Funny money to the rescue

Stanley Berkeley's "Gordons and Greys to the front", also known as the Stirrup Charge at Waterloo; a deed to stir any man's heart. Apologies for the trivial use.

Friday: what looked like a hairy day on the Dow saw a rescue in the last hour of about 80 points. Was it the vast volumes of cash shovelled into the system by central banks, or the fabled Plunge Protection Team (aka Ronald Reagan's Working Group on Financial Markets? If only we all had such understanding bankers.

More on Brad Setser

Further to the last, it's worth struggling through Brad Setser's presentation to the Congressional committee even if (like me) you're not an economics buff.

In essence, he says that America has gotten away with its continuing trade deficit over the last few years, for several reasons:

• the effective interest rate on foreign debt held by the US, is higher than on loans made by foreigners to America


• foreign equities have had higher yields and better capital appreciation, so US overseas investment has done better than foreigners' share holdings in America


• the weakening dollar has amplified the effects in both points above


• foreign central banks' willingness to buy US debt has kept US interest rates low, making Americans' debts easy to service and fuelling share and property booms

But it can't go on for ever. Either America's debts will continue to increase, or foreign sovereign wealth funds will buy more and more equities, or both. If foreigners slacken in their support for US debt, interest rates will rise; and losing equities to foreign owners takes away from America's future wealth and income.

Setser concludes:

The US will likely both have to sell more equity to the rest of the world and pay a somewhat higher interest rate on its external debt than it has recently...

While rapid central bank reserve growth and large official financing of the US deficit can help the US postpone the necessary adjustment, the longer the adjustment is deferred, the greater the long-term risks...

Bringing the US deficit and emerging economy surpluses down without tremendous costs will also take time. If the US and the world are to adjust gradually, they need to get started.

Yet again, I wonder whether the UK's enormous purchases of US dollar-denominated securities since June 2006 make sense for Britain.

Another thought: seeing two late market interventions last week, Dan Denning in The Daily Reckoning Australia (3 August) speculated that there may be "...in the financial market a buyer of last resort who comes in to goose the indexes at critical times, when investor confidence is especially fragile."

Rather than the Plunge Protection Team, could it be foreign sovereign wealth funds buying-in on the dips? Maybe that's why the Dow has bounced back 286 points today, as I write.

Official market intervention?

Interesting quote from today's Daily Reckoning Australia:

Meanwhile, is the Plunge Protection Team (PPT) hard at work in the US? For the second day in a row, Wall Street rallied over 100 points in the last hour of trading.

You can interpret this in one of two ways. First, bulls and bears are earnestly engaged in combat for control of the market. Bears are winning the field for most of the day, with the Bulls rallying late.

The other, more sinister theory is that there exists in the financial market a buyer of last resort who comes in to goose the indexes at critical times, when investor confidence is especially fragile. We take no position on the matter. But it sure does look weird on a chart.

This could be connected up with the UK's surge in US Treasury security purchases over the last year. The conspiracy theory here would then be that the plane is already in trouble, and the stewardesses (I've forgotten the PC term) are walking the aisles to reassure the passengers.

Time to take gains?

Plunge Protection Team trying to keep precious metals low

An extraordinary (to me) comment by Michael Misunas, responding to Michael Panzner's post in Seeking Alpha today - do read it. He says that the US Government's "Plunge Protection Team" has not only punted huge sums into derivatives to support the stockmarket each time it falls significantly, but has recently been rigging the market against gold and silver.

Assuming that you can't buck the market forever, it looks like an opportunity to buy precious metals.