HOW THE GOVERNMENT RUN RALLY MORPHED INTO THE BANK RUN RALLY
In early March I turned quite bullish for the first time in 2009. My reasoning behind the bullishness was relatively simple. The market had overshot the mean to the downside and psychology was far too negative. This created a market that was like a loaded spring. All it needed was a catalyst. That catalyst came in the form of the M2M rumors. In other words, the government was going to directly intervene in the market and stop the bleeding. What resulted over the ensuing months was even larger than I ever could have expected.
At the end of March I began referring to the rally as the “government run rally”. Although the actual underlying fundamentals were not improving, the government had created a series of events and catalysts that forced the shorts out of positions and changed the psychology of the market:
The last of these well crafted maneuvers were the capital raises and the stress tests. This series of events created a foundation for a market bottom and helped form the most important portion of the current rally in stocks. It would sound conspiratorial if it weren’t entirely true. What has ensued since has confounded even the most veteran of traders. The market has continued higher in a nearly straight line.
There is no doubt that the economy has rebounded sharply from the days of ISM 35 and GDP -6%. The overshoot to the downside was extreme to say the least, but what is less clear is why the market has rallied an astounding 60% off its bottom and effectively priced in 20%+ earnings growth and 4% GDP going forward when the real underlying problems that caused this entire mess are still apparent. We have simply implemented the failed Bank of Japan policies of the 90’s combined with the failed bank policies of Maestro Greenspan – crank up the printing press, turn on the liquidity spigot, implement quantitative easing and let the banks earn their way out of their problems. It sounds great in theory, but Greenspan’s policies failed miserably as did the Bank of Japan’s. Neither approach proactively attacked the root of the problems. The results speak for themselves.
Mr. Bernanke has declared an end to the recession, but we continue to see mounting consumer credit losses, 500K jobless claims weekly and stagnant wages. Meanwhile, the banks are back to their old tricks and the banking bonuses are back to record highs. While the consumer struggles and banks flourish the market continues higher despite the fact that the consumer is a far larger portion of economic growth. So what is driving the market higher now that the government has stepped out of the way? Moonraker Fund Management lays out the scenario we have long believed, but been unable to prove:
Moonraker Fund Management, the independent investment boutique, is concerned that banks may have been using their bailout money to buy equities, helping to fuel a rally that is vulnerable to a major correction if they consequently sell in thinly traded markets.Instead of lending to businesses and homebuyers, banks may have been using some of their bailout money to buy stocks from an oversold base in March, Moonraker believes. The British Bankers’ Association’s own figures show that gross mortgage lending by the banks has fallen from a high of £21.5bn in June 2007 to £9.1bn in August 2009, while new term lending to small businesses was £796m in July, compared with around £900m last October.
Jeremy Charlesworth, Chief Investment Officer of Moonraker and manager of the Moonraker Commodities Fund and Global Opportunities Fund, commented: “Little of the bailout money given to banks seems to have been passed on to businesses or consumers. But it must have gone somewhere and it might have gone to the proprietary desks of the banks to punt the markets. Given all the calls for more transparency, it would be good if the banks could clarify this.
“The banks have every right to use the money they borrow in any way they choose. But it would be good to know how much of the bailout money has been used to buy equities. Clearly, someone has been buying, and given that it hasn’t been ordinary investors and the institutions that does just leave the banks.
“The banks’ balance sheets will certainly have benefited from their equity holdings. If they could sell these investments into a rising market then they would be in a better position to repay their debts. But there will be a problem if the public and institutions do not join the rally and the banks have to sell equities into a vacuum.”
In essence, the government has passed the baton on to the banks so they can keep the party going. This phenomenon has been most evident in bank earnings. Banks are in the business of lending, but an odd thing has occurred while bank earnings soared – they were doing no lending! Banks have been hoarding record amounts of cash as the government floods their balance sheets via various programs and bailouts. Many assume that the banks are either attempting to loan the money or simply letting it sit on their balance sheets earning nothing. But Moonraker’s analysis raises a more nefarious possibility – the banks are effectively creating a ponzi run stock market in which they use the bailout money to drive various market prices higher and thereby juice their own earnings. It’s quite brilliant when you think about it – until the music stops.
All of this of course, has created an environment of false positive psychology. Investors truly believe the crisis is over and that all of our long-term structural problems have been solved by the government. Unfortunately, should this nefarious action be even remotely true, it’s only a matter of time before the banks stop buying for their own accounts and begin to take profits. If the economy continues to flounder and consumers remain wary of the recovery it’s unlikely that the rally will find legs to continue on. The banks will have once again taken advantage of the U.S. taxpayer who so kindly lent the hand that allowed them to survive. But alas, such is the way of the boom, bust manipulated capitalist system that the Federal Reserve has been running for the last 25 years….
Perhaps most important is the role of the Fed in this matter. I have long been critical of Dr. Bernanke and his boom, bust policies, but perhaps the person we should be more critical of is Mr. Obama who has announced that his government will be the most transparent in history. If we are trying to create transparency then why do we have no idea where the Fed has wired all of the taxpayer bailout money? If there is more nefarious action performed by the banks why do we not know about it? Do the citizens of this country deserve to sit around while we are spoon fed this recovery propaganda while at the same time investing our retirement savings in a market that is essentially nothing more than a Fed induced ponzi scheme?
Of course, there is the distinct possibility that the banks are not using the bailout money to drive markets (though highly doubtful). There is the distinct possibility that the banks learned their lessons and will not create another disastrous scenario for the economy (don’t count on it). If this is the case then what does the Fed have to hide? But if it is not the case then every investor in this country and in the global economy deserves to know that the markets are being driven by false demand.
In summary I bring you thoughts by the always pragmatic, Richard Russell:
Back to the Fed. The Fed created two trillion dollars of assets and debts to rescue banks from their stupidity and mistakes. American taxpayers, to whom the Fed is beholden, have no idea how the money was spent and who it went to. The Fed’s answer is that US citizens have no right to question or audit the Fed. The Fed has resisted all requests for an accounting or an audit.
Under the Freedom of Information Act, Bloomberg filled suit to force the Fed to reveal what it has done. When the case went to court, the judge ruled that the Fed is obligated to release records of its lending on behalf of taxpayers. The Fed is now considering an appeal.
On his second day in office, President Obama in a letter to ALL agencies wrote, “Transparency promotes accountability” because “information maintained by the federal government is a national asset. My administration is committed to creating an unprecedented level of openess in government.
So why not audit these arrogant basterds at the Fed. What are they hiding? What are the “dangerous secret”?
Indeed, what are you hiding Mr. Obama and Mr. Bernanke?
TPC, what gives me faith is that in all honesty, the small investor sees what is going on. This doesn’t mean some won’t get burnt because they will get greedy eventually and won’t be able to stomach missing out. But very few informed people believe what the government says and very few believe this rally is real. I mean how can we? The world was crashing down and then a day later things were improving? This whole thing is the government’s way of enticing everyone to begin spending again, hiring again and investing again since the ’stock market is rallying and banks are earning record profits’. But if nobody is buying it, then this whole scheme is going to come crashing down. They are just funneling money to buying equities and buying treasuries. It is going to be a science experiment that I believe will be studied by future generations in their economics classes….
i would describe this rally, the first 20 percent was simple relief rally, the second 20 percent there was a lot of manipulation by the big banks aka GS and JPM, who were often driving the market up in the last 15 minutes of trading day, as it was described on zerohedge. the last 20 percent was driven by traders, fonds and hedge fonds and at the end of this rally, joe6pack put some investments into stock market again.
guess who will be crashed most by any sell-off. poor j6p again. i really feel sorry for him, since he is the real base for the economy.
I think most Americans will agree with you. The bailout money should have gone back to the tax payers or to people who neeed them instead of these bankers.
excellent analysis; Marc Faber’s latest:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=auxNst31pP24
If we rest the thesis on the Fed trying (sucessfully) to duplicate Japan’s (unsuceesful) policies, then the gov stock market support was definately intentional. Japan tried this for a time – explicitly. I think the intent behind this is to affect the mark-to-market balance sheets of everyone; we are talking citizen’s 401k’s, Calper’s pension liabilities, derivatives (not just for speculation, but also the “plain vanilla” stuff sold to retail investors), etc. It’s pretty good marginal leverage .. spending a few $100B over 6 months has increased worldwide balance sheets by $5-7T. Of course, the reverse can also happen (as we all know). The Fed is trying for a soft landing. Now that the S&P is just ~30% off it’s recent 07 high the Fed will preceive this as just soft enough. I expect the broad markets to go nowhere absent some real or perceived change.
http://www.ecb.int/pub/pdf/mobu/mb200909en.pdf
May be worth perusing p 29 / 30 of the ECB september monthly bulletin
Where are the equities funds flows coming from?
TPC, I have just assumed this was case the past few months. Once people started talking about a “liquidity driven rally” and “FED pumping in more liquidity” I just assumed that meant banks balance sheets are strenghted by the FED with more cash and the banks use that cash to buy assets, ie Treasuries, bonds, and equities. So now I’m a bit confused, how is this breaking news? Can you explain how everyone talking about a “liquidity driven rally” is different from this revelation that banks are using excess reserves to buy equities. I feel like I either knew something all along or was making a wrong assumption about the phrase “liquidity driven rally.” I’ll error on the latter until I get an explaination. Thanks.
“We have come to be one of the worst ruled, one of the most completely controlled goverments in the civilized world – no longer a goverment of free opinion, no longer a coverment by a vole of the majority, but a goverment by the opinion and duress of a small group of dominant men.
“Some of the biggest men in the United States, in the field of commerce and manufacture, are afraid of something. They know that there is a power so organized, so subtle, so watchful, so interlocked, so complete, so pervasive, that
they had better not speak above their breath when they speak in condemnation of it”
- Woodrow Wilson
“These international bankers and Rockefeller-Standard Oil interests control the majority of newspaper and the colums of these papers to club into submission or drive out of public office officials who refuse to do the bidding of the powerful corrupt cliques which compose the invisible gowerment.”
-Theodore Roosevelt
In a statement to congress, President Abraham Lincoln states, “I have two great enemies, the Southern Army front of me and the financial institution in the rear. Of the two, the one in my rear is my greatest foe”
Great quotes Finn.
Here’s another famous one:
I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
- Thomas Jefferson
It’s sad that people are quibbling over so many insignificant political issues when this one issue impacts the future of our citizenry so much more than anything else. Unfortunately, the average joe simply doesn’t understand basic finance….
“It’s sad that people are quibbling over so many insignificant political issues when this one issue impacts the future of our citizenry so much more than anything else. Unfortunately, the average joe simply doesn’t understand basic finance…. ”
-The Americans joe doesn’t understand a lot of thing and refuse to ask the mind opening provocative questions. We have fallen so far in science, math, engineering when comparing to emerging market. Take away the calculators and American kids can’t give you the correct change. All the majority of Americans do now is repeating like a parrot, right and left. I guess all that TV really kill our brain. Science in my opinion helps people to see the different scenario, to compare, see the differences. Obama spending plans scares me. Notice how i say plans because we don’t really know where or how much money are being spend yet. But for a bunch of Republicans who voted for the TRILLIONS tax cut (spending) in 2001 and hundreds of billions tax cut in 2007 start to talk like they care about our children debt future is too much of a hypocrisy for me.
Anyway, watch the Supreme Court decision on corporations and their constitutional right as people. Watch who are in favor of that. What will happen when the vote defined by who has/contribute the most money. You think the corruption and the vote buying now is bad? Wait until it becomes legal.
http://www.nytimes.com/2009/09/22/opinion/22tue1.html?hpw
This Supreme Court, the John Roberts court, seems to be having trouble with that. It has been on a campaign to increase corporations’ legal rights — based on the conviction of some conservative justices that businesses are, at least legally, not much different than people.
I like this blog along with zerohedge, market ticker. You guys actually do the analysis and math instead of being propaganda like CNBC
. Also the readers in here are much much better than in marketwatch site
Thanks Henry. I try not to be all doom and gloom, but it’s now clear that the banks have once again stolen from the public. People should be outraged, but no one seems to give a damn….
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