Sunday , 22 September 2019

The “Plunge Protection Team”: What is It? Does It Act In the Interests of the Average Investor?

“It is a pure leap of faith to believe that if the Plunge Protection Team is indeed directly intervening, that it is acting in the interests of the average investor.”

Prepared by Lorimer Wilson, editor of munKNEE.com – Your KEY To Making Money! 

[Editor’s Note: This version* of the original article by Daniel R. Amerman has been edited ([ ]), restructured and abridged (…) by 67% for a FASTER – and easier – read. Please note: This complete paragraph must be included in any re-posting to avoid copyright infringement.]

“The “Plunge Protection Team” is the colloquial name for the Working Group on Financial Markets (WGFM) and was established by the executive order of President Reagan in 1988, in the aftermath of the stock market plunge of October, 1987.

  • The group reports to the President, and the official members of the group include:
    • the Secretary of the Treasury,
    • the chairman of the Federal Reserve,
    • the chairman of the SEC,
    • and the chairman of the CFTC. In other words, the group members are the four more powerful financial officials in the United States.
  • In practice, the committee can be composed of senior aides and officials that have been designated by those top officials.

According to Treasury Secretary Mnuchin, the WGFM met by telephone on the afternoon of December 24th, to discuss the ongoing plunge in U.S. stock indexes.

  • The very next trading day, the Dow Jones index experienced its largest ever single day point gain, closing up over 1,000 points.
  • The following day, more than half of the 1,000+ points in gains were temporarily lost – until there was a late day reversal that came out of nowhere, and the Dow climbed by over 600 points to close with another gain.

Coincidence? There is no doubt that the Plunge Protection Team does exist, and that it convened on Christmas Eve…

The idea of a “Plunge Protection Team” sounds pretty good from some levels.

  • Once a market plunge gets going, then it can become difficult to stop – and this can be exacerbated by automated trading programs…so the Plunge Protection Team becomes a form of circuit breaker. It keeps the markets from going to where they would naturally fall absent the interventions.

Some believe that the purpose of the Plunge Protection Team is to secretly manipulate the markets using vast sums of money in a series of interventions to keep investors from decreasing prices to a more rational level. In this case, the Plunge Protection Team:

  • keeps levels artificially high, and many other investors, particularly many naïve investors and index investors, continue to buy stocks (or whatever the asset is) at unfairly high levels.
  • Viewed from that perspective, a Plunge Protection Team becomes much less desirable.

What underlies everything else when it comes to investments and their utility to the public over the long term is that purchasing investments is supposed to work in the investors’ interest, not the interest of the financial system, but that’s really what the Plunge Protection Team is:

  • it is a committee that is dedicated not to investors but to the financial system.
    • If in the interest of serving the financial system, government manipulations create excessively high prices – then by definition, investors are being cheated out of future yields.
      • because for any future stream of cash flows…the higher the price we pay today for what the cash flow will be in the future, then the lower our future profits or returns.

Why does the Plunge Protection Team intervene?

  • It is to make sure that prices are higher than investors would be paying of their own free will, with the best information that they have at that time

Therefore, when the Plunge Protection Team intervenes…it is manipulating the market to cheat investors…

  • The investors are being prevented from acting on the best information they have
  • and, because of that, other investors who don’t understand what is going on – such as passive index investors – continue to buy these assets at far higher prices than they really should.

…Government interventions that favor prices going up and discourage prices going down are something that arguably serves the system at the expense of investor outcomes. Indeed, the essence of the Plunge Protection Team is that it:

  • sacrifices the ability of investors to buy at prices that accurately reflect market conditions, for the common good of the system, including financial institutions and the government…

What’s the greatest risk involved with something like a Plunge Protection Team?  The problem is that:

  • eventually the market is going to go where it is going to go [so] there is likely only so long that artificial manipulations can prop it up so the manipulation eventually fails,
  • and because the manipulation fails, we have millions of investors who bought into markets for what could be months or years at far higher prices than they should have paid.
  • This means that they take far greater losses than they should have taken…because the Plunge Protection Team kept the best information from reaching normal investors.
  • On the other hand, those in the know would have had that information all along, and what extraordinarily valuable insider knowledge that would be. Such is the problem with the combination of secrets, vast powers and human nature.

…The real costs of the market manipulation that is purportedly involved with the Plunge Protection Team are three forms of investor losses, three forms of cheating investors.

  1. It cheats investors by making them pay too much for a security at any given time compared to what they would be paying if the Plunge Protection Team wasn’t there.
  2. It cheats investors by taking too much of their future profits because they are paying too high of prices today in exchange for any given amount of future cash flows.
  3. It cheats investors by exposing them to far greater risk of catastrophic losses than they would knowingly take if the Plunge Protection Team was not there.

…The fascinating part about the Plunge Protection Team is that even though it has been publicly created by the government – it still looks an awful lot like a conspiracy.

  • We have a group of extremely powerful insiders who are acting in ways that are not being fully described to the public and which the public does not fully understand.
  • Because they are doing this in secret, it is very easy to believe that:
    • maybe they are doing this in their own self-interest, and…not…in the interests of the average person…

It is a pure leap of faith to believe that if the Plunge Protection Team is indeed directly intervening, that it is acting in the interests of the average investor.”

(*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)

For the latest – and most informative – financial articles sign up (in the top right corner) for your FREE bi-weekly Market Intelligence Report newsletter (see sample here).

Scroll to very bottom of page & add your comments on this article. We want to share what you have to say!

If you enjoyed reading the above article please hit the “Like” button, and if you’d like to be notified of future articles, hit that “Follow” link.

Want your very own financial site? munKNEE.com is being GIVEN away – Check it out!

A note from Lorimer Wilson, owner/editor of munKNEE.com – Your KEY to Making Money!:
“Illness necessitates that I spend less time on this unique & successful site so:
  1. if you’re interested in exploring the opportunity of taking the site to the next level as associate editor/webmaster
  2. and being rewarded with full ownership – at absolutely no cost to you – at the end of the second year of involvement
  3. please indicate your interest in the Comment section below
  4. and I will get in touch with you.”