Saturday, February 9, 2013

Manipulating the Markets

Are you confused about the markets? Richard Russell of the Dow Theory Letters (sub. req.) says you are right to be confused. In his view the so-called "free market" is being subjected to serious manipulation.

Yesterday he summed up the situation:

Seasoned investors are not in love with the current bond or stock markets. The reason is that they know the markets are "rigged" or manipulated.

For instance, at present the Federal Reserve is -- 

(1) Manipulating the bond market by buying $85 billion worth of bonds a month.

(2) Manipulating interest rates -- keeping rates low -- by buying bonds, thereby boosting the price of bonds, which in turn, pressures interest rates to lower levels.

(3) By keeping rates low, the Fed is manipulating (pressuring) investors by forcing them to buy stocks (in buying stocks investors hope to capture dividends and at the same time create profits through rising stock prices).

Because of the widespread manipulation, many investors prefer to stay out of the markets (they fear the Fed might suddenly back out of its manipulation game). After all, the Fed's balance sheet is over $3 trillion dollars, and that must worry Bernanke and the Fed's voting members. 

How long can they keep it up? Your guess is as good as anyone else’s. One thing is clear: you do not want to be holding any of these “assets” when the Fed takes away the juice.


Anonymous said...

Great story, if only we knew what a non-manipulated market looked like. This story for me explains the adage "Don't fight the Fed", and that makes this conclusion complex "One thing is clear: you do not want to be holding any of these “assets” when the Fed takes away the juice."

Basically when the Fed stops juicing the markets, you can be sure we'll have much bigger problems to worry about than what your investments are worth.

The more interesting question to me is the inflation/deflation debate, but it seems as long as we have sovereign debt, it can all be "printed" away, so inflation will take all wealth in the long run, but in the short run, there may be periods of deflation (like real estate) where proper cash-holdings can buy a lot more than at present.

I accept the assessments that Europe will set the path since their problems are harder to delay indefinitely. But here in the US state budgets like California will also show us the future before it happens to all of us.

For me "retirement" someday means not having debt, and reducing needed expenses. What most bothers me is there's no end to retirement fears, no amount of money you can accumulate to feel "safe" you can retire on anything close to your peak income. It's better to be ready to downsize, or never rise too high in the first place!

JP said...

"How long can they keep it up? Your guess is as good as anyone else’s. One thing is clear: you do not want to be holding any of these “assets” when the Fed takes away the juice."

The answer is that they can keep it up until commodity inflation becomes too painful to continue, at which point, they will step off the financial accellerator and we get another bear market.

Bonds are basically dead money at this point and stocks are being supported by the Fed, et al, pumping money.

I just bet on the Fed doing the wrong thing for too long until something bad happens and they have to pull the liquidity.

2013 looks pretty boring (meaning a steady up market).

I've been sitting in 0% cash just waiting to see if we get another commodity spike.

Jim said...

Warren Buffett once said that the worst place to have your money for a long period of time is cash. I suspect many of the more timid readers at this site missed out on the bull market that started in stocks in 2009. Even today, stocks are priced at good fundamentals with respect to earnings and dividends. Profits drive stock prices and productivity improvements and innovation drive profits. Opportunities abound and even our most obtuse government officials can't stop them. All you scared rabbits who keep your money in cash and gold waiting for the end of the world will look foolish - even if you are right, which odds are, you aren't.

Stuart Schneiderman said...

True enough, anyone who bought at the 2009 lows has done very well. On the other hand anyone who bought the Dow in 2007 would still be showing a loss. The price of gold in 2007 was between 700 and 800.

Curb your enthusiasm!

Jim said...

The S&P 500 is close to its 2007 high and with dividends reinvested, has shown a small profit. While investing 5% of your $ in gold is prudent, over the past 30-35 years gold has been a dysmal investment compared to stocks. Indeed, over your lifetime, blue chip and growth stocks have been the best investment with the least risk. What is so different now than then?

Stuart Schneiderman said...

If you compare the performance of the Dow or the S & P beginning in 1999/2000 with the performance of gold over the same period there's no comparison. It's not even close.

Beware conventional wisdom.