Investor Alert

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April 4, 2019, 11:20 a.m. EDT

The Federal Reserve has lost control of the financial markets

The central bank is now following, not leading, the stock, bond and currency markets

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By Avi Gilburt

Federal Reserve Chairman Jerome Powell.

There are ideas that are so ubiquitous that it would be considered blasphemous to oppose them. A common one is that you cannot fight the Fed.

If you can’t believe your own eyes based on the action in the bond market over the past six months, then allow me to provide you further proof that central banks are not in control anymore.

We often hear discussions about the Federal Reserve as the PPT, the Plunge Protection Team. So what is this “team”?

Since 1987, no one could fool themselves into believing that we have not experienced periods of significant volatility, despite the Plunge Protection Team being ‘on the job.’

‘Working group’

After the stock market crash of 1987, President Ronald Reagan created the President’s Working Group on Financial Markets to recommend solutions for enhancing U.S. financial markets, preventing significant volatility and maintaining investor confidence. The group consisted of the secretary of the Treasury and the chairmen of the Federal Reserve, the Securities and Exchange Commission, and the Commodity Futures Trading Commission.

This “working group” became known as the Plunge Protection Team, and many believed the team would intervene at the appropriate moments to prevent significant volatility in the markets, which would, thereby, prevent market crashes in the future. As the myth has been perpetuated, it can supposedly do this by convincing banks to buy stock index futures, or by having the Federal Reserve do the buying. The goal was supposedly to allow markets to correct in an “orderly” fashion so as to “maintain investor confidence” in our equity markets.

Since 1987, I don’t think anyone can fool themselves into believing that we have not experienced periods of significant volatility, despite the PPT/central bank being “on the job.” In fact, the following instances are just some of the highlights of volatility since the supposed inception of the Plunge Protection Team:

February 2001: Equity markets declined of 22% within seven weeks.

September 2001: Equity markets declined 17% within three weeks.

July 2002: Equity markets declined 22% within three weeks.

September 2008: Equity markets declined 12% within one week.

October 2008: Equity markets declined 30% within two weeks.

November 2008: Equity markets declined 25% within three weeks.

February 2009: Equity markets declined 23% within three weeks.

May 2010: Equity markets experienced a “flash crash.” Specifically, the market started out the day down over 30 points in the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.19%  and proceeded to lose another 70 points within minutes. That is a loss of 9% in one day, but the market managed to close down only 3.1%.

July 2011: Equity markets declined 18% within two weeks.

August 2015: Equity markets declined 11% within one week.

January 2016: Equity markets declined 13% within three weeks.

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