July 25, 2009
Here's a wild speculation on the stock market and the real economy: the Powers That Be have engaged in a covert but easily visible wild speculation.
Bear with me while I speculate wildly about an unprecendented campaign of wild speculation by The Powers That Be.
The U.S. economy is at a cross-roads. Either it is exiting the recession and about to resume its glorious path of "growth" or it is teetering on the abyss.
If you were the Powers That Be--those holding the reins of political power and those making hundreds of millions in Wall Street bonuses--which alternative would you prefer? Which one would you throw your weight behind?
Duh--you'd be working every covert and PR lever possible, and inventing many new ones, to push the idea that the recession is over so spend, spend, spend.
Now here's the first thing we have to understand: borrowing $200 billion at zero-interest and dumping it into the $12 trillion U.S. economy is akin to spitting in the wind. The Bush-era "stimulus" of around that size just vanished sight unseen, barely registering in the economy at all.
But $200 billion dumped into stock market futures and churned in program trading and high-frequency trading has enormous leverage. While the total value of the U.S. stock market is in the $10 trillion range (down from $15 trillion at its 2007 height), only a few percent of the total outstanding shares trade hands each day.
But by buying futures contracts and churning via program and high-frequency trading--essentially buying from oneself or others in your manipulation game until other traders join in the bogus rally--the leverage is greatly increased. Thus a mere $10 billion thrown in relentless buying of futures contracts can spark a huge rally.
Before the Internet era, technical analysis was a black art of charting done by hand. Now every punter and middle-class owner of a 401K or IRA has access to thousands of charts displaying dozens of indicators and models. Everyone has access to data which was once limited to the exchanges and large brokerage houses.
Now that everyone see the same indicators and data, guess what becomes much easier: manipulating the market. Just two weeks ago, the mainstream financial media was filled with stories about the supposedly ominous "head and shoulders" chart pattern. In the past, H&S patterns were never mentioned in the MSM except in commentaries by market technicians. For Technical Analysis to have spread to the headlines is noteworthy.
Why? If you set out to manipulate the market higher, this makes your job much easier. Now that everyone "knows what to look for," then all you have to do is engineer a rise to certain levels which triggers "buy signals" that will be screamed and trumpeted in one media venue after another.
Want to engineer a rally behind the scenes? It's easy:
1. Kick-start a rally with massive buying at the open of the market day. Counter every bout of selling with massive buying of futures, and then "paint the tape" with more buying in the last 15 minutes. Then buy thousands of futures contracts at higher bids in the after market to set expectations that the rally will continue the following day.
2. As everyone who holds bets that the market would decline (shorts) has to buy back the stock they shorted, then this adds buyers (albeit reluctant ones) which further boosts the "Bull rally."
3. Do this for 10 days in a row, so the MSM can make fawning comparisons to previous "bull runs" in previous "Bull markets."
4. Identify key "technical signals" and then trigger them so the MSM can pump up this "proof that the Bear is dead and the recession is over." Recently, there was a frenzy of MSM coverage of the "bullish cross" in which (on at least some charts) the moving averages crossed in a "we're going higher" signal.
Other "buy" signals which have recently been triggered include "a new yearly high" for all the indices and a "Dow Theory Buy" as the Dow Transports and the Dow Industrials both logged new annual highs.
Seen in this light, sparking a Bullish frenzy is like taking candy from a baby. And most amazingly, it doesn't take much money to do so because the leverage offered by futures contracts and high-frequency trading is so extreme.