Is the Federal Reserve Directly Controlling the Stock Market?

Is the Federal Reserve directly controlling the stock market?  I do not ask this question with reference to policy or open market operations.  I suggest the Federal Reserve is micro managing the stock market just as they have now micro managed interest rates.

In the 1987 mini crash, back when the Dow Jones was below 3000, it was strongly suggested and partially proven that the Federal Reserve, through their working arm, the New York Federal Reserve, purchased Standard and Poors futures at the Chicago Mercantile exchange to stop the carnage and stabilize the market.

In a semi emergency such at that instance, one could make the argument that to temper the emotions of the moment, a Federal Reserve support would be helpful.  I do not make that argument, but one could.

Today, just as the interest rate “beach ball” is pressed beneath the surface of free market forces by the Federal Reserve, it appears that the stock market has also assumed a new character of sorts.

The Volatility Index  (VIX) which measures the “fear factor” of the market place is trading at near all time lows.  Volatility or the chance of volatility would increase the level of the VIX which takes into consideration the premiums for puts and calls on the stock market indexes.

Now, one might ask, “Why would the “fear factor” or volatility index be near record lows, with so much potential for geo politically damaging events?  Syria is in a civil war, Iraq is falling apart, China is jabbing Vietnam and Japan, Iran is nuclear arming, and Putin is chipping away at former Soviet holdings.

The answer to why there is no fear in the “fear” index may be that those in the know have learned that the Federal Reserve will not allow the stock market to go down.  The stock market may indeed be managed in a gentle uptrend just as interest rates are managed.  Knowing this, there is no need to be afraid of drops of giant sell offs.  The stock market seems to have become “guaranteed” in a clandestine way.

To wit, the Dow is now near 17,000.  A one percent move would only entail a 170 point drop.  Not recently nor rarely have we seen any sell offs approaching this small metric.  But when the Dow was trading in the 10,000 pt range, a 2% move, a 200 point move, could be an event but something not out of the range normality.  Today, with the Dow 70% higher, we never see such selloffs even with a world that seems on the brink of a major geo political event.

Bloomberg noted that Central Banks around the world have injected trillions of dollars into equities.  “Central banks, guardians of the world’s $11 trillion in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk- averse investors toward equities.”

While it is acknowledged that the Federal Reserve "has no mandate to buy stocks directly," purchasing stock index futures would certainly be “indirect” and a managing tool.  Also, the Federal Reserve has no mandate to encourage inflation, yet it does.  It appears the Federal Reserve is not tethered to anything but their own ability to unilaterally expand their mission and powers.

Contrarians in the stock market are out of business.  The stock market is the new federally insured annuity.  All selloffs will be extinguished by some unknown power. Yearly per cent age returns will be provided.   There is no fear, there is only record complacency.   The Federal Reserve will shelter and protect you, until it can’t.

 

James Longstreet

Is the Federal Reserve directly controlling the stock market?  I do not ask this question with reference to policy or open market operations.  I suggest the Federal Reserve is micro managing the stock market just as they have now micro managed interest rates.

In the 1987 mini crash, back when the Dow Jones was below 3000, it was strongly suggested and partially proven that the Federal Reserve, through their working arm, the New York Federal Reserve, purchased Standard and Poors futures at the Chicago Mercantile exchange to stop the carnage and stabilize the market.

In a semi emergency such at that instance, one could make the argument that to temper the emotions of the moment, a Federal Reserve support would be helpful.  I do not make that argument, but one could.

Today, just as the interest rate “beach ball” is pressed beneath the surface of free market forces by the Federal Reserve, it appears that the stock market has also assumed a new character of sorts.

The Volatility Index  (VIX) which measures the “fear factor” of the market place is trading at near all time lows.  Volatility or the chance of volatility would increase the level of the VIX which takes into consideration the premiums for puts and calls on the stock market indexes.

Now, one might ask, “Why would the “fear factor” or volatility index be near record lows, with so much potential for geo politically damaging events?  Syria is in a civil war, Iraq is falling apart, China is jabbing Vietnam and Japan, Iran is nuclear arming, and Putin is chipping away at former Soviet holdings.

The answer to why there is no fear in the “fear” index may be that those in the know have learned that the Federal Reserve will not allow the stock market to go down.  The stock market may indeed be managed in a gentle uptrend just as interest rates are managed.  Knowing this, there is no need to be afraid of drops of giant sell offs.  The stock market seems to have become “guaranteed” in a clandestine way.

To wit, the Dow is now near 17,000.  A one percent move would only entail a 170 point drop.  Not recently nor rarely have we seen any sell offs approaching this small metric.  But when the Dow was trading in the 10,000 pt range, a 2% move, a 200 point move, could be an event but something not out of the range normality.  Today, with the Dow 70% higher, we never see such selloffs even with a world that seems on the brink of a major geo political event.

Bloomberg noted that Central Banks around the world have injected trillions of dollars into equities.  “Central banks, guardians of the world’s $11 trillion in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk- averse investors toward equities.”

While it is acknowledged that the Federal Reserve "has no mandate to buy stocks directly," purchasing stock index futures would certainly be “indirect” and a managing tool.  Also, the Federal Reserve has no mandate to encourage inflation, yet it does.  It appears the Federal Reserve is not tethered to anything but their own ability to unilaterally expand their mission and powers.

Contrarians in the stock market are out of business.  The stock market is the new federally insured annuity.  All selloffs will be extinguished by some unknown power. Yearly per cent age returns will be provided.   There is no fear, there is only record complacency.   The Federal Reserve will shelter and protect you, until it can’t.

 

James Longstreet