Financial Markets Still Exist?
By Paul Craig Roberts, Dave Kranzler, Michael
14, 2018 "Information
For many decades
the Federal Reserve has rigged the bond market
by its purchases. And for about a century,
central banks have set interest rates (mainly to
stabilize their currency’s exchange rate) with
collateral effects on securities prices. It
appears that in May 2010, August 2015,
January/February 2016, and currently in February
2018 the Fed is rigging the stock market by
purchasing S&P equity index futures in order to
arrest stock market declines driven by
fundamentals, and to push prices back up in
keeping with a decade of money creation.
should find this a surprising suggestion. The
Bank of Japan has a long tradition of propping
up the Japanese equity market with large
purchases of equities. The European Central Bank
purchases corporate as well as government
bonds. In 1989 Fed governor
said that as the Fed already rigs the bond
market with purchases, the Fed can also rig the
stock market to stop price declines. That is the
reason the Plunge Protection Team (PPT) was
created in 1987.
at the chart of futures activity on the
E-mini S&P 500,
we see an uptick in activity on February 2 when
the market dropped, with higher increases in
future activity last Monday and Tuesday placing
Tuesday’s futures activity at about four times
the daily average of the previous month.
Futures activity last Wednesday and Thursday
remained above the average daily activity of the
previous month, and Friday’s activity was about
three times the previous month’s daily average.
The result of this futures activity was to send
the market up, because the futures activity was
purchases, not sales.
would be purchasing S&P equity futures when the
market is collapsing from under them? The most
likely answer we can come up with is that the
Fed is acting for the PPT. The Fed can actually
stop a market decline without purchasing a
single futures contract. All that has to happen
is that a trader recognized as operating for the
Fed or PPT enters a futures bid just below the
current price. The traders see the bid as the
Fed establishing a floor below which it will not
let the market fall. Expecting continuing
declines to make the bid effective, they
front-run the bid, and the hedge funds
algorithms pick it up, and up goes the market.
there another explanation for the shift in the
market from decline to rise? Are retail
investors purchasing dips? Not according to
in Bloomberg, that last week a record $23.6
billion was removed from the world’s largest ETF,
the SPDR S& 500 index fund. Here we see retail
investors abandoning the market.
central banks can produce zero interest rates
simultaneously with a massive increase in
indebtedness, why can’t they keep equity prices
far above the values supported by fundamentals?
As central banks have learned that they can rig
financial asset prices to the delight of
everyone in the market, in what sense does
capitalism, free markets, and price discovery
exist? Have we entered a new kind of economic
Dr. Paul Craig Roberts was Assistant Secretary of
the Treasury for Economic Policy and associate
editor of the Wall Street Journal. He was
columnist for Business Week, Scripps Howard News
Service, and Creators Syndicate. He has had many
university appointments. His internet columns
have attracted a worldwide following. Roberts'
latest books are
The Failure of Laissez Faire
Capitalism and Economic Dissolution of the West,
How America Was Lost,
The Neoconservative Threat to
views expressed in this article are solely those
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