This is a rigged-up stock market

Sep 4, 2015

- By Bill Bonner

Bill Bonner
Gualfin, Argentina

Dear Diary,

Markets were quiet yesterday. Investors didn't know whether they were coming or going. We don't know either. But we rate the odds of 'going' a lot higher and more dangerous than the odds of 'coming.'

As we pointed out yesterday, from an investment point of view, there are two possibilities. What we've seen so far is either the natural volatility and correction of an normal, upward bound market. Or we are the early stages of a major bear market.

Most likely, it will be interpreted in both ways. Because we probably are at the beginning of a bear market. And also not too far away from an explosive move upwards. Why? Because the authorities are not likely to let a bear market proceed in the normal way. Instead, as it intensifies - if it does - they are likely to intervene with such massive force (remember, this is war!) that it will send stocks flying, like the bumper of an automobile that has just hit a land mine.


We reported yesterday that the shills for Wall Street are on TV explaining that in a pullback like this investors can expect to wait 4 months before the market has fully recovered. We suspected that this phenomenon describes something other than the normal functioning of a healthy market. So we asked our research team to have a look.

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Sure enough. The reported facts are correct. There were two major corrections since 2009. Each took about 4 months to repair. But if you look carefully, you see that this was hardly natural market forces at work. Instead, the fixers from the Fed were on the job. In both instances, the Fed announced new liquidity programs near the bottom of the corrections. Stocks headed up again soon after.

Take a look at the chart. You'll see what was going on.

What this reveals is not a solid bull market...with periodic sell-offs, followed by a healthy revival of buying. It reveals a market so rigged up by the feds that it can only be kept aloft by further huge doses of credit.

And as we told you yesterday, credit inflows are falling. All around the world we see signs of slowdown - that is, of less credit demand, generally...and less stimulus by government, both monetary and fiscal.

As charted by central bank balance sheets liquidity is only crawling forward - not nearly fast enough to keep this market pumped up. Or, you can look at actual 'money supply' growth rates; they're dropping too.

And here's Bloomberg again, describing how falling reserves are creating a situation of "Quantitative Tightening:"

    ..2015 will mark the peak of reserve accumulation after two decades of growth with China in the vanguard as its new currency regime means it has to pare reserves to avoid a freefall in the yuan. It has already reduced its holdings to $3.65 trillion from $3.99 trillion in 2014.

    "This force is likely to be a persistent headwind towards developed market central banks' exit from unconventional policy in coming years, representing an additional source of uncertainty in the global economy," Saravelos and colleagues in a report to clients [of Deutschebank] on Tuesday. "The path to 'normalization' will likely remain slow and fraught with difficulty."
On the fiscal front, too, deficits are falling. The US, Japan, France, Italy, Australia, Canada, and India all are borrowing less. And Germany is running a surplus.

All of this is just a warning. This is a rigged-up market. And the riggers are not rigging it as aggressively as they need to in order to keep prices going up.

In an honest stock market, you do not need the Fed to pump in liquidity so that corporations can take advantage of the cheap credit to buy their own shares. In an honest market, real investors put their own money-carefully studying which stocks were likely to pay them the most reliable and or most abundant dividends. They buy stocks in good companies, trusting management to fructify their investments with growth and income.

In an honest market, they do not make so many mistakes; you can often correct them with just a 10% cut in prices.

But that is not what you see in the chart above. This market was pushed for out of line by the feds. Now, it is subject to a major reversal.

Stay tuned.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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