [But unlike the others, Mr. Norris makes a spin that a sharp plunge in dividends may translate to a sharp recovery] to many other issues mostly focused on valuations (e.g. Vitaliy Katsenelson).
Little have these experts noticed that government policies of printing colossal waves of digital and paper money would have an impact to the markets, had to go somewhere or find something to exchange for and would affect the markets and the economy unevenly. One analyst even called “inflation” as “secondary” concern.
In short, the basic flaw wasn’t only to underestimate on money’s neutrality but to greatly discount the incentives of the policymakers that prompted for such policy actions.
Value Scale Of Authorities: Banking Gets The Priority
Importantly, the obvious policy priorities of global authorities, especially in the US have been to rescue and ensure the survival of its banking system. The US and European governments have spent and guaranteed some $15 trillion (Bloomberg) of commitments or liabilities! This signifies as more than two fifths of the combined economy.
For anyone to argue that these governments have been devoting their efforts to mitigating economic woes (such as unemployment) have severely been misjudging the scale of values of those in power.
And this also has been evident with a shift in the model of the banking system from one providing traditional “loan services” to a “Banker as Trader” business model, where major banks have seen profit windfall from arbitraging financial markets that have been heavily massaged by the US government.
In 5 Reasons Why The Recent Market Slump Is Not What Mainstream Expects, we have discussed why most of the financial markets have been dysfunctional to price market based risks.
We said that…
1. By manipulating the mortgage markets and US treasury markets with the explicit goal of lowering interest rates, in order to ease the pressures on property values and to mitigate the losses in the balance sheets of the banking system,
2. By working to steepen the yield curve, which allows for conducive and favorable trading spreads for banks to profit and to enhance maturity transformation aimed at bolstering lending, and
3. By providing the implicit guarantees on ‘Too Big To Fail’ banks or financial institutions, this essentially encourages the revival of the ‘animal spirits’ by fueling a run in the stock markets.
Let me add that by implementing quantitative easing programs, the US government has fundamentally been subsidizing her banks by absorbing the toxic assets of the banking system allowing for the cosmetic enhancements of their balance sheets.
Next, by juicing up the equity markets, the US government has attempted to unleash the “animal spirits” in order for the market to abet on the financing of equity to the capital dispossessed banking and financial industry.
And like hitting two birds with a single stone, such unprecedented scale of market manipulations attempts to paint a picture of recovery and allow for the redeployment of stashed capital at the expense of savers.
In other words, the incentives to manipulate the financial markets to attain stabilization of the banking system appear commandingly superior to any other concerns.
Ergo, the markets of 2009 behaved in terms of the impact from political policies, as we correctly predicted in November of 2008 [see Stock Market Investing: Will Reading Political Tea Leaves Be A Better Gauge?], and believe that such dynamics will remain in operation for 2010, as we asserted in Investment Is Now A Gamble On Politics.
How does the US government manipulate the stock market? Perhaps through the Presidential Working Group On Financial Markets, an ad hoc group created in March 18, 1988 via Executive Order 12631 by President Ronald Reagan “established explicitly in response to events in the financial markets”, possibly channeled through the S & P futures.
As Zero Hedge’s Tyler Durden suggests, ``One way to manipulate the stock market would be for the Fed or the Treasury to buy $20 billion, plus or minus, of S&P 500 stock futures each month for a year. Depending on margin levels, $20 billion per month would translate into at least $100 billion in notional buying power. Given the hugely oversold market early in March, not only would a new $100 billion per month of buying power have stopped stock prices from plunging, but it would have encouraged huge amounts of sideline cash to flow into equities to absorb the $300 billion in newly printed shares that have been sold since the start of April.”
Of course, manipulation of the stock market would be speculation on our part. But the underlying incentive seems credible enough to suggest that such conjecture could be for real.
