Author: By Med Jones, Oct 25, 2023

If you are a market strategist, economist, money manager, journalist, or an investor/trader who is losing money and/or confused by "irrational" asset price movements, I’d be happy to reveal the root cause of your confusion & losses.

The culprit is the actions of the three major market actors; the government, the Fed (& central banks), large market participants, and the leading financial media. They currently have different priorities and are directly and indirectly intervening in the economy, financial markets functioning, and manipulating asset prices (mostly unintentionally, but sometimes intentionally).

For example, the current Government (like prior governments) wants to prevent a recession to avoid losing the 2024 elections. On the other hand, the Fed’s current priority is fighting inflation, and is willing to cause a recession and risk a rise in unemployment to achieve price stability. Both actors may not fully admit the price of their ultimate goals, at least not publicly.

The combined actions of the three largest actors are distorting economic forecasting models, impeding asset price discovery, and trapping both traders in the short term and investors in the long term.

What is the evidence to the preceding "market manipulation" claim?

1. Massive Government Infrastructure Reduction Act (IRA) & deficit spending is offsetting Fed Fund Rate (FFR) hikes & Quantitative Tightening (QT)

2. Student debt (delay then forgiveness) to win votes & prevent consumer spending decline and recession before the congressional and presidential elections

3. Promoting employee retention credit (ERC) claims in 2023, even when COVID lockdowns were over in 2022 and unemployment was at ~ 3.6% historic lows.

4. Strategic Petroleum Reserve (SPR) release to keep oil & gas prices down before the elections, at the risk of having to refill it at much higher prices.

5. Replacing Fed's inflation hawks (voting members) with doves to influence the inflation fight, even if the risk of further re-inflation is real. Possibly even, influencing some in their academic network to write papers &/or to promote the idea of changing the Fed inflation target from 2% to 3% even when it could de-anchor expectations and cause a re-inflation spiral.

6. Fed's Bank Term Funding Program (BTFP) to bail regional banks = "Not QE" QE and guarantee of SVIB deposits > $250K i.e. beyond FDIC's legal limit, thus changing the rules for some depositors, but not others before them. One would ask why some well-connected and privileged depositors get their money bank at SVIB, but not others. = Seeds of future socioeconomic moral hazards and legal conflicts. This is similar to bailing Wall Street during the 2008 GFC instead of the homeowners.

7. Treasury depletion in H1/2023 and refilling the Treasury General Account (TGA) with more expensive short-duration bills to prevent raising long-duration bond yields = shadow Yield Curve Control (YCC) aiming at stimulating growth to offset Fed policy in fighting inflation, and ease further banking stress, and slow & delay the bond bubble correction to fair value after more than 10 years of artificially low interest rates = kicking the can down the road.

8. Announcing treasuries buyback plan to promote market "resilience". One would ask: Why would they need to do so if you claim to have the "deepest & most liquid free market" in the world? This raises a serious question about the confidence in the long-term health of our financial markets with continuous bailouts and support.

9. Secret and public political pressure and negotiations with oil-producing countries to bring the price of oil down, until at least after the elections of 2024 in return for security guarantees and other political concessions

10. Coordinating with other central banks to manage the timing and degree of rate hikes and liquidity injection, even when they do not admit it in public.

10. Negotiating temporary unrestricted (not debt limit) deficit government spending that resulted in the ensuing historic house speaker removal and political dysfunction at DC.

The work of the government policies and their connected large hedge funds and asset managers and financial media can easily manipulate the sentiment and price action of asset prices until they cannot. What is the limit one might ask? Math! There is only so much any government can do to manipulate investors’ sentiment until they hit the wall of math. For example, how long can a government keep pumping asset prices bailing out banks, individuals, and businesses, and overhiring government workers to prevent the natural market cycle? The answer is when government debt services exceed income and government bond investors start to question GDP growth or the sustainability of the deficit spending. At a certain point, the government has no choice but to print money i.e. devalue their currency and cause inflation or cut spending and raise taxes to cause recession. The calibration of such actions to achieve the immaculate soft-landing is near a miracle, unless of course you can manipulate the macro data and keep revising prior year data until you lose investor’s confidence.

What is the final result of all these interventions (manipulations)?

With non-stop manipulation, even the largest and best fundamental, macro, and technical traders and investors get surprised and misjudge the timing and the degree of asset price corrections and recovery. No wonder most decision models suffer from distortions, markets suffer from volatility & investors suffer behavioral errors (FOMO & TATI), doubt, confusion, and painful losses, be it oil futures, gov treasuries, stocks, corporate bonds, gold, or bitcoin.

The worst case scenario is the investors get conditioned to buying the dip over a decade or so until the central banks or policy-makers make a serious error like the subprime policy, banking and derivatives trading deregulation pre-2008 great financial crisis or the 40-year inflation of 2021 the resulting losses is worse housing and stock market bear market since the great depression of 1929 and worst bond bear market in history in 2022 and beyond

To be clear, this is not a US-only market problem, three clear examples of overt government interventions (manipulations), include China's direct intervention by ordering banks and funds to support the Chinese equity markets, the Japanese government buying ETFs, and the Turkish government forcing its central bank to ease money policy despite the out-of-control inflation.

Also, to be fair, such tactics are not exclusive to one political party, they all do it to varying degrees at different election cycles. The problem is each action/intervention has a cost that compounds until the math or the physics of the cycle's limit is painfully broken.

Conclusion:

We do not have true free, fair, and efficient markets. We have inefficient markets with constant interventions and government elites trying to pick winners and losers (via bailouts, tax credits, regulations, spending budgets, etc.). No wonder, a few well-connected investors (policy insiders and their network) on Wall Street make money, while the overwhelming majority of traders and investors lose their life savings.

This generation of investors and savers who worked hard all their lives are watching their spending power dissipate with the highest Inflation rate in more than 40 years, including historic bond losses (TLT down more than 50% for the first time in its history), stocks/crypto bubble formation and burst in 2021-2022, highest inflation in 40 years, regional bank failures (most risk delayed for now but continues, especially in the commercial real estate sectors CRE), dangerous sovereign debt levels, and the resulting loss of debt management credibility in US government. Evidence? Recent rating downgrade by Fitch and rising LT bond yields which likely to continue to rise until the US suffers from a recession or succeeds in cutting deficit spending by more than half which is not easy (painful for many). As for the new generation of workers, they are priced out of homeownership, feel trapped, and cannot catch up.

Is there a hope for the new investor?

The only hope is that this generation of investors have much more access to information and tools. So, their learning curve could become much shorter than prior generations. However, governments are hard to change, special political and economic interest groups are strong, political structural changes are even harder, and democracies are complex and messy, so we do not count on quick and positive developments. It is ultimately your responsibility to protect your hard-earned retirement money over the next few decades, by becoming a more informed investor.

What practical steps that new investors can take?

You learn math, chemistry, physics, and other skills in school in order to make money, but they do not teach you how to invest your saved money to build and preserve your wealth. Don't be a victim of the adage of "Wealth made on Main Street is lost on Wall Street." - It is your money, if you do not protect your money, no one will.

The first step is to learn investment risk management and ask your advisor how they will manage risk first (before they chase returns), learn how to choose quality credit and equity investments before you reach out for yields and returns. Develop an investment methodology, do not speculate. Do not be afraid to ask your advisor tough questions about their performance in bear and bull market cycles. If they do not have a track record, find better advisors.

References & Sources:

·         The Investment Think Tank Research at  Investment Management Best Practices webpage

·         Top Investment Education: The  Investment Management Workshop and Strategic Investment Management Master Class for CIOs