| ECONOMICS - LOOKING GLASS NEWS |
|
The Invisible Hand (of the U.S. Government) in Financial Markets |
|
|
by Robert Bell Financial Sense Entered into the database on Thursday, April 07th, 2005 @ 23:28:48 MST |
|
Summary:
The U.S. government is manipulating all major U.S. financial
markets—stocks, treasuries, currencies. This article shows how it is
possible and how it is done, why it is done, who specifically is doing
it, when they do it, and where they get the money to do it. Most
people probably believe that the major capital markets in the U.S. are
basically true markets with, occasionally, maybe very occasionally, a
little bit of rigging here and there. But evidence shows that the
opposite is the case—the rigging is fundamental with a little bit of
true markets here and there. I have discussed how this works concerning
U.S. and some other stock markets in an earlier article.[1]
Here I will primarily discuss the rigging of currency and U.S. Treasury
markets. Perhaps
the main reason for the urban legend that major markets are not
generally rigged is that they are assumed to be too big; the millions of
independent buyers and sellers, worldwide because of globalization, make
effective and sustained coordination impossible. The implicit assumption
is that any market could be systematically rigged if it were small
enough, or at least small enough at some critical choke point. Little
Markets In
the case of the market for U.S. Treasuries, the Financial Times
summed up exactly how small it really is in two major stories, one just
under the masthead on page one, on 24 January 2005. One story began,
“During the past few years the US has become dependent, not so much on
millions of investors around the globe but on a few individuals in a few
of the world’s central banks.”[2]
In 2003 these central bankers bought enough treasuries to cover 83% of
the U.S. current account deficit, and 86% of those purchases came from
Asian central banks. The
two main sources of money for U.S. Treasuries
are the central banks of Japan and China. Japan held about $715 billion
in U.S. Treasuries, as of November 2004,
and China held about $191 billion.[3]
All the other nations’ central banks hold altogether, about the same
amount again, roughly another trillion. As
the total of all obligations is about $4 trillion, two central banks
obviously hold about one quarter of the total. They are in the position
to pump or dump the Treasury market all by themselves. They can sell
what they have or simply stop buying when the Treasury sells. Since
the money comes from a handful of foreign central banks, the possible
rigging of the Treasury market equals the possible rigging of the
foreign exchange markets. These central banks have to buy dollars before
they buy Treasuries. Even Alan Greenspan has acknowledged that the two
go together, admitting that Asian central banks “may be supporting the
dollar and U.S. Treasury prices somewhat.”[4] U.S.
stock markets are also capable of being systematically rigged, and for
the same reason—a handful of players can dominate if they coordinate
their actions. The key choke point is in the number of mutual funds,
which themselves hold about 20% of all the stock in the major markets.
Of the over 8000 all-stock mutual funds, a mere 497 hold roughly
three-fourths of the stock. This is easily a small enough number to pump
the market, whether through coordinated buying disguised as programmed
trading, or simply a follow-the-leader mechanism.
All the other thousands of funds and the millions of individuals
around the globe putting their money into these markets can do little
more than follow the momentum. No major U.S. stock market writer,
advisor or player seems to publicly acknowledge this, as far as I know.
But the CEO (PDG) of the French insurance giant AXA has acknowledged it:
Claude Bebear wrote in his 2003 book Ils vont tuer le capitalisme
(They are going to kill capitalism): “…
today, shareholders are relegated to the role of quasi-spectators. The
small shareholders that are now called ‘individual investors’ know
that they have little weight. All together, they only represent a small
percent of capital because the investments of households
are more and more in the form of mutual funds, pension funds (fonds
communs de placement) or life insurance funds. The shareholders today
are thus the institutional investors.”[i]
[5] Bebear,
in charge of one of the world’s biggest stock portfolios, adds: “We
are no more, in effect, in a world that one reads in the economic text
books, with innumerable investors of various characterizations, choosing
each in his own way the stocks that he’ll put in his portfolio; the
results of their millions of decisions generating a sort of changing
market equilibrium, but a stable one. The truth is that for several
years, the reasoned investment on a stock has almost disappeared in
favor of more and more mechanical behavior.”[ii]
[6] Programmed
trading in an utterly concentrated stock market pretty much guarantees
the possibility of systematic and continual market rigging. But to
accomplish this, and coordinate it with the currency and Treasury
markets, some sort of orchestrating mechanism would need to exist. It
does; it is known as the President’s Working Group on Financial
Markets, occasionally referred to in the business press as the Plunge
Protection Team. Then President Ronald Reagan signed it into existence
on 18 March 1988, with the specific intension to avoid another stock
market crash such as that of 19 October 1987. The Working Group’s
existence is no mystery. See for yourself. Go to Google and type
in Executive Order 12631. You will find the Executive Order, and
even a 14 November 2003 statement from Secretary of the Treasury John
Snow giving a brief history of the Working Group, describing its policy
advisory activities, and concluding with these words: “It
also is a forum used to exchange information during market turmoil
through ad hoc conference calls and meetings.” Presumably
Plunge Protection doesn’t hold these ad hoc conference calls and
meetings just to be passive bystanders.
Executive Order 12631 specifically authorizes them to coordinate
buying: “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.” So
not only is the fix in, it is legal. In a 1989 Wall
Street Journal article, then Federal Reserve board member Robert
Heller even suggested a market intervention strategy: “Instead of
flooding the entire economy with liquidity, and thereby increasing the
danger of inflation, the Fed could support the stock market directly by
buying market averages in the futures market, thus stabilizing the
market as a whole.” Guess Whose Money is
Used to Buy Stock Market Insurance? There is even a
potentially unlimited source of money to do this pumping. Federal
government contractors operate under a special law, CAS, in their
defined benefits pension plans. This gives them stock portfolio
insurance, something which small fry players would obviously like to
get, but can’t find anyone willing to issue. Should the pension funds
of the federal government contractors lose money in their investments to
the degree that they fall below minimum reserve requirements imposed by
other federal laws, they can simply make up the difference by adding it
on pro-rata to subsequent items sold to the federal government. The vast
sums of federal tax money devoted to plugging the holes in the pension
fund for the largest Pentagon contractor,
Lockheed Martin, were discovered by Ken Pedeleose, an analyst at the
Defense Contract Management Agency. He was concerned about staggering
cost increases for the C-130J transport but a chart he made public
showed the mind boggling per plane cost increases for a number of
Lockheed Martin airplanes. The chart amounted to a Rosetta Stone for the
military-industrial complex. It showed, essentially, how the
military-industrial complex linked to the stock market through the
Lockheed Martin pension fund, and by extension through all the others
covered by the same law. Is there a
corresponding source of tax money to pump the currency and Treasury
markets? There is an
official one for currency, the Exchange Stabilization Fund. It was
established in 1934 to prop up the dollar in foreign exchange markets.
But it can be used for any purpose determined by the Secretary of the
Treasury. In mid-1995, the fund contained $42 billion.[iii]
The actual amount varies depending on how well the Treasury does
on its currency transactions. The money originally came from the sale of
U.S. government gold, but the Treasury kept the money as a private fund,
not under Congressional control. Since it is a finite amount of money,
not appropriated by Congress, it probably is not often used to pump the
stock market or even the market for Treasuries. The markets for
Treasuries, and also currency, are being pumped using the tax code and
pension fund laws. But to understand this we have to first look at why
pumping might be necessary. Treasuries Exchanged
for Jobs The
U.S. Treasury holdings of Japan and China are essentially a consequence
of a trade imbalance between the U.S. and these two countries, with the
balance heavily tilted to the latter. To maintain the imbalance, which
they both clearly want to do, both countries must keep their currency
pegged against the dollar at a lower rate than it might otherwise be. If
they did not do that, the Toshiba computers, Toyota cars and other
quality items made in Japan would be more expensive, and so Japan
wouldn’t sell as many of them in the U.S. A similar case holds for
vast numbers of Chinese manufactured items sold pretty much everywhere,
but notoriously at Wal-Mart.
To keep the items relatively cheap, the central banks of those
countries keep their currencies cheap by buying a corresponding amount
of dollars, thus supporting the dollar against their currencies. The
dollar may essentially collapse against the euro, but not against the
yen and the yuan. With
the dollars the Japanese and Chinese central banks have bought, they can
buy something denominated in U.S. dollars; the item of choice is U.S.
Treasuries since it is like holding dollars that pay interest. So this
has the effect of pumping the price of Treasuries too. Because the items
made in China and Japan are cheaper than those of corresponding quality
made in the U.S. (in the case of many Japanese items, there may not be
U.S. items of similar quality), the effect is to create manufacturing
jobs in those countries while simultaneously losing them in the U.S. In
effect the jobs are exported and foreign currency is imported to buy
dollars and then Treasuries. This
has an advantage for the Bush administration, which has the ruinously
ridiculous policies of simultaneously cutting taxes and waging wars or
building up for them. In effect, the basic racket is: the Bush
administration exports jobs to these countries, and in turn they finance
Bush’s fiscal deficit so he can continue his wars and cut taxes for
his friends. The deficit for 2005 will be at least $400 billion,
according to the Congressional Budget Office.[7]
The Pentagon budget for 2005 was about $400 billion. Add in two
supplemental requests for the costs of his Iraq war and the Pentagon
figure is roughly $500 billion. “It is interesting to note that the
military budget is about the same order of magnitude as the fiscal
deficit,” said veteran Pentagon waste fighter Ernest Fitzgerald. The
tax cuts were at least in part intended to stimulate spending—the
purchase of all those Toshibas, Toyotas and Chinese whatnots. So the
fiscal deficit is intimately linked to the current account deficit. If
the money had been taxed away to pay for Bush’s current war and arms
build-up for future ones, it would not be in people’s pockets to pay
even for the down payments on the Toyotas. But
won’t the Japanese and Chinese central banks ultimately get burned by
holding vast quantities of dollar denominated assets? Sure, if the
dollar ever collapses against their currencies too.
The dollar having fallen roughly 30% against the euro since the
beginning of the war in Iraq, the same fate or worse could await these
Asian currencies. With currently issued Treasuries paying a coupon rate
of no more than 4%, they would be materially shafted on their
investments in U.S. Treasuries. Then why don’t they bail out? For
the Chinese, the basic racket is too delicious and too ironical. They
industrialize their country at the expense of the de-industrialization
of the U.S. Not only is it sweet revenge for more than a hundred years
of humiliation at the hands of Europeans and Americans, but also at the
end they are relatively strong and the U.S. is relatively not. What do
they care if the deal isn’t quite as good as it would be in a perfect
world and they lose a third, half, two-thirds of
their savings in U.S. Treasuries? Besides, in an even mildly less
imperfect world, the U.S. President would not make such a blatantly
corrupt bargain against the people of the U.S. Billionaire investor
Warren Buffett calls this system of indebting U.S. citizens to foreign
governments “a sharecropper’s society,” to distinguish it from
Bush’s supposed “ownership society.” No
wonder Chinese central bank governor Zhou Xiaochuan told a press
interviewer at the time of the G-7 session in London in early February,
“now is not the time” to revalue his currency, the yuan.[8]
Of course it is not. He is clearly not stupid. The time to revalue is
after China has sucked all the remaining jobs out of the U.S. that it
can or just before the U.S. gets a less dishonest government.
For the Japanese, the basic sweetness of the deal plus
geopolitical strategic reasons may keep them tied to the U.S. There is
also the spirit of J. Paul Getty’s famous line: “If
you owe the bank $100 that's your problem. If you owe the bank $100
million, that's the bank's problem.”
Some Japanese clearly think they have a problem. Prime Minister
Junichiro Koizumi said on 11 March 2005 concerning his government’s
U.S. dollar holdings, “I believe diversification is necessary.” This
instantly shook the currency markets, causing the director of the
Japanese finance ministry’s foreign exchange division, Mastatsugu
Asakawa, to blurt out, “We have never thought about currency
diversification.”[9] Mr.
Asakawa has been kept busy making this point. On 23 February 2005 he had
already stated, “We have no plans to change the composition of
currency holdings in the foreign reserves and we are not thinking about
expanding our euro holdings.”[10]
He added, “Valuation loss is not our primary concern. My opinion is
that I don’t have to care seriously about that.”[11] There
are, of course, other major single party buyers of dollars and
Treasuries besides the central banks of Japan and China. In fact Mr.
Asakawa’s earlier remark was precipitated by a market panicking
statement on 22 February from the Bank of Korea. They indicated they
were considering diversifying some of their $200 billion in currency
reserves, 70% of which were in dollars. The dollar plunged 1.2% against
both the yen and the euro. Part of this was due to programmed trading
which kicked in with sell orders after the dollar hit a threshold of
$1.3210 to the euro.[12]
After the dollar suddenly fell, South Korean officials quickly
announced they wouldn’t sell any of their existing dollar reserves,
leaving open the possibility of putting new reserves into other
currencies. South
Korea, presumably, can be muscled. Other
central banks are less susceptible to pressure. On 5 February 2005
Russia announced that it would no longer peg the ruble to the
dollar, but instead to a shifting weighting of dollars and euros. Russia
had been selling dollars and buying euros since October 2004, during
which time the U.S. dollar had tumbled significantly against the euro.[13]
This of course corresponded to the period when Bush was seen to be back
in power for another four years. The
overwhelming consensus of financial writers was that both the dollar and
Treasuries would really hit the skids in the new year, 2005. The
consensus was global. For example, the French financial paper, Les
Echos wrote in its edition of 21-22 January: “Until now, it was a
question of the great bet adopted nearly unanimously by foreign exchange
traders—the dollar will fall in 2005.”[14] Of
course, as implied by the quote, the dollar did not fall. Nor, of
course, did its fat twin, U.S. Treasuries, which are little more than
interest paying dollars. Is this because the trade deficit improved? Not
really, although it showed a slight gain in early February, long after
the dollar and Treasuries had materially improved. The dollar had gone
up 3.6% from 1 January 2005 until 22 February 2005. Why? Did Bush raise
taxes, thereby erasing some of the fiscal deficit? Not at all. On the
contrary, he cut taxes—as usual for a select group—and that’s why
the dollar rebounded. In
late October 2004, the U.S. public was looking the other way when the
tax cut was passed. Most people were obsessing over who would win the
presidential election. Few
were paying much attention to what the Republicans in Congress were
doing, which was giving billions in tax cuts to U.S. corporations which
had profits parked in tax havens around the world, such as in Ireland or
Singapore. Bush signed the law enabling this tax giveaway on 22 October
2004. The tax changes were noted by a few at the time, even before the
law changed. But the general level of financial journalism is so bad
that they got no real echo in the press. Most people speculating against
the dollar had no idea they were about to get stung. Obviously a few
knew what the implications of the tax law were. They made out, more or
less literally, like bandits. But one cannot legitimately claim insider
trading since the tax law changes were publicly available knowledge, and
even made it to the internet on various accountant websites in October.
But they don’t seem to have gone much beyond these specialists. On 15
January 2005, I had a long talk in Paris with a top European stock
market guru. Well connected and with a devoted following which he
obviously did not want to burn, he had in all sincerity advocated buying
gold to a gathering of thousands of his devotees a couple of months
earlier, in November, after the passage of the U.S. tax law. Most
speculators were caught unaware on this source of currency pumping
money, so it is unreasonable to assume that there will not be other
surprises, which will be announced in due course. The
law Bush signed in late October 2004 goes by the obscenely false name,
the American Jobs Creation Act. If there is one thing it will not do is
to create jobs. It will instead create takeovers, which nearly always
produce losses in jobs—in the name of synergy. Takeovers are on the
limited menu of activities companies are permitted to do with the money
they can “repatriate” under this law. Not that the limited menu
makes much difference, since the money brought in does not have to be
fenced off in any way. So if $10 billion were spent by a company on
takeovers, that frees up another $10 billion to do whatever was
prohibited under the law, such as paying dividends, buying back stock,
or filling the pockets of executives with extra bonuses.
Normally such profits earned in foreign subsidiaries of U.S.
companies would be subject to a tax rate of 35% if they were brought
home, which is why the money had stayed parked in the tax havens. But
the law gives companies a one-year window for the “repatriation” of
this cash at a tax rate of only 5.25%. Nobody knows how much will be
brought in. When the law was passed in October, the general expectation
reportedly was that the figure would be about $135 billion.[15]
But one player has estimated it at $319 billion. “This has some
investment bankers salivating,” wrote David Wells in the Financial
Times.[16]
But how much would be converted into dollars from other currencies?
According to two different investment banks, the figure is somewhere
around $100 billion.[17]
That would be the minimum available from this source to pump the dollar
for one year. Recall that the Exchange Stabilization Fund has
less than half that for eternity. The
Bush administration’s use of repatriated foreign profits to pump
domestic markets shows that they are not
going to let “thin ice” signs stifle their version of the economy,
at least not without a fight. However, the underlying weakness of the
economy because of the twin deficits remains, so basically all that Bush
and his Plunge Protection team are doing is moving the “thin ice”
sign out onto thinner and thinner ice. The weight of the Bush team will
eventually crash through that ice into exceedingly cold water. But
what about those drooling investment bankers? They will claim that this
harvested money used in takeovers will eventually produce U.S. jobs,
despite initial job losses due to the takeovers themselves. Investment
bankers, who engineer many if not most takeovers, nearly always argue
that the takeovers ultimately create jobs in the long term. The
investment banks themselves, however, nearly always insist on being paid
substantially in the short term through the transaction fees.
Their employees, the investment bankers, are also substantially paid
short term through annual salaries and bonuses. They get paid now;
others can wait for the long term. Panic
Buying One
short-term thing the money has already done is to pump the dollar. The
mechanism by which this is accomplished is quite simple and is signature
Plunge Protection. It is the device of the short covering rally. This is
what happens when speculators sell an asset—stocks, Treasuries or
dollars—short. With stocks, this means that they sell the asset
without actually owning it. They borrow the shares they sell, betting
the stock will fall. They then buy it at the reduced price and return
those shares. Another way to accomplish essentially the same thing is
through options. The risk in a short sale is that the stock will not go
down but instead go up. The short seller literally is exposed to
unlimited losses in this case. This is the basis for a short covering
rally. Non-shorters buy in
sufficient volume to force up the price. The price rise scares the
shorters into buying right away before the price goes too high and they
lose too much. This results in panic buying as large numbers of short
sellers feel compelled to buy to limit their losses. Often when the
stock market suddenly blasts up out of a long slide for little or no
reason, we are watching a short covering rally.
There have been several such rallies in the currency and
Treasuries markets so far this year, and there will probably be quite a
few more. According
to a J.P. Morgan survey, the year 2005 began with most U.S. and
international speculators holding short positions on U.S. bond markets.[18]
Obviously this is because they had foolishly looked at the
underlying economic reality, and failed to understand the profound
import of the American Jobs Creation Act. Most people were utterly
unaware of it until at least January 13, when the U.S. Treasury, under
whose direction the Plunge Protection team works, announced the
specifics of what the grand skim could and could not be spent on. As
noted, the list included stock market pumpers—takeovers. The
$100 billion (minimum) that will be brought in is not petty cash. One
currency strategist at ABN Amro, Greg Anderson, has been quoted as
saying, “The U.S. trade deficit is probably $600 billion in 2005, so
this flow will be financing a sixth of the deficit all by itself.”[19]
Thus this amount is clearly enough to have some impact on currency
markets, especially if used to trigger short covering rallies. Whatever
is the actual amount that is brought in, it is exceedingly unlikely to
be all brought in at about the same time. The companies have full
discretion as to when to bring it in, and Plunge Protection is there to
make sure they don’t do it at the wrong time. Various of the “ad
hoc conference calls” referred to above by Secretary Snow could
include fund managers and Chief Financial Officers of companies with
chunks of cash lined up to bring in. Would this incestuous network of
essentially insider traders be legal? It would be very difficult to
prosecute without impeaching the President himself. As cited above,
Section 2b of Executive Order 12631 states: “The Working Group shall
consult, as appropriate, … with
major market participants to determine private sector solutions
wherever possible. (emphasis added)” Obviously a major currency plunge
is exactly what Plunge Protection is charged with avoiding. The
major market participants involved in these money pumping rackets would
not only be making money, but would view each other as true patriots.
They would simultaneously serve themselves and serve the national
interest. And, if the story ever got out, they would be unlikely to
serve any time. They would also get the reputation for being
currency-timing geniuses. Each time they brought in cash from euros or
pounds, the foreign currency subsequently fell. Their timing would
appear impeccable. Never mind that they and some government officials
are creating the timing. How
big are these chunks of cash? Johnson & Johnson announced in
February that they would bring in $11 billion.[20]
Pfizer put its planned figure at $37.6 billion.[21]
But are these figures big enough to pump the dollar?
You bet. An ABN Amro currency strategist, Aziz McMahon, has been
quoted as saying, “The sums are so large that if even a small
proportion is transferred from other currencies, the positive impact on
the dollar could be substantial.” According to that bank’s
calculations, each $20 billion pumped in from other currencies pumps the
dollar against a broad index of currencies about 1%.[22]
So the announced amounts would be sufficient to trigger both
momentum trading in the dollar and trigger short covering rallies which
themselves would trigger further momentum trading. Even
the announcements of the currency repatriations can trigger short
covering rallies. ABN’s McMahon added, “The psychological impact a
wave of announcements could have on structural short-dollar positions
should also not be underestimated.”[23] Just
Printing Money to Pump Markets Short
covering rallies certainly played a role in the prolonged stock market
run up which followed an initial Iraqi War bombing rally in March 2003.
But there is more. A
respected gold market analyst, Michael Bolser, has shown how the Fed
quite simply pumped money into the markets during this period, with
massive cash injections often timed at local stock market bottoms. His
article, “Repurchase agreements and the Dow,” should be required
reading for anyone who wants to understand rigged markets.[24]
According to Bolser’s analysis, the Fed was simply flooding the
economy with liquidity just before and during that rally. Using data
available on the Fed website, Bolser plotted the injections of cash from
the Fed when it bought Treasuries on the open market, which means buying
them from the 22 banks that deal directly with the Fed. The simple
buying of existing Treasuries by the Fed is called a “Permanent Open
Market Operation” (POMO). By contrast, buying back a certificate with
a specific repurchase (buy-back) date is called a “Temporary Open
Market Operation” (TOMO). Bolser observes, “There were four closely
spaced Permanent Open Market Operations just prior to the 1,000-point
mid-March DOW launch. In addition, there was another POMO on March 13th
of $710 Million coupled with a net TOMO injection of $3.25 Billion which
resulted in a 303 point DOW gain on that day.” Bolser
also clarifies the relative market impacts of these cash injections:
“Permanent Open Market Operations [POMOs] are usually much smaller in
magnitude than Temporary operations but have a far greater effect on the
market. Experts have suggested that there is a nine times market
multiplier effect inherent in permanent open market operations.” But
what about all those billions that are already parked in dollar
denominated tax havens, such as Puerto Rico?
Among the Treasury Department permitted uses of the repatriated
cash, is benefit plans, including pension benefits. Most of these plans
are nowhere near recovery from losses suffered during the late 1990’s
bubble. Normally, the repatriated money would go straight into the stock
market, thus pumping it--except for one thing.
A number of companies do not have sufficient money in the
reserves of their defined benefits pension funds to meet their
contractual obligations to their retirees. If a pension fund goes broke,
a federal agency, the Pension Benefit Guaranty Corporation (PBGC) takes
on some of the obligations—typically pensioners collect 25 cents on
the dollar. But the PBGC is itself broke, with companies defaulting or
threatening to do so. For example, the PBGC has moved to take over the
defined benefits pension funds of United Airlines.[25]
And this is probably just the start of many such takeovers. By November
2004, the plans PBGC insured were under-funded $450 billion, an increase
of $100 billion in just one year. Companies whose debt was evaluated at
less than investment grade (a group that could soon include General
Motors) were under-funded by $96 billion, an increase of $12 billion
from the previous year. So
the PBGC could require another gigantic federal bailout, “Some have
compared this to the savings and loan crisis of the early nineties,”
said James Moore, who is in charge of pension products at a major bond
fund, Pimco.[26] But
the U.S. government is also broke—because of Bush’s pro-war,
anti-tax policy combination. Are there solutions? Sort of. One is just
to fake the numbers, reducing the required reserves in these pension
funds. Bush also plans to change the rules for investing for defined
benefits pension plans in a way to reduce their likelihood of
defaulting. Stocks can be down when pension payout demands are up. The
right kind of bond could deliver the money at the right time. The new
rules have not yet been announced, but seem certain to encourage the
buying of Treasury Inflation Protected Securities (TIPS) by the depleted
pension funds. Some funds are already jumping in to avoid even higher
prices later. With the long dated TIPS pumped, the dollar looks less
unattractive to Chinese and Japanese central banks and others. Masayuki
Yoshihara, who manages, with others, over $9 billion at Japan’s fourth
biggest life insurance company, Sumitomo Life Insurance Company, said
“Pension funds will continue to be overweight the long-end of the
curve. We expect the yield curve to flatten even more,” [27]
What? Translating from finance-ese, he says that pension funds will keep
buying long dated Treasuries, which will pump up their price and thus
reduce their effective interest yield. (The interest is fixed, literally
printed on the bond. So if buyers pay more to get the same printed
interest rate, their effective yield goes down.) With long term interest
rates falling and short term ones rising, the graph which represents
these rates is becoming more and more of a flat straight line. So
there are a lot of relatively new sources of money for official
manipulation of markets: federal contractor pension fund money, nicely
insured under CAS; POMO and TOMO money, freshly printed by the Fed; the
American Jobs Creation Act money, conveniently parked off shore; trading
“partner” money, sometimes willingly given, sometimes extorted. One
nice thing about rigged markets is that they permit updating trite stock
market axioms, such as “Buy on the rumor, sell on the news.” For
Treasuries, this has now become, “Buy on the rumor, buy again on the
news, and then sell it to the Chinese or Japanese central banks.” All
who imagine that the mythical market forces will prevail seem to
deliberately avoid actually looking at what the so called markets really
are, including their concentrations, Plunge Protection mechanisms, and
Plunge Protection’s extensive access to a variety of pools of other
people’s money. The
mechanisms and the market concentrations permit the Bush administration
to systematically sell off U.S. assets to pay for its more wars/less
taxes policies. The Bush administration is comparable to a group of
corrupt trustees for the family fortune of a lazy and incompetent heir.
They siphon the money out by selling off the inheritance while the heir
is too stupid or drunk to notice. He still has his mansion, his fleet of
big cars and his monthly check, and he doesn’t notice that the assets
are shrinking. He may not for a while. This family’s fortune is big
and there are a lot of assets still to sell off. ©
2005 Robert Bell Robert
Bell, Chairman of the Economics Department, Brooklyn College, N.Y., is
the author of seven books, including: Beursbedrog (The Stock Market
Sting), De Arbeiderspers, Amsterdam, 2003; Les peches capitaux de
la haute technologie (The Capital Sins of High Technology), Seuil,
Paris, 1998; Impure Science, Wiley, N.Y., 1992 REFERENCES [1]
See “The U.S. Government’s Bubble
Blowing Machine.” |
|