Did the Fed Buy the Market to Stop the Collapse?

Now that the market has rolled over and erased most of the gains from last week, I can’t help but wonder just why the market rallied at all. True, it was oversold… but the FOMC announcement wasn’t exactly bullish (Seriously… ZIRP for another year was reason for an 8% rally in four days?).

I found it interesting that the New York Post published a story containing the following quote just 3 hours before the post-FOMC market ramp job started.

Back in October 1989, a guy named Robert Heller, who had just quit his post as a Fed governor, suggested that the government should purchase stock index futures contracts to calm the markets in times of distress.

“The Fed could support the stock market directly by buying market averages in the futures market, thus stabilizing the market as a whole,” Heller wrote in an op-ed piece in The Wall Street Journal after saying the same thing in a little-noticed speech. “The stock market is certainly not too big for the Fed to handle.”…

This is a rather odd turn of events… a former Fed official urges the Fed to step in and buy the stock market… just three hours before the markets mysteriously reverses and rallies hard on no real news of note.

This begs the question… did the Fed buy the market to put a floor under the collapse? There’s no telling for sure. But it’s rather odd that this article came out just three hours before the market magically reversed and exploded higher

If the Fed did actively buy the stock market to try and put a floor under it, we can assume three things:

  1. The Fed is becoming truly desperate
  2. The Fed realizes QE isn’t helping
  3. QE 3, if it arrives, will be coming later down the line

If the Fed did in fact buy the market two weeks ago, then the Fed is getting extremely desperate. We know the Fed has been supplying juice to key Wall Steet firms who then bought the market, but never before has it been so obvious that the Fed itself may have been buying the market.

Remember since March 2009, QE has been the primary tool the Fed used to deal with the Financial Crisis. QE 1 was something of a success in that in restored investor confidence in the system. However, as I’ve noted in previous articles, by the time we got to QE 2, the negative consequences of QE (inflation) far outweighed the positive consequences (stocks rising).

So the fact the Fed did not announce QE 3 two weeks ago but chose to buy the market (at least it looks that way), indicates then we’re are DEFCON 1 RED ALERT for the entire financial system as it indicates that the Fed is abandoning its more traditional monetary tools and simply trying to buy the market it means the Fed is losing control of the system in a big way.

It also indicates that the Fed realizes that the benefits of QE come at too high of a cost for it to engage in more of this for now. Instead, the Fed will save QE 3 for a little further down the road as a final Hail Mary pass.

Which brings me to the most important point from yesterday’s Fed FOMC: there were three dissenting votes (an 18 year high). This tells us that Bernanke’s “inflate or bust” mentality is coming up against serious friction at the Fed. And it also tells us that there will be fierce resistance to QE 3 if the Fed chooses to unveil it down the road.

The take home point here is that the Fed is not as market friendly as before. There is growing dissent amongst Fed officials. And we’re beginning to see signs of desperation.

In plain terms, the situation in the markets right now is very VERY dangerous. It is easily the most dangerous market I’ve ever seen. We are going to see greater losses and sharp rallies. But the overall trend is now down.

I warned to get defensive several weeks ago. That warning is even more important now. I would avoid stocks and Treasuries as neither are particularly safe. I’d have increased exposure to cash and PHYSICAL bullion (Gold and Silver). If you have to remain long stocks shift into large-caps and companies that will exist a year from now (brands and industries people will need regardless of how bad the economy gets).

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Good Investing!

Graham Summers





Posted by Phoenix Capital Research