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Could There Really Be a Bernanke Put?

Stock-Markets / Market Manipulation Mar 26, 2011 - 02:34 AM GMT

By: Sy_Harding

Stock-Markets

Back in 1998, the U.S. stock market had become overbought and was in a normal correction, while Asian markets were plunging due to a currency crisis. When on top of those situations, giant hedge fund Long-Term Capital Management collapsed, causing problems for some major banks, the U.S. Fed worried that the combination might send the U.S. economy into a recession. So it quickly and dramatically cut interest rates. The economy did not slow into a recession, and the interest rate cuts encouraged the stock market, which turned back to the upside and kept going into the 1999 bubble.


Since the Fed had pulled the stock market back from a correction, talk began of a ‘Greenspan Put’, a reference to Put options used as insurance in a stock market decline, and a claim that Fed Chairman Alan Greenspan would not let the stock market decline. We know the ending. The market later plunged into the severe 2000-2002 bear market.

In early 2008, as the severe 2007-2009 recession began, and the Bernanke Fed began drastically cutting interest rates to attempt to control the worsening recession, the financial press began talking about a ‘Bernanke Put’, that the Bernanke Fed’s real goal was to prevent the stock market from going down.

If there was a Bernanke Put, it didn’t work very well, as the stock market plunge worsened into the severe 2007-2009 bear market.

However, over the last year or so, as the stock market has recovered, and the Fed continued and even extended its easy money policy, there has been resurrection of belief in a ‘Bernanke Put’, that the Fed will not allow the stock market to go down into even a normal correction.

I’ve been saying such a thought is ridiculous. We have a capitalist system, a free-market system, the definition of which is that goods are voluntarily exchanged at a price arranged solely by the buyers and sellers, without government intervention. The government’s role is to prevent collusion or fraud, while providing a healthy economic environment in which the free market system operates.

With that in mind, it was understandable that Japan’s central bank, the equivalent of the U.S. Federal Reserve, acted quickly to flood massive amounts of money into the Japanese financial system, in an effort to limit damage to the Japanese economy from the triple-hit earthquake, tsunami, nuclear power crisis.

But I was shocked to read in Bloomberg Business Week that Japan’s central bank was also in the stock market, buying large amounts of ETF’s (exchange-traded funds) that specialize in Japanese stocks. In other words, intervening in its stock market to prevent it from finding a lower level that buyers and sellers might now believe is its fair value in light of the new reality.

And indeed, the iShares Japan etf, symbol EWJ, experienced a huge inflow of new money. As CNBC reported “Inflows into Japan ETF’s since the earthquake and tsunami ravaged the nation have confounded market strategists. How to explain the flood of money into a country that will take years to rebuild, and will likely act as a drag on global GDP growth?”

Nick Colas, chief market strategist at ConvergEx says, “If you had told me what was going to happen in Japan and what the Japan etf EWJ would see, I would have guessed at least a billion dollars would have flowed out, and it’s been just the opposite, and it doesn’t feel like retail flows.”

It does make one at least think about what is happening in the U.S. stock market, and the possibility of a ‘Bernanke put’, since there is similar puzzlement regarding the U.S. market’s recent actions.

The U.S. stock market topped out in mid-February, and was in a mild correction when the disaster in Japan struck. Like other global markets, the U.S. market plunged further on the news from Japan. The sizable additional plunge did have the U.S. market short-term oversold, and likely to have a brief bounce off the oversold condition.

But the expected brief oversold bounce continued into an impressive rally, with the market up six of the last 7 days, in spite the worsening of the previous concerns that had the market topped out in mid-February; rising global inflation, spiking oil prices, political uprisings in oil-producing countries, the European debt crisis, and so on.

The driving force seemed to be, as with the Japanese market, unusual support coming in from somewhere.

For instance, over the last two weeks, in addition to the worsening of the previous concerns, very sobering changes have shown up in previously positive economic reports. Among them, home sales are declining dramatically again, Durable Goods Orders unexpectedly plunged last month, inflation at the producer level spiked up in the largest monthly rise since the terrible inflation spiral of the 1970’s, consumer confidence has fallen to its lowest level in five months. And on and on.

Yet, each time a negative report was released and initially greeted by selling in the stock market, buying came in from somewhere to move the market to the upside.

If I hadn’t read about the Bank of Japan’s activity in its stock market it would not enter my mind. A ‘Bernanke put’?

Nah. It must be just the market climbing an unusually high ‘wall of worry’. . . . But still . . . . Could the market really be encouraged by worsening economic reports, and not yet knowing the further additional impact that might come from the massive disaster in Japan?

Sy Harding is president of Asset Management Research Corp, publishers of the financial website www.StreetSmartReport.com, and the free daily market blog, www.SyHardingblog.com.

© 2011 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Eddie Beer
26 Mar 11, 10:33
Bernanke put

Ever hear of POMO?


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