Since last Friday’s blog post revisiting my ongoing speculation about the government buying stocks, I had dinner with a friend who once again characterized such a thought as “crazy.” And the chorus continues to grow of people who have said over the past year that it’s unconceivable that such an action could escape detection and publicity. Frankly, that lack of publicity surprises me as well and remains the biggest stumbling block to my making a more confident assertion of government interference.
As I have in each prior post, I acknowledge that I have no proof of such an intrusion in the equity markets. There is also the possibility that supportive actions which might be interpreted as governmental in origin could be coming from very large trading interests with a stake in keeping stock price momentum positive. As I mentioned in Friday’s post, however, there are not many organizations with the buying power needed to move markets.
Why still suspect government? We know they have a motive. Former and present Fed governors have pointed to rising stock prices as the quintessential stimulus. They have applauded results of the dramatic jump in equity prices since Bernanke’s Jackson Hole speech in which he outlined the QE2 to come. We know they have the firepower. Expansion of the Fed’s balance sheet over the past year and a half demonstrates no inhibitions about spending future generations’ money to solve today’s problems.
Would they dare interfere in free markets? Clearly that has never been a concern with respect to fixed income markets. Whereas in the past, such active involvement might have been limited to Treasury issues, no such compunction limits them today. In their wisdom they have deemed it appropriate to paper the Fed balance sheet with mortgage-backed securities for which there was no other viable market. Prior Fed governors would have shuddered at the thought of such balance sheet pollution.
But equity markets are clearly different, aren’t they? For years commentators have sneered at China for its widely reputed support of common stocks. Within the last few weeks, however, Japanese monetary authorities have also expressed clear intentions to bolster prices in that giant world market.
Are U.S. monetary authorities so different from their compatriots elsewhere that they would never sully their hands buying stocks? Are they comfortable pointing to higher equity prices as an objective of their jawboning efforts and applauding that result, but uncomfortable taking any direct action to promote it? In the last two years they have indicated their unequivocal willingness to promote higher stock prices by direct ownership of banks, insurance companies and automobile manufacturers. Is the concept of extending that support to the broader market so antithetical to their free market principles?
How might the government “buy stocks”? Picture the Fed Chairman calling his broker: “John, this is Ben. Markets have just broken short-term support. Pick me up a quick 10 million Spiders (SPY). Put it on my Fed account.” Hardly! Word might get out.
Imagine something like this instead. We have long known that increased liquidity typically boosts asset prices. Without trying to paint a detailed picture, let’s assume that one of Ben’s lieutenants assures one or more giant primary dealers that if they see the need to take a large proprietary position in equities in support of market prices that the Fed would follow with liquidity injections of a meaningful size. “We won’t hang you out to dry.” When we read statistics indicating trading profits for major investment banks on nearly 100% of market days, one has to assume that such firms receive a great deal of valuable information, at least in the form of order flow, if not in more explicit forms of support.
There remains no direct evidence of government market intervention, but patterns show significant buying in support of prices coming in at illogical technical points. The government has an expressed incentive and clearly has the means. Fully recognizing the ongoing abrogation of free market principles throughout the government’s unprecedented rescue effort, my suspicion remains.
Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.