Invisible Hand

It is known that one of the main functions of central banks is to maintain the stability of markets, but does that also extent to directly propping the markets up? Mainstream media and analysts will say of course the central banks don't get directly involved with manipulating the stock market prices, that would amount to interfering with “free” market forces, and that surmounts to rigging the market, that's illegal.

So let's shed some light on the very issue, that mainstream shy away from. Do central banks rig the market?

If we analyse the recent buoyant bounce back in equities, again we see negative divergence in the markets to the maximum, which is when the price of securities go up but the money flow and the fundamentals go in the opposite direction. Negative divergence typically signifies a market top and time to sell.

Recent company results are not bullish, even the most defensive companies, which usually do well in a recession, are reporting poor results. For example, McDonalds profits down 30 percent on a sales slump. It reported a larger-than-expected drop in profits a fortnight ago. Net income for the third quarter fell 30% to $1.07 billion ($1.09 per share) from $1.52 billion ($1.52 per share) a year ago.

“McDonald’s third quarter results reflect a significant decline versus a year ago, with our business and financial performance pressured by a variety of factors – from a higher effective tax rate, to unusual events in the operating environments in APMEA and Europe, to under-performance in the U.S., our largest geographic segment,” said McDonald’s President and Chief Executive Officer Don Thompson. Retailers are also having a challenging time from Walmart in the US, Tesco in the UK and Carrefour in France These are discount retailers and they are all struggling in this extremely challenging business environment. Homebase, the large DIY retailer in the UK, will be closing roughly a quarter of it’s stores by 2018, leading to job losses. Home Retail Group, which owns Homebase and Argos, said that after conducting a review of the DIY chain, it had found “several challenges”, including inconsistent standards across its stores, as well as large stores with low sales. The mainstream like to portray the problem as just a change in fad, a new generation falling out of love with DIY. But the painful reality is that the economy might be going through a reset, the new generation can't find full time stable work, which means they can't secure a mortgage and buy their own property, so they rent. Renters aren't interested in DIY projects and neither are Landlords. This isn't rocket science. 

With respect to “large stores with low sales,” this is a growing problem that retailers are likely to face in the future, particularly those catering for the dwindling middle-class, who are being mashed with job losses, falling real wages and rising taxes. Maybe we will see a rise in the local super discount convenience stores where the consumer frequents several times a week to buy their groceries, a kind of hand to mouth existence.

There's no need to labour the gloom, the question that interests us as traders is what happened to the market on October 15, Wednesday, within just minutes of the market opening the Dow Jones industrial average was down 350 points. Later in the day, after a lot of shocking ebb and flow the Dow bottomed out with a decline of 460 points. It was only in the last hour of trading that the Gods appeared and managed to trim the Dow loss to just 173 points. This happened only after FED Chairman/person Janet Yellen’s private, upbeat remarks about the economy were leaked.

Seasoned traders know that we get storms in October, not just the atmospheric ones, for some reasons stock markets also experience flash crashes. It is no coincidence that crashes and major price corrections occurred in 1929, ’78, ’79, ’87, ’89 and 2008-all were in the month of October. Bizarre but true!

Let's look into this unknown force in the market, nicknamed as the “plunge protection team”, or the “President’s Working Group on Financial Markets,” which is the official name given to the group when it was formed by President Ronald Reagan after the market turbulence of 1989.

So, yes it does exist!

Have you heard about the “Doomsday Book?” The public discovered the existence of Doomsday Book during the AIG trial in Washington, which the government fought to keep secret from the public. A limited audit revealed that 16 trillion US dollar cannot be revealed to the public and yet 4.4 US trillion dollars is only visible on the Fed's balance sheet. More than 11 trillion US dollars remains unaccountable. That is a massive amount of money that is unaudited. Where did it go? What was it used for?

Is the Fed working according to a script in the Doomsday Book?

Certainly an invisible hand rescued the markets during October 15 and it is likely to become a regular occurrence.

Robert Heller, who was a member of the Federal Reserve’s Board of Governors until 1989, proposed just such a rigging as soon as he left the Fed. It would be inappropriate for the government or the central bank to buy or sell IBM or General Motors shares,” Heller wrote. “Instead, the Fed could buy the broad market composites in the futures market.”

So the Fed does indeed prop the markets up. That figures, after all, why would the elites crash a system that serves them so well?

In short, don't gamble on a long term crash, the Gods just won't let it happen.