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Best of the Exchange: Massive Moves and Market Manipulation


Minyans discuss the financial crossroads ahead.


With the launch of The Exchange, Minyans now have a forum in which to express their viewpoints, comment on articles and meet other like-minded financial souls. Minyanville publishes "A Best of the Exchange" each Friday to highlight the many insightful posts and discussions going on behind the scenes.

Become part of The Exchange and let your voice be heard!

(Editor's Note: Some of the following posts have been modified slightly from their original form.)

Todd talked about the need to Get Ready For a Massive Move, and Minyans weighed in with their own view of the situation.

Minyan WIlliam:

We're maybe in the bottom of the first of this credit crunch and the global financial system is already disintegrating before our eyes: State and local governments are cutting back (finally and way overdue!) and preparing bankruptcy filings.

Each aspect of the credit markets feeds on itself in a downward spiral. For example, if California counties go bankrupt, bonds don't get paid, bond insurers must pay claims, thus they need more capital, but they cannot get it because the banks that hold the bonds need the capital because of the losses caused by the default on the bonds. It is a vicious cycle. And it works in reverse. For example, if the bond insurers fail or lose their AAA ratings, then the bonds get downgraded and probably default, banks take losses, etc., etc.

Minyan Tony:

I don't know if it's the best spread to watch, but I check the TED spread as my barometer for things credit. It's the spread between 3 month TBills and 3 month LIBOR. Just take the difference between the two and there's your spread.

The reason I look at it is simple - it basically shows me how strong the flight-to-quality bid is. If the spread is wide, credit risk is high. If it's tight, the market is fairly complacent. Right now it's at 91 basis points. This time last year, it was only 21.

Mr. Practical wondered if there was Market Manipulation Afoot, giving examples such as every rally being futures-led. What did Minyans think?

Minyan Ben:

I feel like a mouse trying to stay alive among dancing elephants. I agree there appears to be no rhyme or reason to certain moves these days.

Minyan Dan:

The bottom line is that too much is invested in things that nobody really needs, the investment is being done by automated systems and people watching automated systems which were designed to handle variations within limited parameters. Any resulting trends are simply mirages of intent. If there is a conspiracy to change the results by some unknown entity with 'infinite' capital, then there is no more to be done, since that 'infinite' capital will eventually be either a tax or unlimited printing of money which cannot be supported by the resources available in the real economy.

Prof. Depew asked Where Does the Debt Crisis Leave Us Now? in his Five Things article Friday, discussing The New Deal, Bernanke and the shifting mounds of debt in the current economy.

Minyan Jason:

If this is only the beginning, what are the best places to invest if this scenario plays out?What were the best investment strategies during the downturn in the 30's?

Prof. Depew's response:

For some investment ideas consider what people will continue to purchase even during a severe recession or contraction. I like consumer staples and own XLP the ETF, among some other select stocks in Pharma, Food and Beverages, Healthcare. Keep in mind, however, that sometimes performance comes in relative terms, not absolute terms. Relative outperformance is sometimes difficult to spend; e.g. 2002.

Minyan Michael:

Unfortunately, it's only money to those that have more money available. To those that don't, it's everything. What has happened over the past eight years is that many more citizens are living closer to the edge.

Pep always does a great job putting things in perspective. But that view is from somewhere closer to the top than the average citizen. My fear is that for those that have little to nothing, their perspective will be gained from the gutter looking upward.

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