Analysis: Plunge protection for markets?
By Ian Campbell
UPI Chief Economics Correspondent
Published 3/20/2003 5:15 PM
Eight days ago, the Dow Jones Industrial Average, king of the U.S. stock indices, was at a five-month low, while the euro had risen to $1.10, its highest level against the dollar for more than three years. Then, suddenly things changed.
The Dow began on a rally that would take it up 713 points, or 9.4 percent, in five trading days. The dollar suddenly surged 4 percent, bringing the euro's value down to a little below $1.06.
These surges were somewhat surprising. The first upswing was attributed by some to the possibility that war might be delayed or not happen at all; the second to a belief that the markets were relieved to see war begin and "closure" of the Iraq crisis approach.
"The two reasons contradict each other," wrote London's Evening Standard newspaper, adding that "the explanations do not make sense unless the markets are being rigged."
Rigged? U.S. markets? By whom?
The Standard gives an answer: "Who might want to do that? Well, the U.S. government would. The last thing President George W. Bush needs is for his invasion of Iraq to set off a stock market crash, a collapse in the price of the dollar, a rush into gold or a spike in the price of oil."
How might this rigging be effected? The Standard refers to the so-called "plunge protection team," which it said "consists of the president, the secretary of the treasury, Federal Reserve Board Chairman Alan Greenspan, various other senior administration officials and the leading movers and shakers of Wall Street."
However, according to the remit of the Working Group on Financial Markets, the official name of the grouping, set up in March 1988, five months after the October 1987 stock market crash, its membership doesn't include private-sector officials. The group is chaired by the Treasury Secretary, now John Snow. The other members are Greenspan, the chairman of the Securities and Exchange Commission and the chairman of the Commodity Futures Trading Commission.
The group's initial remit, which does not appear to have been amended, was to examine "the major issues raised by the numerous studies on the events in the financial markets surrounding October 19, 1987."
The group was to "consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible" and "report to the president initially within 60 days (and periodically thereafter) on its progress and, if appropriate, its views on any recommended legislative changes."
In 1999, the group recommended changes in legislation governing financial derivatives markets.
If the group were to act to reverse trends in markets, which doesn't appear to be within its remit, how might it do so? The Standard has suggestions.
It writes: "Last week, and again precisely at 3.30 p.m. yesterday, massive selling undermined the euro on the currency markets and made the dollar correspondingly stronger. To the minute, there was similar sudden heavy selling on the gold market."
The Standard also suggests there was intervention in stock markets: 3M, which "accounts for more than 10 per cent of the Dow's value," The Standard writes, "has seen huge volume in recent days."
And so did the U.S. government intervene "massively" in markets as The Standard implies? Might there be another explanation for the sharp changes in trend? We think there might be.
On March 13, the day the rally began, United Press International and no doubt many investors received a piece of research from the London office of JP Morgan, an investment bank, entitled "Global credit survey shows record shorts."
Every two weeks, JP Morgan surveys clients, asking them about their positions in the market. "When investors report being very long, it is often a sign that there is not much buying they can do, and a sell-off is on the way. Conversely, when they are very short -- as last October -- the market has often gone on to rally."
The latest survey showed investors were heavily short -- that is to say, with their cash out of the market or playing for a fall in markets. They had "the shortest overall positions since the survey began at the beginning of 2001," the report writes.
This was, according to JP Morgan, a "bullish signal."
What JP Morgan's research suggests is that the recent rally was typical of the ebb and flow of financial markets. Investors had become more and more negative because of poor news on the U.S. economy and the threat of war. They had sold until, at the prevailing prices, they were reluctant to sell more -- and some began to see what they considered bargains.
Another phenomenon reinforces the buying. Seeing the rally, some investors who hold short positions are forced to buy to prevent themselves from making losses. The shorts are burned. The smell can be pungent and irritating. Those who have lost money might well be tempted to find a conspiracy theory.
This, at least, is how we would tend to see it. It is unlikely in our view that the Working Group would have intervened in the markets to change their course, which would be a very unfortunate step.
With its ultra-low interest rates and frequent resort to fiscal stimulus, the United States is beginning to resemble Japan quite enough.
But the group's workings seem shadowy. There is little information on it and its activities.
UPI has written to the Federal Reserve, asking it to confirm that representatives of, for example, Wall Street banks, do not attend meetings. It would also be useful to receive confirmation that the Fed would not intervene in the stock market. Perhaps an enterprising congressman might like to ask Snow or Greenspan for confirmation of this.