Charles Schwab: The Fed is manipulating the markets

Chuck lays it on the line for struggling small investors and retirees. Photo: AP

WASHINGTON, November 22, 2013 — Action on American stock exchanges, at least as of 2 p.m. EST today, is bullish on light trading volume, otherwise known as a “melt-up” by many professional traders. That’s because the buying isn’t running into heavy selling, which, in turn, either means the bears are laying low waiting for the right time to raid, or naysayers and market bubble theory fans have already gone home early for the weekend.

This kind of market is fun if you’re in, and not so fun if you’re out, fearfully awaiting the upcoming crash the bears are trumpeting, the better to scoop up those super-good prices that never quite happened in 2013.

The story here is a simple one, but it’s proved frustrating to long time traders and investors, including this writer. In past times, most regular investors have relied on two methods of analysis—fundamental and technical analysis—to read the tea leaves and determine which stocks or business areas to invest in.

Branch brokerage office, Charles Schwab Co. (AP)

But in the current market, particularly in this post-crash era, most tried and true methods of analysis, ranging from the aforementioned to more esoteric strategies and theories, have utterly failed to predict market moves.

That’s because, whether you were using balance sheets or charts, markets and stocks generally followed a logical pattern involving the actual earnings of a company and its historical trading patterns.


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But now, all bets are essentially off, primarily for two reasons. First, high-frequency traders (HFTs)—those traders who use computerized trading systems and/or sophisticated algorithms to generate mass quantities of trades (many of them illegal) based on whatever headlines or rumors may be crossing the wires at a given time. It’s easy to see how the system can be gamed, particularly when the SEC turns a blind eye to this kind of manipulation.

But more importantly, the Federal Reserve is gaming the system as well in an effort to inject endless liquidity, encourage more lending by stingy banks, and get a little actual inflation into the economy which, so the Keynesian argument goes, should lead to higher yields and perhaps even higher wages over time, lifting the overall economy in the process.

Unfortunately, the banks by and large, particularly the big ones, are just sitting on all the money the Fed prints each week, either letting it molder in their vaults collecting minimal but reliable interest; or trading pallets of Benjamins themselves in stocks, bonds and commodities, increasing bottom lines, bonuses.

Unfortunately, lending out big money to small investors, or to small businesses or new homebuyers who don’t have perfect credit scores is not an integral part of the fun that’s enjoyed by the Hamptons set.


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Now we have a situation where corporate earnings are virtually flat, yet stocks keep going up and up. On one level at least, that’s another thing the Fed wants—they are eager for asset prices and commodity prices to increase. So do the banks as well as Wall Street’s wealthy in-crowd.

But the banks and the hedge funds and robber barons don’t feel like sharing, and the reason why is simple. It’s this cadre, the direct beneficiaries of the Fed, that’s raking in most of this manufactured dough, profiting at the Wall Street roulette wheel, and doing so enthusiastically as America’s middle class withers away.

Almost no one in the investment world will explain this to people because it exposes the comfy link between the Ivy League Wall Street cognoscenti and the majority Democrats they own and operate in filibuster-proof Washington. That’s one genuinely inconvenient truth they really don’t want you to know.

But suddenly, out of nowhere, Charles Schwab—who heads up the discount brokerage firm that bears his name—laid it on the line this week in a Bloomberg TV interview. (Hat tip to Dave Fry of ETF Digest for digging this one up.)

Chuck declares flat out that the market is being manipulated and lays out his argument with simple clarity. If you’ve been in this business for any time at all, his candor is remarkable. As we’ve been unable to embed this video, here’s the link. It’s worth your time to listen, although you’ll have to endure a 30-second random commercial first.

Maybe that’s one reason to talk to Chuck, who, after all, heads up a firm that primarily caters to the average investor. His business—and ours—would likely greatly improve if we could get back to investing rather than relying on the current generation-destroying money printing that’s responsible both buoying current markets up to record highs while putting most of the profits in individual and corporate hands that have no intention of spreading the phony wealth.

Disclaimer: This writer’s stock and bond accounts are currently held by Charles Schwab Corp.

Read more of Terry’s news and reviews at Curtain Up! in the Entertain Us neighborhood of the Washington Times Communities. For Terry’s investing and political insights, visit his Communities columns, The Prudent Man and Morning Market Maven, in Business.

 


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Terry Ponick

Now writing on investing, politics, music, movies and theater for the Washington Times Communities, Terry was formerly the longtime music and culture critic for the Washington Times print edition (1994-2009) before moving online with Communities in 2010.  

 

 

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