A Plunge Protection Team for China's Markets?
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.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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