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Market Manipulation

Thursday, July 23, 2009, 7:59 AM

The following is an addition to the In Session thread made today (available to all enrolled members).

I want to comment on the notion of market manipulation, which I have hinted at recently.  What does this mean, "manipulation?"  For me, the definition is "moving markets in a given direction for overt political or financial gain for a relative few in opposition to basic fundamentals."

There's lots of evidence, both direct and indirect, to support the notion that our "markets" are not really markets at all, but rather subject to non-economic forces producing something other than "orderly price discovery."

Here's a prime example from yesterday:

S&P flip-flop sows confusion in CMBS market

By Aline van Duyn in New York

Published: July 23 2009 00:23 | Last updated: July 23 2009 00:23

Confidence in the dysfunctional market for securities backed by commercial mortgages has been further dented after a rating flip-flop by Standard & Poor’s caused confusion.

The rating agency, which recently changed its criteria for large numbers of bonds backed by loans for shopping malls, office towers and other commercial property, upgraded bonds to triple A just days after those same bonds had been sharply downgraded.

My comments:  Hmmmmmm, that's kind of strange, don't you think?  AAA bonds had been downgraded not just 'sharply' as the article says, but all the way to BBB-, which is right down there at the very edge of deep junkdom.  From triple-A to triple-B and back again.  In a few days.  What could the reason for this be?   Whatever the reason, we can certainly strike "economic" from our list of considerations.  Let's see if the article provides any further clues.

The reversal on the rating of some commercial mortgage-backed securities (CMBS) came late on Tuesday, the same day that the US administration proposed legislation that would force a raft of new disclosure rules and restrictions on agencies such as S&P, Moody’s Investors Service and Fitch.

My comments:  Okay, that's one potential reason - new restrictive legislation is being considered and S&P suddenly decides to make drastic changes to one of its recent ratings.  So we might surmise that there was somebody in power that was unhappy at the downgrade and applied some pressure via the threat of new disclosure rules, with the message being, "Either you change your rating, or we're going to occupy some of your offices and look over your shoulder forever and ever."  However, I consider this angle to be unlikely.  It simply takes too long to get proposed rule changes in place, and this seems to be a mere happenstance. We can safely ignore this reason.

Let's keep reading.

The decision not to downgrade some of the CMBS after all was made after S&P realised that bonds with a shorter lifespan were less risky than other bonds in similar structures with longer lifespans. Assessing risks of securities backed by loans stems largely from analysing which bonds get repaid first from interest payments and loan repayments.

Alan Todd, head of CMBS research at JPMorgan, said the mistake appeared to be a basic misunderstanding of the way cash flows are distributed across a mortgage-backed security and it was an error that should not have been made.

My comments:  Here it is suggested that there was a legitimate economic reason for ping-ponging between AAA and BBB-, but even though they dutifully trotted out a JPMorgan flack to provide some cover for this 'explanation,' let's be honest:  There's no way this is the reason.  The difference in cash flows and risk across AAA and BBB- is simply too large for this to be a legitimate explanation.  If S&P had maybe bounced the rating back up to BB or even B I would have grudgingly said "Okay, maybe...." but all the way back up to AAA?   No, sorry, nope.

Let's keep reading...the real reason is buried near the bottom of the article (as they often are).

The Federal Reserve is seeking to reignite the market for CMBS, in part by financing purchases of the securities, as long as they are rated triple A.

Ding! Ding! Ding!  We have a winner!!  It turns out that the market for CMBS is still in a deep funk, and the Federal Reserve wants to step in here with its thin-air money program and start buying them up.  But they are restricted to buying AAA securities.  Which means that the ones that S&P downgraded could no longer be purchased by the Fed under the rules of the game as they currently stand.

Clearly the Fed wanted to buy the particular issues involved, and of the two things that could be done, forcing S&P to change its rating was deemed to be easier than changing the rules at the Fed.  So S&P took another hit to its already shredded credibility (which had to gall them terribly) and made a major and embarrassing revision to a recent downgrade.

This upgrade had nothing to do with fundamentals and everything to do with the Fed's desire to buy these particular issues at full price.  If bought at BBB-, these CMBS  products would have been bought at perhaps 60 cents on the dollar, but then the bank that was holding them would have had to record a steep loss.  Instead, buying these as a AAA issue allows the full mistake of the big bank involved to be completely covered up by the Fed.

This is nothing less than a deliberate program of monetizing bad debt by printing money out of thin air to exchange for bad debts on the books of one or more large, well-connected banks.  Small investors, your 401K, and taxpayers need not apply.

This raises a number of troubling issues and conclusions:

  1. Ratings are not worth anything, because where they were subject to market forces making them too high during the formation of the credit bubble, they are now too high due to political pressure and manipulation on the way down.  Ratings are worthless.
  2. Political pressure is being overtly used to effect specific market outcomes.  Where else is it being used?  Does any of this explain the recent stock market behavior and GS's outlandishly good 'trading returns'?  If so, then we are in trouble, because false prices lead to bad investments and therefore serve to enable, not cure, the particular pathology that afflicts us.
  3. There are still enough bad debts on the books of large banks to require this sort of skullduggery.  The notion of a rebounding economy and green shoots are entirely inconsistent with this sort of desperate maneuvering.  It is this sort of manipulation that leads me to be especially skeptical of the notion that the economy is on the mend.  If it were, then this bizarre action would not have been required.

There are a number of other troubling issues for me here, but I think that's a sufficient list for now.  Because I can see such manipulation here in the CMBS market, I assume that manipulation is happening elsewhere, where there is perhaps less transparency.  I make this assumption because in every financial crisis there are two components:  the actual financial damage and the associated loss of confidence.

Of the two, the crisis in confidence is the part most addressable by politicians using their power to effect specific market behaviors.  During the Great Depression, FDR used government power to directly target higher agricultural prices by openly destroying crops and livestock.  The idea was that once people regained their confidence, they were supposed to begin buying and selling with their former vigor.

Under the very best of circumstances, the confidence-building efforts of the politicians will also provide outlandish returns to well-connected financial elite, who will therefore not put up any opposition to the actions. 

Here we have large banks getting full price compensation from the Fed for a pile of ruined debt, in an action designed to "restore confidence" to the CMBS markets so that market participants will resume buying and selling with their former vigor.  That's a win-win-win as far as everyone is concerned.  

Well, everyone except the taxpayers, of course.

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25 Comments

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Market Manipulation

Hello Chris:

Sper read. Thanks! Take care

TheRemnant's picture
TheRemnant
Status: Silver Member (Offline)
Joined: Jan 29 2009
Posts: 141
Re: Market Manipulation

Thanks Chris,

I have to ask this to you and readers.  Are we convinced yet that the State is beyond reform?  I.e. We cannot vote our way out of this?

Government is a disease that masquerades as its own cure.

clthk01's picture
clthk01
Status: Member (Offline)
Joined: Mar 17 2009
Posts: 3
Great article

My Takeaways:

1. The ratings agencies are puppets, and have no independence

2. The Fed Balance Sheet is currently the worst of any entity in the history of the world, based on the crap they have been and continue to be buying since March 2008

3. If Ron Paul's legislation were to pass, and a true independent auditor with no ties to the US were allowed in to audit the Fed balance sheet, the ensuing report would destroy any remaining US financial credibility in the world, collapse the US$, and put US T-bills into junk status

4. This being said, politicians will allow the cloak and daggers to continue out of necessity

Ready's picture
Ready
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Joined: Dec 30 2008
Posts: 917
Re: Market Manipulation
TheRemnant wrote:

Thanks Chris,

I have to ask this to you and readers.  Are we convinced yet that the State is beyond reform?  I.e. We cannot vote our way out of this?

Government is a disease that masquerades as its own cure.

What a great question!

I have been seeking a cause to get behind to initiate real change for several months now. I have not found a way to impact said change as of yet. I hope that someone can point us to something that can work with the time we have left!

TheRemnant's picture
TheRemnant
Status: Silver Member (Offline)
Joined: Jan 29 2009
Posts: 141
Re: Market Manipulation
Ready wrote:
TheRemnant wrote:

Thanks Chris,

I have to ask this to you and readers.  Are we convinced yet that the State is beyond reform?  I.e. We cannot vote our way out of this?

Government is a disease that masquerades as its own cure.

What a great question!

I have been seeking a cause to get behind to initiate real change for several months now. I have not found a way to impact said change as of yet. I hope that someone can point us to something that can work with the time we have left!

There is an answer.  Click the link in my signature.

Ready's picture
Ready
Status: Platinum Member (Offline)
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Posts: 917
Re: Market Manipulation

You gotta love a thinking man.

It will take me some time to digest all that, something I will need to save for this evening.

On the surface, it seems like it is a wonderful desired state. What is not clear to me yet is how to get there. I'll be back... and thanks for the post.

RNcarl's picture
RNcarl
Status: Gold Member (Offline)
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Posts: 382
Re: Market Manipulation
Ready wrote:

You gotta love a thinking man.

It will take me some time to digest all that, something I will need to save for this evening.

On the surface, it seems like it is a wonderful desired state. What is not clear to me yet is how to get there. I'll be back... and thanks for the post.

 

Well,

Human kind in its frailty, will not be able to sustain that concept. Why? Humankind possess vast ability for kindness, love and respect. The same being, harbors with equal ability to be cruel, corrupt, and selfish.

In a perfect world, everyone would contribute to his or her ability, they would care for those who couldn't and be able to settle differences with little duress.

However, as we have seen here on this "community" there are striking differences of opinion that leads to discord. Could Argorism evolve and survive in the shadows? Of course. Barter of services and goods continues even today in many circles. The issue becomes when any "middle" exchange (gold silver) is used to trade things not otherwise easily exchanged. i.e. heart transplant for a haircut.

The concept appears to be very Jeffersonian.

 

End of sideline comment.... you may return now to your regular education on how we are being fleeced on a daily basis.

FWIW, C.

TheRemnant's picture
TheRemnant
Status: Silver Member (Offline)
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Posts: 141
Re: Market Manipulation
RNcarl wrote:

 

Well,

Human kind in its frailty, will not be able to sustain that concept. Why? Humankind possess vast ability for kindness, love and respect. The same being, harbors with equal ability to be cruel, corrupt, and selfish.

I agree.  So let's stop legitimizing monopolies on violence - government - where people can EXERCISE cruelness, corruption, and bring their selfishness to life by imposing their wills over the rest of us.   Agorism is simply a road to get to the community and spirit that Chris talks about repeatedly.

In a perfect world, everyone would contribute to his or her ability, they would care for those who couldn't and be able to settle differences with little duress.

They did before government "solved" it.  Unfortunately, we never learned about that in State indoctrination camps a.k.a. public education.  Here's one or two of a billion examples you won't find in school textbooks.

However, as we have seen here on this "community" there are striking differences of opinion that leads to discord. 

 Yes.  Humans have discord.  And need to be protected.  How can this be acheived in a Stateless society?  A primer can be found here and here.

End of sideline comment.... you may return now to your regular education on how we are being fleeced on a daily basis.

FWIW, C.

LOL.  I know I am being fleeced.  I want to *DO* something about it.

Jeff Borsuk's picture
Jeff Borsuk
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Posts: 150
Re: Market Manipulation

Thanks Chris!

You are truly (and thankfully) our "faithful information scout"!

Jeff

funkyspec's picture
funkyspec
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Re: Market Manipulation

 Maybe this comment would be better left over at the agorism thread, but has anyone checked out the Open Source Ecology effort ( www.openfarmtech.org) and their land-based demonstration site, the Factor e Farm, ( http://factorefarm.org/ )? BTW, PeakProsperity.com is on their weblog ( http://openfarmtech.org/weblog/ ) blogroll, so some of them must be familiar with Chris and his work. I just think that the folks at the Factor e Farm are developing an impressive set of practical tools and technologies that can be implemented at a small-community scale. The goal is to allow a small group of people to become completely self-sufficient given a reasonable amount of land ( ~30acres), so this offers at least one avenue of realizing a society of freely trading communities free from extensive interference from the state, I think. 

resilientjake's picture
resilientjake
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Re: Market Manipulation

Great link, funky.

I just graduated this spring with a BS in bioengineering, which I'm afraid will not be a viable field in a world of reducing complexity. That said, I am more concerned now with finding/building a transition community than I am with finding a job and becoming a wage slave. I've moved back in with my parents and I'm spending most of my time re-thinking my future and working to develop transition skills. The Open Source Ecology effort looks like a great resource for this!

eb_riesling's picture
eb_riesling
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Posts: 53
Re: Market Manipulation

Chris great article as always.

My one comment and observation to date is this:

As repugnant as this practice is to us here on this site the overwhelming majority of people in the US and other leading countries expect the government and central banks to do something even if that something ultimately makes the situation worse.  To do nothing and let the market self correct would be political suicide.  the irony as I see it (anecdotal observations), is that the very people who expect and demand government action are those most hurt by it.

 

Until the general publics understanding of economics improves (Austrian vs Keynes) the current financial system will continue with its present course to an ultimate collapse when all fiat currencies go up in flames.

 

Pity as it does not have to end this way.

 

E

 

Robinson's picture
Robinson
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Posts: 38
Re: Market Manipulation

Yes is the time to work in a community oriented live, independent of the goverment that will collapse in the coming years.

The idea is well depicted in the movie zeitgeist addendum, just is missing the work needed to make the human a real contibutor to the community, the work of each human over the egoism, that work is very well document in the laitman.com and kab.tv sites.

Thanks

 

ELIZABETH S.'s picture
ELIZABETH S.
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Re: Market Manipulation

Chris,

I always check in with this site for the reality that the MSM will not dare report.

The things I read here are often disheartening....

But I'd rather know.

Thanks for it all!

Davos's picture
Davos
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Re: Market Manipulation

I always check in with this site for the reality that the MSM will not dare report.

The things I read here are often disheartening....

But I'd rather know.

I think we are all red pill poppers...Perhaps CNBC and MSNBC are for the blue pill poppers.

Headless's picture
Headless
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Posts: 363
Re: Market Manipulation

The manipulation is much worse than you think:

Not only will "the next twenty years be much different than the last," they will be be worse than the 50 years prior to the last 20 in direct proportion to the extent the last 20 were brought to a frothy boil above said 50; i.e., don't just expect a regression to the 1950 to 1980 mean, expect a standard of living that is equally below that period as was the recent period of bubblemania above it. To put it in simple terms:

1980-2007 standard of living: 10

1950-1980 standard of living: 6

2010-inifinity? standard of living: 2

ejanea's picture
ejanea
Status: Bronze Member (Offline)
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Posts: 53
Re: Market Manipulation

 That depends upon how you measure standard of living.

J

skyriver's picture
skyriver
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Posts: 20
Re: Market Manipulation

 If I understand correctly, it's in the Fed's best interests to take on all the bad stuff they can from their member banks.  This way it's backstopped and ultimately paid for with interest from the US Govt / American taxpayers.  So the more they can take up the bad money from members, the healthier/wealthier the members are, with interest added since the money is borrowed from us.  They are loving it, I'm sure.

 

Another thought - we pay for it once + interest by directly borrowing for homes, etc. and then we will pay for it a second time + interest by paying back the government debt.  So, in effect, the banks make the money twice + interest twice.

DavidC's picture
DavidC
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Re: Market Manipulation

I consider what is happening in the stock markets at the moment to be insanity, if not manipulation (which I believe it to be also).

The UK today published its latest GDP figures - the economy has slumped 5.6% since the second quarter of 2008, the Office for National Statistics (ONS) said, the biggest fall since its records began in 1955.

In the US, Microsoft and Amazon published figures below estimates - estimates, which, as far as I can gather, have been low by analysts because of the current conditions. So, thus far, 74% of S&P have beaten these low analysts' estimates and 60% have had earnings drops, in other words these low estimates have been beaten because of cost cutting (and layoffs presumably).

Result, over the last two weeks the markets have rallied over 11%. TODAY, the FTSE finished UP! And, as I write, it looks as though the Dow and S & P will also finish up! Bloomberg TV a bit earlier described the US moves as being partly due to company report revenues being less worse, while also describing the 'disappointing' Microsoft/Amazon results.

This is absolute madness.

DavidC

http://www.zerohedge.com/article/market-rips-short-interest-plunges

Headless's picture
Headless
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Posts: 363
Re: Market Manipulation

Davidc,

It's all about a certain notorious "bank holding company":  its traders are buying from and selling to themselves--in the upward direction; when enough pension fund managers have bought in at the higher levels over a period of time, as they inevitably must, this group of scumbags will cash out again. This is all going to end very badly within the near future. All the talk about "high frequency trading" completely misses the real point: illegally inflated prices. Were someone to have access to individual trade records, we would see exactly how the market is being manipulated up by coordinated buyers and sellers, all of whom are working together and share the same corporate logo. There is no solution for this other than complete collapse of the market, since these people will always have the advantage and they won't stop until they are forced to...

DavidC's picture
DavidC
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Posts: 243
Re: Market Manipulation

Hi Headless,

Eloquently put! It's what I was alluding to hence my initial sentence and the posting under Chris's 'Market Manipulation', but I really liked your post.

I think what's being done behind the scenes (whether it's for the powers-that-be to maintain their power or to keep the sheeple happy) is doing nothing but exacerbating the situation. Irrespective of short term manipulation or other shenanigans, the incoming waves can't be stopped and won't be stopped by the hubris (for whatever reasons) of the people trying to stop them. In the absence of another bubble to inflate and the inability to cut interest rates further - unless rates are set negatively, in which case the parallels with Japan will be even closer - the market will HAVE to reset to a deleveraging and a paradigm change.

I do think HFT is part of the problem though - Joseph Saluzzi had some good stuff to say today (and refers to the certain notorious bank holding company, albeit not by name!).

http://market-ticker.org/archives/1261-More-On-High-Frequency-Trading.html

DavidC

Headless's picture
Headless
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Posts: 363
Re: Market Manipulation

DavidC,

It's a unique time in history when one can use the word "scumbag" in a declaratory sentence and be called "eloquent"; it takes the existence of true scum to allow this to happen. We know who we are talking about.

I have been "screaming" about the crime syndicate known as Wall Street, more specifically, a certain "bank holding company" for years, and it is with a great sigh of relief that there is finally some indication that some few of my fellow citizens are starting to understand that you don't need to have Italian names to constiute a mafiosa-like organization(as Gerald Celent would say): your "eloquence" comment being a milestone in my lonely and seemingly--until recently--self-abusive quest.

I, at one time, was what could be considered a normal American: going about my business, trying to get ahead. Then, I got sucked into the insanity of the stock market and,  having degrees in math and physics, I quickly came to the conclusion that something was amiss. Having childhood friends who worked in the inner sanctum of a certain "bank holding company,"  I heard stories that made me want to burn American flags. This is the same old story; as simple as buying a yellow Volkswagon and suddenly noticing how many Volkswagons are on the road around you (for the 200Xs, think Honda Civic); that is to say, without any conscious effort, I suddenly realized that level II trades came in mathematical patterns--distinct patterns, that were related to certain market makers in a way that was reminiscent of watching a warm-up rally between Venus and Serena.  I can't even imagine how many people out there know the truth about what has been being done to the average American 401k contributor for the last couple of decades or so, but it's excrutaitingly too bad some large number of them didn't decide to speak up, in the interest of national security and simple fairness to working Americans( Max Keiser being the standout exception), as opposed to covertly conspiring with the criminal syndicate and exploiting the manipulation by riding the wave and exacerbating the market swings for their own benefit.

We are many seconds past our financial 11:59; we can hear the approach of the "tick"; and any day now we could all wake up to financial armageddon. Certain "bank holding companies" have so thoroughly sacked the working class of their hard-earned wealth and concentrated that wealth in a place that knows no productivity in the name of Humankind, that it is merely a downhilll slide into the cauldron from here on. There will be obstacles that will slow or detour the descent, but it is absolutely inevitable. Ask Karl Denninger about the math. Anyone who has some understanding of mathematical reality (which, apparently, 90+% of Americans don't) can foretell the heinous destiny of America and Her sheeple. 

Sean66's picture
Sean66
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Posts: 3
Re: Market Manipulation

 Go to www.thevenusproject.com and www.thezeitgeistmovement.com for some great ideas for the future.

Cloudfire's picture
Cloudfire
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Posts: 1813
Re: Market Manipulation

Hi, Headless;

Your last two posts are great examples of why I value the member contributions of this site so much . . . You nailed it, dead on  . . . precisely my current take on what's going on in the market . . . and why I give it a wide berth . . . It's tempting to think that one can outsmart the market . . . but unless one does exclusively short-term trades, and skillfully at that, it's more than an unfair playing field . . . it's a death-trap.  Thanks for the vivid description . . . . a scumbag by any other name . . . . well, you know the rest . . .

 

Davos's picture
Davos
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Posts: 3620
Re: Market Manipulation

you don't need to have Italian names to constiute a mafiosa-like organization

Charles "Lucky" Luciano was given a tour of the banks/Wall Street, I forget his exact words, but they were to the effect, "And you call me a crook?"

Names, Perception and How Reality Lags Behind

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