I have the utmost respect for John Mauldin of FrontlineThought.com. His grasp of investment-financial affairs is encyclopedic, and the service he offers to the public is superlative. I read him with great pleasure every week. But I definitely must take issue with his recent essay on the existence of the Plunge Protection Team in which he declares the PPT to be impossible -- in his words an "urban myth." I believe Mr. Mauldin has bought into the warped vision of CNBC's Art Cashin1, and in so doing has come to a very wrong conclusion about the reality of the PPT.
Mauldin says that he consulted with Cashin before writing his article; and he quotes Cashin liberally in the piece. The problem, however, with relying on the view of Art Cashin to determine the validity of the PPT's existence is that you are asking a CNBC employee1 about the credibility of Wall Street as an institution. CNBC is a total captive of Wall Street. It could no more bite the hand that feeds it, than it could climb to the moon on a rope of sand. While CNBC employees are willing to expose specific people and corporations for illegalities, they simply cannot speak ill of Wall Street itself as an institution; it is psychologically impossible for them to do so. When asking Cashin about the PPT, you are asking him if the business he revels in every day is being manipulated. In other words, you are asking him if what he does for his living is really on the up and up. Cashin is an insightful, engaging analyst of the NYSE. He's smart as a whip. And I'm sure he's scrupulously honest. But he's also human, and humans are just not able to OBJECTIVELY comment on the fact that their life's work might not be exactly kosher.
In other words, asking a CNBC employee1 about the existence of the PPT is like asking an IRS agent about the existence of Constitutional violations in their operation -- you're not going to get an objective answer. How possibly could Cashin face up to the fact that his daily analyses to millions of viewers on TV are a bit on the phony side? The answer is that he can't. He will have to partake in some artful sophistry. He will have to deny that something like the PPT could exist. His refusal to believe, of course, must be backed up with some reasons. But humans are very clever; they can always come up with reasons to believe what they want to believe.
The Mauldin Argument
After consulting with Cashin, Mauldin has concluded beyond all doubt that the market could not be manipulated. After a lengthy quote from Cashin in his weekly letter of April 4, 2003, Mauldin then launches into his opinion that the market is far too big to manipulate, that the amounts of money required would be too huge, and the losses incurred too staggering. The size of the trading community "is in multiple hundreds of billions," says Mauldin. "It would require the willingness to lose billions of dollars every time you took the plunge." [emphasis added]
But is this true? Let's examine these assumptions and see if they have merit. Let's see if indeed the market is too huge to manipulate, and if it would actually require massive losses. Former Federal Reserve governor, Robert Heller, had the following to say about the size of the market in an article he wrote for the Wall Street Journal, on October 27, 1989 -- an article that shockingly advocates direct intervention by the Fed into the market to buy S&P futures:
"The stock market is certainly not too big for the Fed to handle," Heller stated. "The foreign exchange and government securities markets are vastly larger. Daily trading volume in the New York foreign exchange market is $130 billion. The daily volume for Treasury Securities is about $110 billion. The combined value of daily equity trading on the New York Exchange, the American Stock Exchange and the NASDAQ over-the-counter market ranges between $7 billion and $10 billion."
Observe that this figure of $7-$10 billion is for the combined trading of all the markets, and it is for 1989. Thus, we need to chop it some to arrive at figures for just the Dow, and then we need to expand it some to get today's figures. So let's assume the Dow's daily trading would have been approximately $5 billion in 1989, and that it has grown to around $15 billion today. This is hardly "hundreds of billions," as Mauldin claims. On the contrary, it is a very manageable sum as former Fed governor Heller maintained.
Robert Heller was the man who first put forth the idea that the stock market needs to be "stablized" by an outside source whenever it is in jeopardy. To accomplish the necessary stablization, Heller declared in his WSJ piece that, "An appropriate institution should be charged with the job of preventing chaos in the market: the Federal Reserve....The Fed already buys and sells foreign exchange to prevent disorderly conditions in foreign exchange markets. The Fed has assumed a similar responsibility in the market for government securities. The stock market is the only major market without a marketmaker of unchallenged liquidity or a buyer of last resort." He went on to then say, "The Fed could support the stock market directly by buying market averages in the futures market, thus stablizing the market as a whole." [emphasis added]
So there you have it -- the stock market is quite manageable and the Fed has been urged by one of its own to take on the job. This certainly refutes Mauldin's claim tht the PPT cannot exist because the sums of money involved are simply too huge. But what about Mauldin's claim that the PPT would be required to lose billions of dollars? Any merit there? Listen to what financial reporter Rick Ackerman wrote on the issue in October of 2001:
"There are two reasons why this theory [about the PPT] is not so farfetched as it might sound. First, the firms [that comprise the PPT] could make quite a bit of money at it. And second, they would not have to risk much of their capital to do so.
"Anyone who doubts this," Ackerman says, "could not have been watching the stock market closely last Thursday, when a weak and dispiriting opening hour mutated into a bullish rampage that did not relent until the final bell. During bear markets in particular, rallies draw that kind of explosive power not from routine buying, but from shorts panicking to cover positions gone horribly and painfully awry. So when the stock market is quietly morose, as it was last Thursday, just one sizable buy order tossed into the S&P pit can have the effect of a Molotov cocktail, quickly engulfing shorts in the fires of hell. Keep in mind that, under certain conditions, a buy or sell order as small as 20 or 30 contracts can alter the course of the S&Ps over the very short-term. Just imagine what kind of pop Goldman Sachs, Morgan Stanley and Merrill Lynch could create, especially late in the day, if they were to simultaneously enter large buy orders for S&P contracts.
"This is exactly what has been happening in the S&P futures pit recently, according to friends of mine who have been close to the action, and it represents the refinement of program-trading techniques that have been used with increasing effectiveness since the days of the 1987 Crash. The huge growth of electronic trading undoubtedly has helped to amplify the effect, since a vast, global universe of traders, hedgers and speculators are effectively on a hair trigger, each seeking to be a step or two ahead of the stampede. Traders in the S&P pits are among the first to see the buy programs coming, and it has happened often enough lately to cause them to pull their offers at the first hint that the usual suspects may be about to light the fuse. When the sellers then back away from their offers, the lightened supply that results makes it possible for the S&Ps to lift effortlessly, kicking off a chain reaction of hedge-buying in other indexes, as well as in specific stocks and related securities and derivatives. Once the panic starts, it is a simple matter for the perpetrators to take sizable profits just minutes after the rally has begun. And if they should conspire to kick things off just before the final bell, they can position their offers in Asian and European markets so as to reap substantial profits with almost no risk." ["Does the Plunge Protection Team Exist?" www.marketwise.com, October 31, 2001, emphasis added.]
So we see that the market of $15 billion is quite manageable, and any organization who chooses to manage it would not have to lose money in the process at all. It seems that Mr. Mauldin is wrong on both of his cherished points. While Art Cashin and CNBC's crew of blow-dried script readers will naturally disagree with Ackerman, all savvy traders are in complete agreement with his view.
For example, Bill King of The King Report in New York and formerly the operator of several equity trading desks on the NYSE, wrote the following in an email to me: "The Fed learned in 1987 that they could rig markets via futures. On October 20, 1987, the US financial system collapsed. I remember my NYSE brokers calling me and saying specialists were leaving the floor because they were broke. But then NYSE Prez John Phellan blocked the doors and sent them back to their posts.
"Soon thereafter, Bankers Trust (the lender to the Street) started releasing money after the Fed guaranteed indemnity from any losses. But the real scheme occurred in the Missiles the MX (Major Market) futures.
"A clerk I know on the CBOT told me that Morgan doled out orders to several brokers who bought the MX futures recklessly. Since all other futures were closed and the Missiles were a thin market, the gains were explosive. After that experience, position limits were removed for all intents and purposes. The mechanism for intervention was discovered. [Emphasis added]
"It was utilized after the UAL-inspired mini-crash in 10/89, but it was during Q1 of 1990, as the Japan bubble was bursting, that regular 'ugly buying' of SP futures occurred. 'Name' brokers would 'buy ugly' S&Ps just after US stocks would open sharply lower on Japan. CME floor contacts said the brokers would bid for contracts and kept increasing bids before the crowd could respond. It didn't take CME locals long to figure out the scheme, and they would stand aside and let the brokers race the futures higher.
"During the late '90s, with that series of crises, there were so many 'V' bottoms on 'ugly futures' buying that Richard Russell and others who had previously rebuked intervention realized it was a regular operation.
"I would guess that something is planned for the commencement of war with Iraq. And of course, only Larry Kudlow and other supply siders who thought the Fed was too tight during the biggest stock bubble in history don't know about the gold rig." [email to me March 11, 2003 from Bill King, firstname.lastname@example.org]
Other PPT Misconceptions
Mauldin has other arrows in his quiver, however. He contends that massive amounts of liquidity would have to be injected to pull off such manipulation, which would be impossible to conceal. But as Ackerman and King show, this is not true. Manipulation can be accomplished with minimal S&P futures contracts because of the combustible nature of the S&P pits whenever the shorts see large buy programs coming. So PPT trading would not require impossible amounts of liquidity being injected into the system. And therefore Mauldin's contention that the Fed would have to "take out liquidity by selling treasury notes" so as to balance things out doesn't hold up either. There would be no need to "take out liquidity" because there was no gigantic amount of "liquidity put in."
Mauldin also contends that the PPT's trading would require "a lot of clerks at the Fed and elsewhere to agree to lie." Not true either. In my last Gold-Eagle article, I explained how the entire scheme could be operated by a small corps of Treasury higher-ups and CIA stringers through an offshore account. The orders for the PPT's equity purchases would then come to the designated U.S. brokers as a private corporation buy, certainly not as something of government origin. No one other than a select few would need to truly know. Even JPM and Goldman, as the designated brokers, could be kept conveniently in the dark as to the real source of the buying if needed. For the entire world, it would appear that XYZ Corp was buying S&P futures from an offshore account, when it was really the PPT using Fed provided funds. As to what level of secrecy the PPT actually extends to, we can only guess. But the the entire operation probably comprises a very small group.
This would then dispel the well-worn establishment bromide trotted out by Caroline Baum recently, claiming that such a mega-conspiracy would surely send one of the conspirators eventually to book publishers in pursuit of millions in royalties for spilling the beans in a juicy best seller about political corruption. That may well happen one day, and then the truth will come to light. But the point is it doesn't HAVE to happen. What everyone is missing here is that the PPT does not have to be a mega-conspiracy to function at all. It could well be a very tightly administered organization run by a handful of operatives from somewhere offshore.
Still our establishment defenders insist that any PPT conspiracy would eventually have to be exposed. But this is just not so! As I have written previously, the CIA is involved in plenty of illegal covert activities that have never found the light of day, and have never been exposed by self-servers in pursuit of large book contracts. Also many police and prosecutorial corruptions have been covered up throughout history by scores of participants for entire lifetimes. Why then could not a small combine of clever, high-level bureaucrats and CIA stringers orchestrate the operations of the PPT while all other federal higher-ups remain conveniently out of the loop year after year?
It should be pointed out here that the PPT is undoubtedly a spawn of the WGFM; it is not the WGFM itself. The PPT operates separately, and its primary trading strategies would almost surely have to be implemented from offshore. This would give the higher-ups at the Fed, the New York bullion banks, and the market exchanges the cover of "plausible denial." They all obviously realize that the PPT exists, but this way they have no direct connection with it and can simply claim that it's all a right-wing fantasy conjured up by the wackos who still believe in individual freedom and the Constitution. Think back to John Poindexter's testimony in the Iran Contra hearings. He was insistent that Reagan was NOT informed about the scheme so as to give him the capacity for "plausible denial." This is how government bureaucrats operate. They cover themselves with such tactics. Quasi-ignorance of malfeasance allows them to say it isn't happening, when in the back of their minds, they know it is happening. Blank out. It's done all the time by humans the world around, and bureaucrats are human.
Mauldin claims that the PPT must be "the most incompetent team in the world because the markets have indeed plunged." This is certainly true. The PPT is emblematic of the gargantuan fallacy that dominates our society today -- that government bureaucrats can competently manage and manipulate the market and all other facets of our lives. But because the PPT has not succeeded in stopping the market from its bearish plunge does not mean that government elites are not trying. As I have stated repeatedly, these are desperate men who are confronting an immense crisis of their own making, a crisis that has the potential of bringing about wholesale ruin for America and her people. These elites will react as all humans do in face of horrendous crises of their own making that are unsolvable; they will grasp at straws. They will strive to manipulate the market through the PPT even though in the long run it will prove ineffectual, just as they will continue to cut interest rates in face of its failure. Desperate men are not known for rational thinking. They are usually known for obtuse action in the absence of thinking.
Mauldin maintains that when the market makes "large and strange moves," it is "traders taking profit, either on the long side or short side." Certainly true. But it does not mean that ALL large and strange moves are the result of profit taking. Most of them are. But it is those select times when crisis is looming that the PPT enters the arena and lights the match to the S&P futures. It doesn't require constant intervention -- only occasional manipulation is needed. Our problem is that the occasional interventions seem to be increasing.
One of the misconceptions in the conventional media's mind is that we "conspiracy theorists" claim that the PPT is all-powerful and all-pervasive. This is not so at all. The PPT is a select tool of manipulation that the government makes use of very sparingly (at least its intentions are to use it thusly; whether it can hold to that policy remains to be seen). In other words, the Fed and the Treasury do not want to use the PPT to rigidly control the markets all the time. They set up the PPT as an EMERGENCY TOOL to be used only when there was a severe crisis that threatened the overall system itself -- such as the LTCM and Asian collapses of the 90's. They realize that use of PPT intervention too often and in too large of a manner would risk exposure, which would destroy the credibility of the markets in the public's mind. This they certainly don't want to happen.
But here's the irony. This, in effect, becomes one of the weaknesses of the PPT, and why it will ultimately fail. The government knows it can't use the PPT indiscriminently. It has to be selective and keep as low a profile as possible so as to avoid exposure. If not, it will destroy the system, which would negate the PPT's purpose of preserving the system. So their intentions are to not OVERUSE it. This makes the PPT a tool of limited capacity.
This means that as the bear market increases in intensity, the PPT will prove ineffective because it cannot be used in a massive enough way for fear of detection. (This assumes that the Fed will continue to fear detection and not risk destroying the credibility of the markets by wholesale public intervention.) Eventually the market will move too fast, in too powerful of a panic mode for PPT operatives to counter it. There will come a time when they can no longer "light the match to the kindling" of the S&P. This, however, will not keep them from trying to avert the consequences of the bear market all the way down. They will feel they must "do something." But in the end all they will be able to do is buy some time and cause a lot of delusion along the way. No group, private or governmental, has ever been able to stop a "primary trend" in the markets. As the venerable Richard Russell reminds us, "the market always does what it wants to." The PPT will DELAY the ultimate destiny of the market, but it will not be able to STOP it.
Is Belief in the PPT a Result of Scapegoatitis?
This brings us to a final fallacious point made by Mauldin and Cashin. They claim that we "conspiracy theorists" are looking for a scapegoat on which to blame our investment losses. It can't be us and our decisions. "If my horse doesn't win," says Cashin, "the race was fixed -- the horse was doped. The variations are myriad. It can never be my fault or my miscalculation." So the PPT is nothing but a fevered fantasy in our minds that we use to explain our failures.
This is an example of the fallacy of attributing to ALL people's rationale the defects of SOME people's rationale. It is also a crude form of strawmanism. Set up a straw man, and then knock him down, and claim you have proved your point. I'm sure there are many believers in the PPT who have lost in the market and are indeed looking for a scapegoat. But there are also many believers in the PPT who have profited in the market. What, pray tell, are they looking for? No, Mr. Cashin; such illogic will not fly. The PPT cannot be ushered out of existence through specious argumentation.
Moreover, not all those who have lost in the market are guilty of scapegoatitis either. If logic and the facts of reality point to a conclusion, then the reasons why one espouses that conclusion are irrelevant. The PPT's existence cannot be explained away because of "emotional resentment" on the part of its believers. The PPT's existence needs to be asserted or denied on the basis of facts and logic! If one wishes to deny the existence of the PPT, he needs to do it with something more than shallow psychologizing.
We who assert that the PPT exists are not trying to evade responsibility. We are not trying to say we were robbed. We are trying to say that the government is obsessed with controlling the economy. It wants to create stability and order through intervention and manipulation, and it will do whatever is necessary to achieve such order. It will even "irrationally" try and control the stock market so as to try and avoid the consequences of its past policies over the decades. This is not an issue of bitching about losses; it's an issue of recognizing the true nature of government and the ruthless, desperate men who make the decisions for that government. It's about the freedom of the markets ultimately. It's about how our obsessions are corrupting that freedom, and how the Federal Government has the power to destroy that freedom if it were to panic and intervene massively and publicly to try and avert a major 1930's style crash.
To believe that our government is benign is the scourge of the modern era and the myth of all authoritarian societies. Government today is not our friend; it is our enemy. Our economic problems are not the result of free-enterprise; they are the result of intervention into free-enterprise. The PPT is but a small wart on the face of Big Brother; but it is a very symbolic wart. It is an example of the amoral system we have created and the manipulative madness that we have come to tolerate as "necessary" on the part of Washington.
Those who toe the establishment line and adamantly deny the existence of the PPT are denying the logic of history, the past record of all governments, the frailties of human nature, and the impact of economic crises. They are letting their wishes be father to their facts. The far more rational argument lies with the PPT's existence. In light of the fact that Big Brother has taken on the manipulation of just about every other facet of our existence over this past century, what are the chances that he has assumed he should also manipulate the stock markets as they begin to implode? I would say awfully good. I would say the PPT is a fact of reality, and that there are a lot of people who are afraid of contemplating that reality.
1Art Cashin is a "paid" employee of UBS Paine Webber and not a "paid" employee of CNBC. I use the word "employee" because he is "employed" daily by CNBC to do his analysis for millions of viewers. He may not be "paid", but he is "employed".