Plunge Protection Team

James Quillian writes the weekly column Stock Market Forecast and Comments, complements of the Quillian & Taylor Private Investment Company. Quillian & Taylor Private Investment Company. Contact: news@quillian.net , 325-869-5255, Published each Sunday, usually between 11:00 a.m. and 1:00 p.m. CS

Waiting for all of the evidence to land on the table sounds more prudent, but actually puts a trader at a serious disadvantage. Facts are not available fast enough to be valuable. In 1987 the Federal Reserve and others, on an emergency basis, intervened to stabilize the stock market. The mythical Plunge Protection Team (PPT) was born. Since that time the Plunge Protection Team has been rumored to have supported the stock market on numerous occasions. Experienced traders frequently allude to bizarre trading patterns. The Plunge Protection Team is increasingly mentioned in the capacity of supporting stock prices on a continuing basis.

So, is the Plunge Protection Team fact or fiction? In order to justify further investigation it doesn't have to qualify as either. In the stock market suspicions count. Good investors get into the habit of acting on suspicions that seem reasonable. Concentrating on what seems true constantly turns out to be more profitable than collecting absolute facts.

The chances are actually very good that clandestine efforts have been underway to elevate stock prices. But, the idea of a Plunge Protection Team is a decoy that keeps the public’s thoughts mis-focused. The original Plunge Protection Team, although counterproductive, had a few noble intentions. What is likely being witnessed today is highly sinister, and has little in common with the original group.

I have coined a new term “Asset Enhancement Initiative” that I hope will find common usage.

Democracy leaves leaders few options if they want to remain in office. One way to avoid bad economic numbers would be to find a method that would cause financial assets to steadily increase in value. No conservative president could be re-elected in the face of a falling stock market . A strong stock market is always a critical ingredient to maintaining support under any circumstance. Unlike the Plunge Protection Team, an Asset Enhancement Initiative would be used to manage stock prices cosmetically. Where a Plunge Protection Team is thought of as a formal organization, an Asset Enhancement Initiative would be of loose structure and operate on a system of silent understandings.

How might an Asset Enhancement Initiative work? The Federal Reserve would create money by buying securities in its open market operations. The recipient of the Federal Reserve’s business would silently understand that its new deposits would be used to support stock prices. The Securities and Exchange Commission might conveniently ignore market manipulation when the result was a higher price.

Why would a major brokerage firm cooperate with the government for the purpose of bolstering stock prices? A better question is why would it not? Financial firms make huge profits when stock prices rise. A perpetual bull market is a brokerage firm's dream. Any firm showing abnormal trading profits could be a potential participant.

So, it is asked, what is the harm in the government causing stock prices to rise? One problem is that short sellers get cheated. Selling short, despite a bad reputation, is a legal transaction that adds necessary liquidity to the market. It is unfair to all investors to cause stocks to move higher on an arbitrary basis. Using sound economic criteria to make decisions becomes futile. When assets increase in price because of a government edict, consumer spending is likely to increase as well, creating a fragile economic expansion. Continued economic growth is then dependent on financial assets increasing in value year after year. Inevitably the government’s ability to cause increases in value would weaken to the point of being ineffective. A financial disaster would be the eventual result.

The beneficiaries of an Asset Enhancement Initiative would be parties who have held the assets from the beginning. The brunt of a stock market crash would be borne by the investing public and foreign investors. Ordinary people who work daily to make ends meet would end up suffering the most. The end result of an Asset Enhancement Initiative would be economic failure.

So is the government engaged in an ongoing Asset Enhancement Initiative? I believe that it is.