Intervention Buying by US Financial System Behind False Market Buoyancy

It is glaringly obvious that there are elements active in US Equity and Futures markets responsible for buying large volumes of ‘reference’ assets to induce positive sentiment and risk-on buying by investors large and small.

Given the non-public disclosure of who is buying what at scale in these reference assets, this conclusion is reached based on patterns that are inconsistent with legitimate buying interest patterns.

Abnormally large volume of purchases of S&P Futures ahead of the FOMC’s policy statement on January 26 drove the price higher during a period where any bets by real market players would have been placed, and the normal pattern would be characterized by low volume and static pricing. Investors driving these markets typically wait to see what the Fed policy actually is going to look like.

S&P 500 Futures Volume Increase Before FOMC Meeting

A reference asset, for clarity, is one whose daily price and volume performance are widely considered to be representative of the general direction, condition, and sentiment, in the markets more broadly.

Positive index, futures and ETF performance in assets derived from the most liquid markets, i.e. Dow Jones Industrial Average, NASDAQ 100, NYSE and the S&P 500, are known to foster positive, risk affirmative buying interest in the broader market, while negative performance by these assets cause risk aversion and drive selling interest.

It was Barack Obama, who, after winning the presidential election in November 2008, first indicated that stock market closes were being watched as a way to measure the severity of the financial crisis then unfolding and might be targeted with direct asset purchases by government-affiliated entities.

Since then, the very policy of the Fed is described as being motivated toward the achievement of the “Wealth Effect” whereby the injection of fabricated liquidity into markets at the top tier trickles down into the wider population as banks lend according to the volume of Tier 1 capital on their balance sheets. (US Treasuries are Tier 1 capital by virtue of their ostensible “zero risk” of default).

The problem with the decade plus of quantitative easing is that, the more liquidity there is injected into the system, the more money there is chasing a finite set of investable assets, which do not proliferate as readily as Fed stimulus dollars. Thus, inflation. But the price inflation in stock market equities is followed by price inflation in everyday consumer goods as stimulus-fueled demand drives up the prices of everything from oil to copper to soybeans.

At the same time, the zero interest rate policy punishes savers – primarily pension funds and retirees – by causing returns to be shrunk to zero just as inflation shrieks higher.

Inflation was always the inevitable outcome of the Fed’s relentless stimulus. The onset of inflation was only delayed by the explosion of new assets as the Fed permitted the advent of crypto alongside ever more arcane derivative formats to absorb all that extra liquidity.

Now with runaway inflation forcing the Fed to acknowledge that stimulus and zero rate policy have reached that inevitable outcome, they have no option but to raise rates and reel in stimulus. Unfortunately for them, the stock market has become reliant on stimulus and zero interest rate policy to achieve positive growth year after year with low to no risk.

So being in a situation where there is no choice but for the Fed to dial back dovish monetary policy means investors will commensurately dial back investment. And so here we are.

The Fed can guide its affiliated entities to offset deflation of the stock market only through direct asset purchases – its last avenue of influence on markets.

In terms of the proof of this activity, I can’t point to any, beyond the pattern of increased volume in the aforementioned assets prior to Fed press releases and announcements. So I guess you could categorize this as conspiracy theory.

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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