California Scientific
4011 Seaport Blvd
West Sacramento, CA 95691

Mark's Market Blog

3-20-10: Conspiracy Theories

By Mark Lawrence

Please help support this web site

  • If you need a windshield, consider ours.
  • Contribute to our site maintenance fund:
  • Support our advertisers. Thanks, Mark

The stock market finally went down. Below is our alternative chart, showing the two day RSI. The market was in overbought condition for 13 days. More normal in a bull market would be 4-6 days. In 1995 the market once went 12 days in an overbought condition. 13 is a new record, and apparently a once in a century event, roughly a 3 standard deviation event. To compare this to something you're more familiar with, the probability of this happening is comparable to having a son who grows up to be 6'7" or taller.

S&P 500 September 19 2009 to March 12 2010

Today we're going to ask, how did this happen? Perhaps it was just a random event. Perhaps. Below is a 5 day chart covering last week. In this chart we see the selling volume. Each vertical bar in the volume is 5 minutes. As much as 1/4 of the total day's volume happened in the first 10 and last 10 minutes of the day. This is computer trading - computers are programmed to recognize particular patterns and jump on them. What did the computers know that I didn't know?

S&P 500 September 19 2009 to March 12 2010

The answer is that on about February 24th, the Fed held a secret auction of MBS - Mortgage Backed Securities. This was a backwards auction: of course no one wants to buy these things, so the Fed did. They bought about $200 billion worth of them, thereby injecting $200 billion of cash into the largest banks including Citi, Wells Fargo, BofA, and my personal favorite Goldman Sachs. The banks immediately started using this new money to play on the stock market, particularly bidding up their stock prices, which is really good for all the bank employees who are trying to cash in on their stock options. Financials led this 13 day rally. The Fed has had this MBS program for over a year, and has used it to buy up $1.25 trillion of these junk bonds, letting the banks convert them into cash. Each time in the last year that the Fed had one of their secret auctions, the stock market responded with a big jump up as the players put their new money to work straight away. This auction was the last one, the program expires at the end of March.

So, is this it? Is the Fed done manipulating the Stock market? Nah. Concurrent with this secret program shutting down, the Fed has quietly announced a new program, the CBS - Commercial Backed Security Repurchase Program. They're very aware that commercial properties are the next big crisis, and they're going to use this crisis to bail out more bankers and inject more steroids into the stock market from time to time. Without telling anyone, so that by the time the word gets out a week or two later their pet bankers have already made a bunch of money. I'm seriously angry at Bernanke. I think this should be investigated by the SEC and a couple dozen people should go to jail, but this is not a crime, it's national policy.

As we all know, this financial crisis was created by low interest rates causing a bubble in real estate and stocks; insane trading in derivatives like Mortgage Backed Securities where, for example, Goldman Sachs was simultaneously creating and selling these MBS's all over the world and taking out secret insurance policies with AIG betting their own creations would fail; and insufficient banking reserves to cover the resulting losses. There is much talk in the government of how to try to make sure this doesn't happen again. This includes talk of reinstating the laws that the Clinton administration voided which say banks can't speculate on the stock market; making new rules about derivative trading to regulate MBS and CDO type products; making the large banks contribute to a bailout fund similar to the FDIC; and raising reserve requirements. What does our Hero, Ben Bernanke, have to add to this debate? In his latest testimony to Congress (read the very last paragraph), Mr.Bernanke said, The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system. I'm starting to think this guy is a dangerous nut-case.

Many, your intrepid writer among them, believe that the market has another big leg down to experience before this crisis has passed. How will this happen? More and more, people are thinking that Bernanke will see a major leg down as a blow to confidence, and confidence is his personal mantra. It's thought that if the market drops by 20% or 25%, Bernanke will likely quietly step in behind the scenes and hand a huge dollop of liquidity to his favorite pet bankers and bring the market back up. Heck, in January it only dropped about 9% and Bernanke stepped in in February.

Greek Prime Minister George Papandreou has said Greece would prefer aid from the EU but gave Germany a one-week deadline to agree to an aid package or he will seek a bailout from the IMF. It's thought that if the IMF helps Greece that this will seriously undermine the authority of the EU and perhaps even fatally weaken it. Germany gave a cold response to this threat, and the next day Papandreou backed down and said the IMF was inappropriate for Greece. Two days later the German government, mired in politically unpopular negotiations, said perhaps the Greeks should go to the IMF after all. Bottom line: two weeks ago it was thought the Greek bailout was a done deal, now suddenly it's all up in the air again.

Retractions: I don't like making mistakes, and last week I made two. Sorry. I said that inflation was 2.7% in China in February. This was correct, but it was a year over year number, not a monthly number, so my 30% number was completely wrong. China has a target inflation range of 1% to 3%, so they are getting very close to contracting their money supply, but it's not a panic situation. Next, I had an extremely poorly worded first paragraph in my blog on Hispanics in the US. It's true that roughly 10% of the population of Mexico is here illegally, but my sentence implied that the 54 million Hispanics were all illegals, and therefore the population of Mexico is something like 500 million. Here's my revised first paragraph:

54 million Hispanics now live in the US, many of them illegally. The population of Mexico is 110 million; about 35 million Mexicans live in the US, roughly 12 million of them illegally. A third of all Mexicans now live in the US, 10% of the population of Mexico is here illegally. Just as West Germany and East Germany reunified, apparently we're unifying with Mexico. Here are some interesting statistics.

I've also added a couple of graphs to my blog on Hispanics, here they are:

As you can see, generally women are going to college at significantly higher rates than men, and Hispanic men are being left behind.

There will be few Hispanic accountants, statisticians, engineers, mathematicians, or physicists.

It is a well established if regrettable and non-PC fact that minorities score significantly more poorly than whites and Asians in math. Why? A possible explanation comes from a recent experiment on Swedish chickens. Three years ago, researchers led by a professor at the university of Linköping in Sweden created a henhouse that was specially designed to make its chicken occupants feel stressed. The lighting was manipulated to make the rhythms of night and day unpredictable, so the chickens lost track of when to eat or roost. Unsurprisingly they showed a significant decrease in their ability to learn how to find food hidden in a maze.

The surprising part is what happened next: the chickens were moved back to a non-stressful environment, where they conceived and hatched chicks who were raised without stress, and yet these chicks, too, demonstrated unexpectedly poor skills at finding food in a maze. They appeared to have inherited a problem that had been induced in their mothers through the environment. Further research established that the inherited change had altered the chicks' "gene expression" - the way certain genes are turned "on" or "off", bestowing any given animal with specific traits. The stress had affected the mother hens on a genetic level, and they had passed it on to their offspring. This effect is called "epigenetics," and it's the latest hot thing in molecular biology.

I believe most in this country, PC or not, would agree that most minority mothers live in more stressful neighborhoods with significantly lower income and higher economic uncertainty than the national average.

Table of Contents   Next Entry   Previous Entry