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September 2005
A Daily Spec Thread: Does the Plunge Protection Team Exist?

Victor Niederhoffer: Nefarious Operations

A tabulation by my colleague Mr. Duncan Coker of the 2005 returns of the 20 biggest markets around the world shows the U.S. to be third-worst of all, ahead only of Taiwan and China. The median appreciation of all 20 is about 12%. How long can the differential between the equity rate of return of 6% and the long-term bond return of 4% (see our work on the Fed Model) be gainsaid? I must tip the hat to the chronic bears who remember the salad days of 2000-2002 and still promulgate the view that stocks are far overvalued in terms of P/Es, bringing back terrible memories of 1929 and how the Crash really got bad in 1932 when the Dow moved back down to 50, a level which doubtless would be in the cards now, were it not for the nefarious work of the Plunge Protection Team.

Mitchell Jones writes:

Why can't the plunge protection team exist, Victor? Of course, that would mean the permabulls on Wall Street are just parasites whose success is due to timely assists by government, rather than visionary seers and geniuses, as they prefer to see themselves. However, leaving aside the psychological facts that would lead to widespread denial, what, objectively, precludes the existence of such an entity? Is it not obvious that the authoritarians in Washington have quite literally no moral compunctions whatsoever, regarding the means by which they will pursue their perceived self-interests? And is it not obvious that their goal of staying in power would be frustrated, if the stock market were to collapse? Why, then, would they not intervene to prevent it from doing so?

[You commented:]One of the many reasons that one believes that commodity prices are likely to fall is that the demand for them is relatively inelastic, not rising or falling with income, and the risk of producing a commodity that has a stable demand is low, and thus competition is very high, and this brings the rate of return on investment in such a > field to the risk-free return. If the rate of return is close to the > risk-free rate, and the quantity demanded doesn't change, how is price going to go up.

It's going to go up because central banks have flooded, and will continue to flood, the world with counterfeit money. Result: actual price levels are rising rapidly and the real rate of interest--the difference between nominal interest rates and the rate of change in the prices people actually pay--is negative. (People don't pay "seasonally adjusted" or "hedonically adjusted" prices, and they don't buy houses based on prices derived from "owner's equivalent rent." Instead, they pay the actual prices that are offered to them in the marketplace, and those prices are rising much faster than prevailing rates of interest.) That means higher rates of return are available to those who buy and hold storable commodities than to those who invest in interest bearing paper such as CDs, stocks, bonds, etc. Result: massive flows of savings, as well as flows of investment and speculative capital, are being diverted into storable commodities, driving up their prices. For example, a man who filled his barn with copper bars a year ago is sitting on a nominal 48% gain as we speak, and a real gain, assuming actual inflation is 10%, of around 38%. On the other hand, the man who sat on 10-year notes for the last year got a nominal 4.25% gain and a real loss, less inflation, of about 5.75%. And, of course, as the flows of money into storable commodities increase, their prices will increase even faster. That will draw more attention to those types of investments, which will cause the flows to increase even further, and so on. It's the process that began in the 1970's and, for a time, was stopped by a grand deception. But that lie now stands exposed, and the process has resumed and will not be stopped again. (Though it will, of course, proceed by fits and starts, punctuated by "deflation" scares. But each "deflation" scare--e.g., a stock market crash--will be "solved" by more counterfeiting, and so the ultimate result will be a hyperinflationary depression, not a deflationary one.)

[You commented:]... not even considering all the innovations and history that Julian Simon has documented as the cause of their constantly declining underperformance relative to equities?

In my view, you take insufficient note of the deteriorative processes--i.e., the ongoing orgy of authoritarian decrees and activities (such as central bank counterfeiting) which violate property rights "in the public interest" and, over time, have transformed the West from primarily market driven economics to the economics of fascism. I am reminded of the section in the early part of Atlas Shrugged, where Dagny muses about the huge oak tree on the banks of the Hudson, on the Taggart estate where she grew up, and of how as a child she came to regard it as a symbol of indestructable strength--until the day when it suddenly collapsed, revealing that its innards had been consumed by a process of slow rot stretching over decades. You, like Dagny as a child, seem to see only the form of America, not the substance, because you do not seem to focus on the cumulative effects of the process of rot that has been eating away the innards of the country for more than a century. To take such things seriously would, in your terms, be "old hearted." Thus, to escape such an appellation, we are supposed to simply assume that good is stronger than evil, and will ultimately triumph, and to interpret the facts accordingly.

Personally, I don't buy it. Sometimes evil wins; and when it does, civilizations fall. The rational way to decide whether it is winning is by looking at the facts and by drawing logical inferences from the facts, even if we do not like the answers that we are getting.

No offense is intended by any of this, by the way. It just needed to be said, that's all.

Here is a link to a Sprott Asset Management report dealing with whether the government intervenes in the U.S. stock markets. Judging from what I read on your website, you will not like the conclusion of this report, but you should read it anyway. --MJ

Hany Z. Saad responds:

I admire Mitchell Jones' writings and followed his posts religiously few years back when he was a list member. He has an unmatched talent for debating some erroneous points in a most convincing way. If the reader of Jones' posts is not well rounded about the topic of discussion, he can be very easily "brain washed" . This is a talent that very few writers possess and makes one very alert when reading Jones before accepting or rejecting any of the points he makes..

Let me discuss the points Mitchell makes here. I will start in this post with the Plunge Protection Team.

Jones asks why do we objectively reject the concept of a Plunge Protection Team, PPT? To respond to this question I have to give you an idea of how I place a qualitative trade. If I make up my mind about the market going into a certain direction, I try to prove my theory wrong first a la Soros and if I can't find any flaws in my theory, I reject the trade altogether.

Now, let's assume that the PPT does exist. Supposedly this team exists in all major exchanges including Japan, Germany, France, the States and so forth. The theory is that the PPT was created by the Reagan administration following the 1987 crash and they buy index futures when the market is dropping to prevent panics.

Now, if you are a trader who knows the internal workings of the stock market, you know that this theory doesn't hold water. Buying the index futures doesn't stop a panic in the cash market.

Alternatively, the government could be buying the components of the indices to stop the panic as you might argue. This operation would require billions of dollars as the government's PPT will have to go against hedge funds prop desks and so forth that mostly follow the trend and sell into panics. As the Fed obviously backs the PPT financially, wouldn't you think that the actions of the PPT using significant amounts like these would show in the money supply numbers available freely to the public?

The theory also is that the PPT executes the orders through JPM, Goldman Sachs, etc.. Manipulation this size requires hundreds of traders to execute. Since 1987 non of these traders was shown on Larry King Live or Fox news exposing the PPT scandals. If the American president himself with his very limited entourage couldn't manage keeping his oral sex adventures a secret, would you consider, even for a moment that an operation of this size involving so many participants could be kept a secret. If it is, it must be the best well kept secret in history.

How do you explain the "irrational exuberance" speech and the "bear market" that it triggered? Isn't Greenspan working with the PPT or is the PPT a secret kept from him also? If he is aware of the PPT, he must be the biggest nightmare for the PPT operators and I vote to fire him as he triggered some of these so-called panics.

How do you justify the Nikkei's action in the last 10 years? Where was their PPT?

Mitchell Jones responds:

Skepticism is, of course, always a good idea, provided it is not of the pathological variety, in which one clings to one's original view long past the point of its ruination.

Mr. Saad wrote:

If I make up my mind about the market going into a certain direction, I try to prove my theory wrong first a la Soros and if I can't find any flaws in my theory, I reject the trade altogether.

I assume the intent of the above was to say "if I can find any flaws in my theory, I reject the trade altogether," rather than "if I can't find..."

It is generally best, when supposedly disputing the views of a specific person--me, in this case--to aim one's comments at the words of that person, rather than at one's own imaginings of what that person might say. Since the above musings, which I have highlighted in red, are not my words, they should not be taken as expressive of my views, and no rebuttal directed at them, as below, should be taken as rebutting my views. In fact, all of the criticisms expressed by Mr. Saad are directed at his imaginings regarding what my views are, rather than at the actual words by which I attempted to express those views. (Not a single word from my remarks was quoted by him.) I would therefore ask that, should anyone else want to argue these points, they should copy my actual words and insert their criticisms into that text, after the actual words of mine which they are disputing. For that, I thank you all in advance.

Mr. Saad wrote:

Now, if you are a trader who knows the internal workings of the stockmarket, you know that this theory doesn't hold water. Buying the index futures doesn't stop a panic in the cash market. Alternatively, the government could be buying the components of the indices to stop the panic as you might argue. This operation would require billions of dollars as the government's PPT will have to go against hedge funds prop desks and so forth that mostly follow the trend and sell into panics. As the Fed obviously backs the PPT financially, wouldn't you think that the actions of the PPT using significant amounts like these would show in the money supply numbers available freely to the public?

I deliberately avoided supplying details because, quite frankly, I am not privy to those details. I, like everyone else not directly involved in the operations of the "Plunge Protection Team," am in the position of deciding whether it exists on the basis of fragmentary information and guesswork. However, the key facts leading to the conclusion that it does, in fact, exist, are those given above: the authorities have a strong motive to intervene in our markets, and they are utterly lacking in the internal moral restraints that would prevent them from doing so. In addition, they have the means to effect such interventions: the American people, in their infinite stupidity, have permitted their duly elected officials to create "money" out of thin air, whenever, as in the case we are discussing, they deem it "in the public interest" to do so.

Now, clearly, a government that can create "money" out of thin air, at whim, has the power to block any price movement they choose to block. They simply bid whatever quantity of "money" is required to stop an undesired downward movement, or offer whatever quantity is required to stop an undesired upward movement. The only constraint they face has to do with the economic consequences of such interventions--to wit: they must minimize fluctuations in the "money" supply, by draining newly injected reserves or by replacing reserves recently drained, at the first opportunity. Thus if they intervene to prevent an incipient crash by injecting reserves, they must take the first opportunity to sell back into the market the positions so acquired; and if they intervene to prevent an incipient blowoff by selling short, they must take the first opportunity to buy back those positions. The most predictable effect of such operations, in an unstable market so far from equilibrium as to require frequent intervention, would be a prolonged and abnormal reduction in overall volatility--a reduction, in fact, very much like the one we have been seeing. Money supply numbers, on the other hand, would not reveal much, if the effects of the interventions were promptly undone, as one would expect them to be. And, of course, interventions that for one reason or another could not be undone in time, could be dealt with by simply massaging the numbers, a procedure in which our morally unconstrained authorities would be happy to engage.

Mr. Saad wrote:

The theory also is that the PPT executes the orders through JPM, Goldman Sachs, etc.. Manipulation this size requires hundreds of traders to execute. Since 1987 non of these traders was shown on Larry King Live or Fox news exposing the PPT scandals. If the American president himself with his very limited entourage couldn't manage keeping his oral sex adventures a secret, would you consider, even for a moment that an operation of this size involving so many participants could be kept a secret. If it is, it must be the best-kept secret in history.

Such interventions would be treated as a matter of national security, and handled in accordance with established intelligence community protocol. Information would be compartmentalized on a "need to know" basis. That means only a few top people at the firms handling the trades would be privy to the fact that the government was behind them, and they would be sworn to secrecy and subject to the same sorts of criminal penalties as would apply to, for example, a CIA agent who coughed up classified information. The government would deal directly with them, and they would break down the government's orders and disseminate them to multiple trading desks within the firm, whether it be Goldman, J.P. Morgan, or whatever, and the traders actually executing the orders would have no substantive basis for distinguishing them from ordinary activity. Nothing, of course, would stop them from entertaining the sorts of unsubstantiated suspicions felt by outsiders, who might regard it as odd that buy orders always seemed to surge just when one would have expected the bottom to fall out of the market, or that sell orders seemed to surge just when one would have expected an upward spike in prices, but proof would be lacking, by design.

Mr. Saad wrote:

How do you explain the "irrational exuberance" speech and the "bear market" that it triggered? Isn't Greenspan working with the PPT or is the PPT a secret kept from him also? If he is aware of the PPT, he must be the biggest nightmare for the PPT operators and I vote to fire him as he triggered some of these so-called panics. How do you justify the Nikkei's action in the last 10 years? Where was their PPT?

I see no specific arguments in the above, and do not have time to respond to vague doubts or misgivings.

Hany Saad replies:

It is obvious that my assessment of Jones's writing style and his unmatched ability of turning facts around is well placed from his very eloquent response below. Mr. Jones states that "Skepticism is, of course, always a good idea, provided it is not of the pathological variety, in which one clings to one's original view long past the point of its ruination."

For the record, Mr. Jones has been bearish throughout the '80s, '90s and the turn of the century using the same exact argument in favor of commodities. In fact, his case in favor of silver was so convincing that I ended up buying some contracts for my own account. However, he missed the incredible bull market of the century and refused to abandon his losing position with commodities and yet he is preaching about clinging to one's opinion. I invite you all to read his wonderful book, The Dogs of Capitalism.

Mr Jones says: "I assume the intent of the above was to say, If I can find any flaws in my theory, I reject the trade altogether," rather than "if I can't find..." No, actually, I meant if I can notfind flaws I abandon the trade, as this may create a false sense of security that can make one lose his edge and move slower.

Mr Jones adds:

It is generally best, when supposedly disputing the views of a specific person -- me, in this case--to aim one's comments at the words of that person, rather than at one's own imaginings of what that person might say. Since the above musings, which I have highlighted in red, are not my words, they should not be taken as expressive of my views, and no rebuttal directed at them, as below, should be taken as rebutting my views. In fact, all of the criticisms expressed by Mr. Saad are directed at his imaginings regarding what my views are, rather than at the actual words by which I attempted to express those views. (Not a single word from my remarks was quoted by him.) I would therefore ask that, should anyone else want to argue these points, they should copy my actual words and insert their criticisms into that text, after the actual words of mine which they are disputing. For that, I thank you all in advance.

But sir, this is precisely what you are asking. Again, cutting and pasting here: Why can't the plunge protection team exist, Victor? Of course, that would mean the permabulls on Wall Street are just parasites whose success is due to timely assists by government, rather than visionary seers and geniuses.

The subject of my whole response was the why? Which part of the why did I miss, Mr Jones, c'est ca. Here is a question for the list and Mr. Jones if he finds the time in his busy schedule to answer: If the permabulls (hypothetically aware of the existence of a so called PPT) with their P& L in the black are labeled parasites, what should one label permabears who are certain of the existence of the PPT and yet insist on going against the stockmarket?

Again, my hat off to the scenario that Mr. Jones so eloquently put together regarding the secrecy of the PPT operation and the way the orders are handled. One of the dangers of dealing with such an attractive writing style is that your helpless mind at times starts accepting the points being made. I almost fell this time again except that as a professional trader, I realize that his scenario is only the working of a layman's imagination, not that of a trader who understands the internal workings of the markets.

Unfortunately Mr. Jones's time ran out before he addresses my questions that he labels nonspecific, vague misgivings. This was also one of Mr. Jones's habits as a member of this list.

Roger Arnold comments:

The plunge protection team is the nefarious name given by conspiracy buffs to the Working Group on Financial Markets - Created by Regan in 1988 in response to the October 1987 crash - which is really nothing more than a SOP developed by the White House on who to call and what their responsibilities are in relaying information to the White House and to each other in the event of another market "crash" - the Treasury secretary, the Fed chairman and the heads of all of the exchanges, stocks, bonds, commodities, etc. are members of the group.

James Lackey comments:

Of course there is a plunge protection team. They are called speculators. A very wise old man asked me to explain my job in a few words. I said it my job to buy when no one else wants to.