This Stock Market Rally

Why are the stock markets rallying? Have they bottomed? Is now the time to get back in? Is the end of the recession in sight? Have commodity prices bottomed?

Stock markets are not just left to fend for themselves....

Executive Order 12631 - Working Group on Financial Markets - Mar. 18, 1988; 53 FR 9421, 3 CFR, 1988 Comp., p. 559.

"By virtue of the authority vested in me as President by the Constitution and laws of the United States of America, and in order to establish a Working Group on Financial Markets, it is hereby ordered as follows:

Section 1. Establishment. (a) There is hereby established a Working Group on Financial Markets (Working Group). The Working Group shall be composed of:

(1) the Secretary of the Treasury, or his designee; (2) the Chairman of the Board of Governors of the Federal Reserve System, or his designee; (3) the Chairman of the Securities and Exchange Commission, or his designee; and (4) the Chairman of the Commodity Futures Trading Commission, or her designee.

Section 2. Purposes and Functions. (a) Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence, the Working Group shall identify and consider:

(2) the actions, including governmental actions under existing laws and regulations (such as policy coordination and contingency planning), that are appropriate to carry out these recommendations.

(b) The Working Group shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible.

Section 3. Administration. (c) To the extent permitted by law and subject to the availability of funds therefore, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions."


This little group is generally known as the "Plunge Protection Team". It operates by playing the futures markets in commodities, currencies, gold and stocks. Since it is backed by the US Treasury, it's power is awesome, if not unlimited. I think that this present rally has been manipulated (at least in part) by the PPT. Once a rally starts, it tends to find its own momentum so the PPT can unwind its positions and actually make a profit on the exercise. It is the ultimate Insider Trading given that the PPT is comprised of the policymakers! The world's capital markets are NOT a level playing field....beware. Edit:- A reader has kindly given me a link to a Washington Post article that describes how the PPT work... http://www.washingtonpost.com/wp-srv/business/longterm/blackm/plunge.htm

So, is this the bottom? No. Nowhere near. We have to go down to the low 700s (S&P) at least before we bottom and we will not see a genuine recovery until some fundamentally good news appears on the horizon. At this time, the situation is becoming more dire by the day. Any rallies at this time are bear market rallies most likely engineered by the PPT.

Is now the time to get back into the stock markets? No. Even if you are prepared to see your investment fall by averaging-down (a well-known investment strategy advocated by stockbrokers, financial advisors and practiced by idiots and philanthropists) many of the firms you might invest in will have gone bust or bailed-out before things get better. If you can cherry-pick and you really know your stuff you will find some firms that will actually profit from this recession, but I can't help you with that.

Is the end of the recession in sight? No. The recession hasn't really started yet. Most firms are still trading and most people still have their jobs. In the US and UK we will see up to 30% job losses before this recession bottoms. In these countries we have built economies that feed on themselves, financed by external borrowing. The borrowing is going to have to stop. The present government initiatives -- spend and borrow to 'halt' the recession -- are insane and due to blind panic. It won't work, it will make things worse and it will cost a fortune. Of course it could give a Christmas bonus to those who would otherwise have lost their jobs but it'll be worse for them in February than if they had done what they SHOULD have done -- cut public spending and cut borrowing.

Have commodity prices bottomed? Maybe. As the debts are unwound and safely wrapped-up in toxic waste dumps the monetary debt-deflation that has been soaking up all the spare dollars will start to fall. With the monumental sums of USD being deluged onto the world, we will soon be awash with dollars. That is called monetary inflation and it results in higher prices because a large number of dollars are competing for a finite resource. If you have $1000 in your pocket you don't argue about the price of an ice cream -- $1 or $3, doesn't seem to matter much. If you only have $10 in your pocket, it makes a huge difference and either you do without the ice cream, or you haggle, or shop around for a better deal. It's the same thing in the world's markets from commodities to finished goods.

Economists are split between those who think we are headed for deflation and those who think we are headed for hyper-inflation. If you see commodity prices start to rise again it could signal the start of a rapid rise in prices, probably completely out of control with inflation running at rates unheard of in the US or UK.