A Plunge Protection Team for China’s Markets?
China may do no better at propping up markets than the U.S.
Bloomberg, July 13, 2015.
Last week, we noted that China’s heavy-handed interventions had turned their stock markets into “a government bureaucracy.” Several other observers whom I respect echoed that perspective, suggesting there were problems with China’s efforts to prop up its stock market and that the effort was doomed to fail.
The knee-jerk response to these thoughts came from people who asked how this was any different from the U.S.’s so-called plunge protection team, or PPT. The goal of today’s column is to outline those differences.
I have written in the past that when U.S. or European regulators temporarily ban short selling, it is misguided and counterproductive (see this, this, this and this). However, the Securities and Exchange Commission was never visited by secret police and told that shorting was seen by the government as one of the primary causes of the stock market collapse. When the Ministry of Public Security sends armed militia to the China Securities Regulatory Commission to investigate “malicious short-selling,” it makes poor American securities-market practices, such as the “Greenspan put,” look downright adorable in comparison.
No one in the U.S. was ever targeted as an enemy of the state for short selling.
That minor difference aside, let’s look at the U.S. version of the PPT.
The 1987 crash had a variety of causes, including portfolio insurance and rickety infrastructure at the New York Stock Exchange. Executive Order 12631 established “the President’s Working Group (PWG) on Financial Markets.” Issued in 1988 by President Ronald Reagan, the PWG’s purpose was “enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation’s financial markets and maintaining investor confidence.”
Almost 30 years later, it remains a little understood organization. Thanks to its lack of transparency — there are no formal minutes kept and surprisingly little academic research on it — the PWG is typically the “they” traders refer to when unexpected market events occur. I’ve lost count of how many times I have heard the phrase “They won’t let the market drop, they were in buying today.”
It wasn’t until 1997 that the PWG received the name by which it is best known today, when the Washington Post ran an article with the headline “Plunge Protection Team.” It was descriptive and juicy and fit into all of the conspiracy theorists’ fevered dreams. Of course, the name stuck.
However, for the purposes of investing in equity markets, experience teaches us that the PPT is more of a tantalizing idea than an actual market player.
Why? Because in the information age it is unimaginable that a secret cabal could deploy billions or trillions of dollars in capital, with not a single shred of evidence ever surfacing. Could an organization support markets via the massive buying of E-mini futures or some other method, and no one ever step forward with some proof? What other secrets could possibly be kept for so long (I mean other than the faked moon landing and the JFK assassination?)
Second, why run a secret cabal when the Federal Reserve operates in plain sight? Former Fed Chairman Ben Bernanke made it crystal clear in 2009 that he believed that goosing the stock market would unleash the wealth effect and consumer spending, eventually helping the economy. Ignore for the moment that the wealth effect is a classic case of confusing correlation for causation. The criticism that we already have a mechanism for market support operating in broad daylight makes most of the conspiracy theories hard to accept.
Last, and perhaps most important, the PPT is really, really bad at its job. In the last 15 years, we had the dot-com collapse in which tech stocks dropped almost 80 percent; the 2008 meltdown of 57 percent; the housing crash of 35 percent; and the commodity collapse of about 40 percent.
Just to add a bit more context, in 2008, while the PPT was supposed to be hard at work, markets suffered “the worst annual decline in the Standard & Poor’s 500 index since 1931,” according to Bloomberg News. The carnage “dragged down every industry in the benchmark gauge and 96 percent of its stocks.”
How incompetent must a secret market-manipulating cabal be before somebody gets fired?
So there’s the difference between U.S. plunge protectors and those in China: In the U.S. we turn to a myth that we hope will prop up the market. The Chinese still believe they really have the ability to prop up the markets.
Originally published as: A Plunge Protection Team for China’s Markets?
The PPTs basically create market “derechos”: https://en.wikipedia.org/wiki/Derecho
They try to create the equivalent of nice summer day conditions that temporarily keeps the cold air at bay. When the cold air held aloft finally breaks through, it does it with a vengeance (2000, 2008, housing crash etc.).
Putting in some simple but firm regulations limiting the potential for damage, and then allowing market forces to play it usually seems to work better than lots of active interventions. Glass-Steagal was effective for decades at reducing the potential for financial crises.
Most large-scale conspiracies are very difficult to pull off, They require a dedicated team that is competent, well-funded, and secretive with no leaks. This is generally very difficult to execute, especially in a democratic society. You can often get one, even two of those, but it is rare to get all three except in rare circumstances .Even the Manhattan Project that the Vice-President didn’t know about was spilling its guts to Stalin and the NSA ended up with an Edward Snowden.
Glass Steagal revocation doesn’t hurt because all the other nation’s keep big bancassurance together without a problem. The issue is DEBT ratios. Bush’s Ownership Society let debt levels go to high. Same with Reagan taking the reigns off the S&Ls. Both led to massive debt fueled busts.
@VennData: You’re correct about Reagan and the S&L’s, however, hundreds of the CROOKS who robbed the banks from inside-out were prosecuted and sent to prison. No such thing happened in the ’00’s debacle, which enrages me and I’m sure millions of other law-abiding Americans who believe that the Justice system can and should break the backs of white-collar criminals.
“Glass Steagal revocation doesn’t hurt because all the other nation’s keep big bancassurance together without a problem”
Mate, you haven’t a bloody clue.
The brobdingnagian Euro banks like Deutsche, BNP, Credit Ag are still insolvent and running on fumes [of capital].
Also, I don’t think you even understand what bancassurance means.
Last, Henry Steagall’s name is spelled with two L’s.
Short-term trading halts are not doomed to failure. Just as shutting down markets after 9/11 wasn’t doomed to failure.
Let the GOP voter/investor follow the idiots and lose their capital. They are the ones that don’t want the nanny state. OK Rock Rubber, go ahead and short BABA.
Sorry you missed the rally you Republican dunces..
Barry, what I find odd about the Chinese response is that they have such a fresh, vivid example with the U.S. economic turmoil and resultant market gyrations, yet they don’t seem to have taken many, if any, lessons from our misadventures. Does this point to a core wetware error amongst us homo sapiens?
Often, when thinking about money and finance, we believe we are in the area of mental maturation, when we are indeed navigating the boundaries of mental masturbation : Greece, the Euro, interest rates, Fed policy, fair valuation, economic science, on, and on, and on. The more we learn, the less we seem to know. True knowledge appears to be an ever changing set of facts.