The trading desk that controls the fate of the US-economy is located on the 9th floor of 33 Liberty Street, also known as the home New York Fed. From a trading desk cluster at this location, the uber-secretive “Plunge Protection Team,” <PPT> directs the vast money machine at its disposal to determine the daily level of interest rates, and the next 100-point swing in the S&P-500 index <SPY>.
The PPT is the bridge between the marble corridors of the Federal Reserve and the Treasury department in Washington and the bustling trading floors of Wall Street. The PPT monitors the markets 24 hours per day, and is active on the stock index futures markets, thru its secret agents – when necessary, in order to prevent a sharp downturn from morphing into a full blown meltdown or a Bear market.
One way to manipulate the stock market, for example, – the PPT could spend $20-billion, plus or minus, and purchase Dow Industrial index futures. Depending on margin levels, $20-billion would translate into at least $100-billion in buying power. If the targeted intervention takes place in a hugely oversold market, $100-billion of firepower could not only stop stock index prices from plunging, but could also encourage huge amounts of sideline cash to flow into equities and engineer a powerful recovery rally.
With Bear Raiders on Wall Street pointing to a litany of worrisome factors, including the US-China trade dispute, and $50-billion per month of quantitative tightening by the Fed, – complacent investors were caught flat footed. The SPY had just suffered its largest monthly loss since the financial crisis a decade ago.
December is typically a buoyant month for stocks. Yet on the close of December 23rd – both the Dow and S&P 500 were down > -14% for the month — and on track for their worst December performances since the Great Depression in 1931. If the stock market indexes close down for the year, which looks likely, … it would only be the 13th time that traders have seen a full year decline since 1960.
As such, on Sunday evening, December 23, US Treasury chief Steven Mnuchin convened the ‘Plunge Protection Team’ – seeking to calm market jitters. Mnuchin tweeted that he had spoken to the heads of Bank of America, Citi, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo, and the CEO’s all assured him they had ample money to finance their normal operations, even though there hadn’t been any serious liquidity concerns rattling the market. Liquidity was not seen as a problem in the economy, so perversely, some computer algos interpreted the phone calls as a signal that a lack of liquidity could become a problem in the near future. Mnuchin’s eyebrow-raising statement came a day after he tried to pour cold water on reports that President Donald Trump had discussed the possibility of firing Fed chief Jerome Powell.
On December 24th – President Trump blasted the Fed in a Monday morning tweet, describing it as the “only problem” for the U.S. economy, as top officials discussed a rout in stock markets caused in part by the president’s attacks on the central bank. Trump laid the blame for the sharp downturn in the US stock market firmly at the feet of the central bank. “The only problem our economy has is the Fed. They don’t have a feel for the market,” Trump said on Twitter. “The Fed is like a powerful golfer who can’t score because he has no touch – he can’t putt!”
President Trump is an avid market watcher, and he was informed that the stock market’s sharp downturn that began in October has erased all of its 2018 gains and was nudging the S&P-500 index closer to its worst year since 2008. On December 25th – President Trump suggested that the recent swoon in the stock market is a buying opportunity for investors. “We have companies, the greatest in the world, and they’re doing really well,” Trump told reporters at the White House on Christmas Day. “They have record kinds of numbers. So I think it’s a tremendous opportunity to buy. Really a great opportunity to buy.”
Trump’s recommendation to buy beaten down stock indexes ahead of the PPT’s forthcoming intervention scheme – came one day after the most violent Christmas Eve selloff on record, and the day when the S&P fell not only to its lowest level in 20 months, but also slumped to border line of a Bear market. For Trump, the stock market is a barometer measuring the success of his economic policies, and while he was pointing out virtually every major uptick for the past two years, the recent -20% plunge has infuriated him, leaving him mute on any market decline.
If Mnuchin’s efforts to convene the PPT were meant to soothe markets, – it was not evident on Monday December 24, – as Wall Street opened sharply lower in a shortened session ahead of Tuesday’s Christmas holiday. All the 11 major S&P 500 sectors were down, and all but one of the 30 components of the Dow Industrials were in the red. For the third straight day, more than 2,500 New York Stock Exchange- and Nasdaq-listed stocks were hitting 52-week lows, reflecting a depth of selling the market had not experienced since the height of the financial crisis a decade ago.
The Dow Jones Industrial index plunged by -653 points on Monday in volatile trading, closing below the psychological 22,000-level. The SPY fell -2.7%, slipping to the border line of a Bear market as it fell -20% from its 52-week highs.
During the previous week the Dow had lost -1,655 points, or -6.8%, its worst week of trading since October 2008 during the financial crisis. The S&P-500 index <SPY> had lost -7% for the week. The Nasdaq index ended -22% below its record reached in August and was squarely in a Bear market. Both the Dow and the SPY were in the red for 2018 by > -10%. Some traders suggested that the market has gotten oversold to the point where a short-term bounce could occur, if only for technical reasons.
PPT intervention in the stock index futures markets is a mechanism designed to keep the markets from crashing either during or on the verge of real panic starting. Such was the case on December 26th – when Wall Street notched its best day in 10 years as stocks rallied back Wednesday, giving some post-Christmas cheer to a market that had been battered this December. The Dow Jones Industrial Average jumped more than +1,000 points — soaring to its biggest point-gain ever — rising nearly +5% as the PPT’s trading desk returned from a holiday break. The SPY index also gained +5% and the technology heavy Nasdaq rose +5.8%, gaining +361-points.
However, on December 27, at 2;30-pm, the Dow was tumbling to a loss of -611-points from the previous day’s close. Then suddenly, Wall Street staged a swift and stunning turnaround in the last 90-minutes of trading, that rescued stocks from a steep dive and put the Dow on track to end a topsy-turvy, volatile session with a gain of +260-points. The S&P 500 and Nasdaq eked out modest gains after having been down -2.9% and -3.3%, respectively. Thursday’s sharp swing in stocks followed their best day in 10 years.
While the financial media remained silent about the reasons for the inexplicable miracle rally, veteran traders saw the fingerprints of the PPT all over the stunning +870-point intra-day turn around.
Even with the two-day winning streak, the Dow, SPY, and Nasdaq are all down more than -9% for the month. Prior to the two-day rally, the SPY had fallen in 11 of 16 trading sessions in December, with five of the declines by -2% or more.
With the US Treasury on course to run budget deficits of more than -$1-trillion per year for the next several years, perhaps the only way to finance the deficits is to scare investors into shifting some of their portfolio positions from the stock markets and into the imaginary safe haven of Treasury notes. Canabalizing the US stock market with a tighter Fed policy (QT) is not a enviable way to finance the gigantic US budget deficits, but the Fed might no other other choice, if it wants to avoid monetizing deficits with QE, and inflating future stock market bubbles.
On Saturday morning, December 29th, Trump took the initiative to set the stage for an upward spike in US stock index futures with his optimistic tweet updating the current state of US-China trade negotiations; “Just had a long and very good call with President Xi of China. Deal is moving along very well. If made, it will be very comprehensive, covering all subjects, areas and points of dispute. Big progress being made!” Donald J. Trump @realDonaldTrump. Traders are aware that Trump is working alongside the PPT and is doing everything in his power to prop up stocks on the last day of the year, and aiming for a recovery rally in January.