Markets Tread Water

(Conspiracy Nation, 08/10/07) – After a day of intense drama, the stock market closed essentially flat. The Dow was down about 30, with the Nasdaq also only slightly down. (The S&P 500 stayed about the same.) There was however extraordinary intervention by the “Federal” Reserve, reportedly at three separate times during the day. So-called “liquidity” was injected at a level not seen since September 2001.

Before markets in the U.S. opened this morning, Conspiracy Nation speculated there would be an economic version of a “Monster Truck Rally.” (“Market Monster Rally,” http://www.shout.net/~bigred/MarketMonster.html). In a way, this did happen: “Fed” interventionists wheeled in the monster trucks filled with “reserves as necessary.”

In “Market Monster Rally” (op. cit.), historical background on a previous market intervention was reported. In 1932, President Herbert Hoover had called “plungers” onto the carpet. Mistakenly reported by this publication was that Hoover had acquiesced in return for a bankers' bailout of the crashing bond market. As detailed by Pat Riott (pseudonym) in The Greatest Story Never Told, Hoover in fact did not call off the dogs. Congressional hearings, known as the Pecora Commission, eventually did take place. The Pecora Hearings, according to Riott, “unearthed a treasure chest of facts and information.”

Riott (op. cit.) explains what “plungers” are and how they profit from a sinking market. One “trick was to first buy up a large quantity of a particular stock.” Next, “the stocks were unleashed onto the trading floors in giant blocks.” Usually the in-group merely sold the large blocks of stock to each other. They hoped to scare the general public into dumping their “plunging” shares. The “wolves” finally gobbled up those dumped shares for pennies on the dollar. This technique is also known as a “bear raid.”

In terms of these “bear raid” techniques, it is intriguing that only quite recently have “the shorts” (those who bet the market is going down) been allowed to operate during market declines. This revision of rules has enhanced downward volatility.

In 1932, Hoover apparently had to rely on a “pool” of private bankers to prop up the bond market. At that time, apparently, it was unthinkable that the “Federal” Reserve would intervene in “free markets.” There are different opinions on this: some say it is best that government not intervene, that markets should be allowed to self-correct themselves. At the other end of the spectrum, we have the “Federal” Reserve today exhibiting enormous intervention so as to prevent a “panic.” The “Monster Trucks” were brought in. But the “reserves as necessary” may not prevent the inevitable serious downturn. The “Monster Truck Rally” of today will wear thin sooner or later. Extraordinary interventions cannot be maintained indefinitely.

In the near future, if a severe crash occurs, various congress-persons and senators might briefly curtail their energetic efforts toward the 2008 presidential election. They might launch a congressional investigation into easy-credit schemes which lured in home buyers. They might probe into the secretive hedge funds.

The dust is still swirling in the air following today's market turbulence. We can be thankful it is at least Friday, and we have two days to let the dust settle and try to see things as they are.

Conspiracy Nation

http://www.shout.net/~bigred/cn.html