I agree with everything you said. Well put.
Once this nonsense plays itself out, and P/E ratios get back to something that makes sense again (avg. 14/1 would be nice) then I'll look to go long again. Until then, forget it. Forward P/E on the S&P 500 is something like 38/1. Give me a break!
Just got around to trying to digest Puplava's 12/10 discussion of possible PPT intervention. Does anyone know if the Working Group authorization (statutory?? executive order??) in 1987 contained any checks/limitations on their power? My suspicion is that their direct participation in market activity is now quite substantial.
This is James Sinclair's take:
http://www.financialsense.com/metals/sinclair/editorials/2002/1206.htm
Who is the "Stabilizer" from one perspective
or the "Manipulator" from another perspective?
To this, there is "ONE" Answer.
EXCHANGE STABILIZATION FUND
Increasingly controversial, the Exchange Stabilization Fund (ESF) is used to influence the international value of the U.S. dollar and to provide aid to foreign countries.
Established by Congress in 1934 to help stabilize the international value of the dollar, the ESF received little public attention until it was used in the provision of financial assistance to Mexico in the wake of the peso crisis of 1995. Indeed, greater scrutiny may have been inevitable given the ESF’s expansion beyond its original mandate.
The ESF began operations on April 27, 1934, with capital of $2 billion. Initially, $1.8 billion of the ESF’s reserves were maintained in the Treasury’s gold account. The remaining $200 million was deposited in a special account at the Federal Reserve Bank of New York as the working balance for investing in gold and foreign exchange. The working fund of the ESF has expanded over time, reaching as high as $42 billion in mid-1995. As documented by Schwartz (1997), most of the growth in ESF assets has occurred since 1960 and has comprised increases in foreign exchange and securities. As of June 30, 1998, cumulative net income, mainly reflecting interest earnings and capital gains on foreign currencies had financed almost 60 percent of the asset total.
The Gold Reserve Act of 1934 excluded the ESF from the congressional appropriations process and explicitly authorized it to operate without congressional oversight and accountability. In other words, Congress gave exclusive control of the ESF to the executive branch. All decisions regarding the ESF are made by the Secretary of the Treasury, subject to the approval of the President.
Legislative changes in the late 1970's somewhat reduced the secrecy under which the ESF operates and made it more accountable to the Congress. For instance, since 1979 the administrative expenses of the ESF have been subject to the budget process. Moreover, a 1977 amendment to Section 10 of the Gold Reserve Act provides that:
“… A loan or credit to a foreign entity or government of a foreign country may be made for more than 6 months in a 12-month period only if the President gives Congress a written statement that unique or emergency circumstances require the loan or credit be for more than 6 months (31 U.S.C. 5302(b)).”
Finally, 1978 legislation requires the Treasury to provide monthly statements of ESF activities to the House and Senate Banking Committees. Nevertheless, none of these legislative changes has reduced the discretion of the Treasury Secretary in operating the ESF. All of his decisions are final and not subject to approval by the Congress.
A common misperception about the ESF is that the “total assets” number reported on the ESF balance sheet, published quarterly in the Treasury Bulletin, adequately measures its size. This might seem to be a reasonable presumption since the ESF cannot unilaterally issue debt in financial markets. However, several important aspects of ESF operations are not apparent from its balance sheet. In particular, since many ESF operations use dollar assets, any limitation on the conversion of non-dollar assets to dollar assets is relevant to an assessment of available ESF resources.
Intervention, the purchase or sale of foreign currencies to influence the international value of the dollar, is a major use of ESF resources. The other is the provision of financial assistance to foreign countries. Whenever the ESF sells foreign currency, it produces a crediting of the ESF’s (non-marketable) U.S. government security account with the Treasury, which is equivalent to “dollar” cash assets. When purchasing foreign currency, the ESF first obtains dollar balances—possibly by selling some of its Treasury securities to the Treasury (with the Federal Reserve [hereafter, the Fed] acting as agent). The subsequent purchase of foreign exchange with dollars leaves the ESF with a lower level of Treasury securities, but an offsetting increase in “foreign exchange and securities.”
Thus the relevant measure of resources available for an ESF intervention depends on whether foreign exchange is being bought or sold. Dollar assets are needed to buy foreign-currency-denominated assets. On the other hand, purchases of dollars are financed from international reserves, which include official holdings of “GOLD”, foreign government securities or deposits at foreign central banks, the reserve position in the International Monetary Fund (IMF), and special drawing rights (SDRs).
Conclusion: There is no question that today’s market in gold, the US dollar and the Dow 30 equities were stabilized or manipulated depending on what your perspective is. Be assured there is a limitation to stabilization (or manipulation if that is the perspective from which you are viewing the three key markets). That limitation exists because stabilization is of the most short-term nature. Its effect is in the shortest possible terms and can be repeated and repeated, but will never defeat a primary trend. At best, stabilization can delay the unfolding of that trend in hope that fundamentals might change to prevent that bullish or bearish unfoldment. If stabilization or manipulation could prevent a primary trend, the Dow and NASDAQ and the Dollar would still be at their all time highs. That should lay your fear to rest for those that see this activity as manipulation.
The community free press on the Internet wastes huge amounts of copy and readers time arguing whether or not there is a manipulative or stabilizing body. There is no question that there is. There is no question of who it is. There is no question but that its activities are legal in a sense. There is no question that its activities are sterile when it comes to preventing the unfolding of a primary trend bullishly or bearishly. It would be better to open discussion here and now on how does ESF operate, what is the ESF’s limitation and how do we identify its action? This is what I am starting here and now. So to follow through on this, please see my technical report on the dollar to be posted today. It follows directly off this article.