Jim Grant: "The Fed Is Now In The Business Of Manipulating The Stock Market...Should Confess It Has Sinned Grievously"
Jim Grant, who will never be accused of being a fan of the Criminal Reserve, and whose views on what will happen to asset prices in a printer-happy world are gradually being validated, appeared on Bloomberg TV, telling Margaret Brennan upfront that Bernanke owes the world an apology. Alas, after various revolutions around the world have been catalyzed by Bernanke's policies, we have a feeling that ever more oppressed people will soon see the Printer in Chief as a patron saint of violent revolution, alas against crony regimes fully supported by the US (and hopefully the US will view it the same way when its time comes). That aside, Grant's criticism of the Fed should really start to grate on the Chaircreature: "I think what would be very good for the Fed if there would be a confession, the Fed should confess that it has sinned grievously, and is in violation of every single precept of its founders and every single convention of classical central banking. Quantitative Easing is a symptom of the difficulties that the Fed has created for itself. The Fed is running a balance sheet which if it were the balance sheet attached to a bank in the private sector would probably move the FDIC to shut it down. The New York Branch of the Fed is leveraged more than 80 to 1.Meaning, that a loss of asset value of less than 1.5% would send it into receivership if it were a different kind of institution...The Fed is now in the business of manipulating the stock market." Jim also has some very critical discussions on how the Fed never settles up on the $3.4 trillion in custodial debt on its books. As always, we can't get enough as more and more mainstream figures turn to bashing that biggest abortion of modern capital markets.
Full interview
http://www.zerohedge.com/print/297995
Audio
Grantham:
Fed Manipulates Stock Market to Boost Economy
Thursday, 11 Nov 2010 08:53 AM
By Dan Weil
The Federal Reserve is rigging the stock market to boost the economy, and the consequences may be dire, says Jeremy Grantham, chairman of Grantham Mayo Van Otterloo.
When it comes to stocks, “What I worry about most is the Fed’s activity,” he tells CNBC.
“QE2 is just the latest demonstration. The Fed has spent most of the last 15-20 years manipulating the stock market whenever they feel the economy needs a bit of a kick.”
The Fed knows its easing will have little direct impact on the economy, Grantham says. “The only weapon they have is the wealth effect,” he argues. “If you can drive the market up 50 percent, people feel richer, they feel more confident.”
Academics estimate that people spend about 3 percent of the total stock market gain. That means last year’s 80 percent gain in the market boosted GDP by about 2 percent, Grantham says.
“That’s a real kicker, though you don’t see it because of the enormous drag of the housing market.”
But, “The problem is they step away as the market gathers steam and resign any responsibility for moderating a bull mark that may get out of control,” Grantham says.
Grantham also explains why the Fed-stimulated boom-bust cycle is coming to an end.
"In 2000 the Fed had a good balance sheet and the government had a good balance sheet. in '08 it was still semi-respectable, and now it's not. It's not very respectable at all," Grantham says. "So what are they going to use as ammunition if they cause another bubble and it breaks in a couple of years? Then we might have some real Japanese experiences."
Pimco CEO Mohamed El-Erian also criticizes QE2, but for different reasons. “QE2 (isn’t) good in getting us out of a world of low growth and stubbornly high unemployment,” he tells The New York Times Video.
“We need QE2 as part of something much bigger.”
© Moneynews. All rights reserved.
Read more: Grantham: Fed Manipulates Stock Market to Boost Economy
Jan. 5, 2010, 5:47 p.m. EST
TrimTabs suggests government manipulated stocks
Analysts say government's financial rescues have fueled conspiracy theories
By Nick Godt, MarketWatch
NEW YORK (MarketWatch) -- The unusual circumstances that led the U.S. market to rally powerfully in 2009 might be explained by secret government moves to buy stocks, according to Charles Biderman, the founder and chief executive of TrimTabs, a research firm that tracks liquidity flows in the market.
"We cannot identify the source of the new money that pushed stock prices up so far so fast," Biderman said in a statement Tuesday.
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The source of approximately $600 billion net new cash necessary to lift the market's overall capitalization by $6 trillion last year could not be identified by TrimTabs, Biderman said. The money, he said, didn't come from traditional players such as companies, retail investors, foreign investors, hedge funds or pension funds.
"We know that the U.S. government has spent hundreds of billions of dollars to support the auto industry, the housing market, and the banks and brokers. Why not support the stock market as well?"
The Federal Reserve or the Treasury, Biderman said, could have easily manipulated the stock market by purchasing $60 to $70 billion worth of futures of the S&P 500 Index (SPX 1,276, -23.20, -1.79%) on a monthly basis.
Conspiracy theories on the rise?
Market analysts, however, were quick to debunk the theory. Yes, the government had a heavy hand in rescuing the financial system and the economy as the system started collapsing in late 2008 and throughout 2009. But the huge boosts of liquidity through the system found their way to stocks by the usual means, they said.
"The idea that this is magic is nonsense," said Barry Ritholtz, market strategist at Fusion IQ and a market veteran. "This was a normal behavior in a recessionary bear market. We saw the Dow plunge 5,000 points in 6 months, which had never happened before and created a dramatically oversold market."
Yes, the Federal Reserve slashed interest rates to near zero and Congress allowed banks to keep their bad loans off their books, allowing them to pretend they were solvent, he said.
But "you can't short stocks when the Fed is at zero," Ritholtz said. "Our own institutional clients came on board" as did other big institutional investors, he said.
Conspiracy theories about the so-called "plunge protection team," or PPT, have been on the rise ever since the U.S. government started to bail out financial institutions in late 2008 under the administration of then-President George W. Bush, according to Dan Greenhaus, market strategist at Miller Tabak.
The PPT is a nickname given by some to a group established by President Ronald Reagan in 1988 after the 1987 stock crash to coordinate governmental response to market meltdowns.
Noting that the Fed has been buying Treasurys and mortgage-backed securities to keep interest rates low and support the economy, even firms such as Sprott Asset Management have started to accuse the U.S. government of running a Ponzi scheme.
"There's a lot of backlash against the government right now and the hate for the Fed has gone into overdrive" in some corners, Greenhaus said. "The fact that the government stepped into the abyss [angered] a lot of people, and the fact that things are better a year later flies in the face of some long-held beliefs about free markets."
As to the scale and power of the 2009 rally, it actually trailed previous recoveries from bear markets, according to research from Miller Tabak.
"While the absolute percentage gain off the recent lows has been more powerful than anything since the Depression era, there is no denying that historical rallies in the equity market have recouped a greater percentage of the declines from the highs," Greenhaus wrote in a note.
The stock market, as measured by the S&P 500, plunged nearly 57% from its 2007 highs until it reached lows in March of 2009.
But even after rallying 58% in the seven months after the March lows, the market remained 31.5% off of its 2007 highs. That's nearly the same amount recovered during the market rally of 2003, as the market began to recover from the bursting of the tech bubble.
In other instances, such as 1975, 1962 and 1938, the market had actually recovered a much bigger portion of its losses seven months after hitting lows. And in 1983, it was actually 7.3% above its previous highs.
Nick Godt is MarketWatch's markets editor, based in New York.
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