Black Swan Over Wall Street
(Conspiracy Nation, 08/11/07) – This is mammoth. It is colossal. Yet most people have no idea of its magnitude. If they notice at all, they notice only that the U.S. stock market ended Friday essentially unchanged.
Economic news is likely to grab more headlines in coming days. “Next week,” stated Peter Cardillo, an analyst at Avalon Partners, “it's all about the economy.” Frederic Dickson, an equity analyst at DA Davidson, agreed: “Keep your seat belts and shoulder harnesses fastened. The ride will remain rough.” (“Investors brace for fresh turmoil,” Sydney Morning Herald, Aug. 11, 2007)
Yesterday, the “Federal” Reserve intervened in an extraordinary manner in the so-called “free markets.” Hoping to provide some comfort that there is ample cash available, the “Federal” Reserve made its largest intervention since the markets reopened on Sept. 19, 2001, after the “terrorist attacks.” The central bank injected $38 billion into the financial system on top of the $24 billion it put in Thursday. (“Central Banks Act To Quell Wild Swings,” Mercury News wire services, Aug. 11, 2007)
Here's how the Fed “injected” $19 billion of that money. Investors are wary of mortgage-backed securities. No one was buying the product offered by financiers. So the “Federal” Reserve stepped up and bought $19 billions worth. This is “the great free market”???????
You have a small business. No one wants to buy the Acme Widgets you offer. You hire Jim Cramer to rant about it. Next day, a man (or woman) from the “Fed” arrives. He wants to buy a large quantity of your widgets! Your business is saved! You smile in relief. Isn't the “free market” wonderful?
In 1994, a strange creature, called a hedge fund, appeared. It was named Long-Term Capital Management (LTCM). By 1998, it was in trouble. It had lost billions of dollars, due to what is called a “Black Swan event.” That happens when you think you have hedged all the bets, but then something totally unexpected – a “black swan” -- ambles up to the roulette wheel and spins double-zero. Well, good old market discipline at that point could have left a cautionary note to future hedge fund entrepreneurs. Instead, the “Fed” arranged a bail-out for LTCM. Message to future hedge fund entrepreneurs: If you make bad decisions, the “Fed” will bail you out.
Yesterday, the “Fed” intervened not once, but three times in a single day! Every time the stock market was down significantly, the “Fed” jumped in. The notorious Plunge Protection Team is small potatoes compared with yesterday's Monster Truck Rally. (http://www.shout.net/~bigred/TreadWater.html)
Aggravating the market volatility is a quite recent change in rules. “The shorts” (those who bet the market is going down) can now operate during market declines. In July, the SEC scrapped a regulation dating back to the 1930s, which restricted short sellers - who bet on falls in share prices. The so-called "uptick rule" meant that short sellers could only trade following a rise in a share price. This is no longer the case, and helps explain dramatic downward pressures. (“Wall Street breathes again as slump eases,” by Andrew Clark. Guardian, Aug. 10, 2007)
“It is generally a feature of any market crisis over the past 20 years,” writes Chan Akya, “that a well-known European bank would announce staggering losses, and then be bailed out by its government.” The most common form of a bailout is a direct rescue that is arranged through the good offices of a state-owned bank. The more indirect route to a bailout is through interest-rate policies. “Former US Federal Reserve chairman Alan Greenspan notoriously invoked the option to cut interest rates on many occasions, helping to thwart banking crises in the US, but creating in its place the asset bubble that now threatens the global financial system.” (“Asia and the vicious cycle of bank bailouts,” Asia Times, Aug. 11, 2007)
Underway now is an apparent “run” on hedge funds, reminiscent of earlier “runs” on banks. As usual, the tendency is to look toward the government to fix things. But incipient “runs” on hedge funds are “Black Swan” territory. There is no roadmap for what lies ahead. The faith now seems to be that increased liquidity is the panacea. But the Fed’s influence is limited when lenders are suddenly risk-averse. “The impetus of lowering interest rates may not help, if they don’t let you borrow in the first place,” said Kingman Penniman, the president of KDP Investment Advisors. (http://delong.typepad.com/sdj/2007/08/paul-krugman-re.html)
We are now, writes Kristina Cooke, in “a weekend of high anxiety.” Next week ought to be interesting for market watchers. How many Monster Trucks does the “Federal” Reserve have? How large will the “Fed” interventions be from Monday, August 13th, through Friday, August 17th? Will the interventions work? Will the interventions make things 10 times worse down the road? Will there be a Black Swan event which completely discombobulates all the bets? If you are awake, then observe the zombies this weekend on your rambles. Feeling alienated? Feeling like, “Don't they see!?” You are not alone.
Conspiracy Nation
http://www.shout.net/~bigred/cn.html