The Fed’s unconventional and incredibly loose monetary policy in the aftermath of the 2008 financial crisis has rendered many previous versions of financial intervention largely moot. We look back on things like the $3.6 billion LTCM bailout in 1998 and think about how quaint they are. That kind of money is but a rounding error in an era in which the Fed purchases over $3 trillion in assets in a matter of months.
One method of market intervention that has also largely been forgotten is the Plunge Protection Team, formally known as the President’s Working Group on Financial Markets. The Plunge Protection Team consists of the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Securities and Exchange Commission (SEC), and the Chairman of the Commodity Futures Trading Commission (CFTC).
The purpose of the Plunge Protection Team is to try to stabilize markets through policy coordination across the four major agencies responsible for regulating financial markets. Instead of taking a broad brush approach, as in the case of quantitative easing (QE) or the TARP bailout, the Plunge Protection Team’s actions are more subtle and, perhaps more importantly, more secretive.
What Happened in Markets Last Week
Stock markets have been declining all year, but last week they started to see some tremendous gyrations. On Monday, January 24th, for instance, the Dow Jones Industrial Average opened almost 200 points lower than it had the previous Friday, and at one point was down over 1,000 points. But miraculously the Dow recovered and ended the day up almost 100 points.
Tuesday was similar, with the Dow opening lower again, and losing over 800 points at one point. But yet again the Dow recovered to end the day down less than 70 points.
These types of massive drops and recoveries aren’t normal. After all, if you’re buying the dip, it’s because you’re expecting prices to rebound so that you can sell higher. But how can you expect that if markets are in the midst of a selloff? Was the Plunge Protection Team hard at work?
Little is known about the day to day operations of the Plunge Protection Team, not to mention its actions during times of crisis. The last major activity the Team engaged in was in 2008, and since then there’s been mostly silence. But operating in the shadows is part of what the Plunge Protection Team does.
One of the methods the Team uses to calm markets is to reach out to Wall Street and major financial firms behind the scenes, encouraging them to buy when everyone else is selling. If enough firms can be convinced to buy in the face of a selloff, and enough liquidity enters markets that way, the hope is that a major crisis and loss of confidence in markets can be averted.
Is that what happened last week? It’s impossible to know for certain, as much of the Plunge Protection Team’s work is shrouded in secrecy. But it’s not outside the realm of the possible that the Plunge Protection Team members impressed upon Wall Street the need to keep stock markets elevated in order to continue the illusion that the economy is doing well.
All it would take is a few calls from Treasury and the Fed to big Wall Street trading firms impressing upon them the importance of buying the dip. There might have even been implied liquidity support for those trades, or some sort of other quid pro quo. Then the cash comes rolling in from big traders, pushing stock markets higher.
It’s not inconceivable that that happened, and on more days than one. And thus far, anything the Plunge Protection Team might have done appears to have worked. Markets appear to have stopped their slide and are on the upswing, or at least not falling as fast as they were earlier.
The other possibility for last week’s events in stock markets is action by stock trading computers working according to algorithms, known colloquially as “algos.” Many experienced traders pointed to algo trading as being responsible for the massive recoveries, as trading programs would have been programmed to buy stocks at certain price points. Thus in the middle of a selloff, automated trading platforms would have begun bidding up stock prices, oblivious to what was actually going on in markets and why people were selling.
That could end up being a costly mistake if it doesn’t work in the future, but it’s one more example of the growing risks in stock markets. Many traders have expressed concern that ordinary retail investors have in many cases largely exited the market, and that computerized trading platforms dominate trading activity. Inexperienced investors could find themselves in a lot of trouble if they don’t understand what’s going on, why it’s going on, and the dangers that are inherent in markets today.
Protecting Your Savings
The recent activity in stock markets could have unnerved you, particularly if you have a lot of money tied up in stock markets. Things today are looking ominously like they were before 2008, when stock markets peaked in October 2007 before beginning a long, slow slide.
Last week’s ups and downs could have been the signal for the coming stock market correction, one that many investors will probably miss now that markets seem to have recovered. But those investors who heed the warning and protect their assets could end up patting themselves on the back in the future.
Many people have already decided to protect their savings with gold and silver. Gold and silver have traditionally been safe haven assets of choice for those looking to protect their wealth against the ups and downs of financial markets. And they traditionally perform well during times of weakness in markets.
During the aftermath of the 2008 financial crisis, for instance, gold nearly tripled in price and silver more than quintupled, while stock markets struggled to regain their pre-2008 levels. And in any future crisis, that kind of growth is what many investors may expect to happen again, hence the continued and growing popularity of investing in gold and silver.
Investing in gold and silver doesn’t have to be difficult, either. With a gold IRA or silver IRA, you can invest in physical gold or silver coins and bars while enjoying the same tax advantages as a conventional IRA account. And if you have assets in a 401(k), 403(b), TSP, IRA, or similar account, you can roll over or transfer those assets into a gold IRA or silver IRA tax-free.
Don’t let your assets plunge in value before you decide to protect them, however. Call the precious metals experts at Goldco today to find out how you can safeguard your savings with gold and silver.