Sep 11

What Would You Own If You Could Manipulate Markets?

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FROM THE NORTHWEST QUADRANT

By Alton Cogert

That is not a rhetorical question.  Alas, there are those who can indeed manipulate financial markets at the stroke of a pen, the mention of a brief comment, or the utterance of a sigh.

Who, you may ask, can consistently do such a thing?

Warren Buffet?  Not really.  Even the wizard of Omaha is subject to seeing where Mr. Market prices securities before he can dream up his next move, which in turn moves a very small part of the market.

President Obama? Yes, but what he says or does could have unexpected and varying impacts on financial markets. Is Obamacare good or bad for markets?  We shall see, but its impact will undoubtedly vary depending upon the company, person, etc. Will declaring war on ISIS cause markets to fall or rise?  A case can be made on both sides of that question.

Big hedge funds, private equity players, algorithmic computer traders?  Yes, but usually only for a very small subset of the markets.

Of course, the granddaddy of all market manipulators would be the Chair of the Federal Reserve. He or she has direct, effective control of short term interest rates offered by the largest debtor in the history of the Universe (as far as we know). And, he or she can create money out of thin air with a press of computer key (QE).

With such incredible power, you probably would want to be very careful where you invested; not wanting to be seen as making decisions ostensibly in the public interest, while lining your own portfolio with profits. As, the most powerful economic figure in the world, you would be very careful what went into your portfolio, whether it was sitting in a ‘blind’ trust managed by others or not.

What investments did the last three Fed Chairs own? (And, please remember that, by law, Federal Reserve Governors cannot own the stock of banks, thrifts or primary dealers of US government bonds.)

Leading off our gallery of manipulators is, of course, “the Maestro” himself.  Alan Greenspan served as Fed Chair from 1987-2006, although subsequent events proved him a less than perfect Maestro.  He invested the bulk of his portfolio in US Treasuries.  Why?  He wanted to avoid stock market investments lest he be seen as having a conflict of interest. 

The second manipulator is the man nicknamed “Helicopter Ben,” since he said any possible deflation could be stopped by printing money.  And print money did he ever during multiple QE’s.  Ben Bernanke served from 2006-2014.  His largest investment holdings were two annuities (one fixed, the other variable) from the venerable TIAA-CREF and dating back to his days as an academic Princeton Tiger.  

Although a variable annuity may move with equity markets, holding onto two annuities from your retirement plan provider for years is not exactly a great way to play the markets you are manipulating.  It is more aggressive than holding Treasuries, but still a relatively conservative, passive approach.

Recently, our still brand new Fed Chair, Janet Yellen disclosed her holdings with her Nobel laureate husband George Akerlof.  The couple owns a mix of investments with individual stock holdings and a variety of mutual funds.

Have times changed for the Fed Chair: from a Treasury only philosophy of not wanting to be seen as having a conflict of interest to a full on equity portfolio. And the Chair is not alone, as her compadres on the Board of Governors also have various equity investments.

Meanwhile, the top market manipulator and her compadres ultimately report to the President, who has most of his portfolio in low yielding US Treasuries.

What would you own if you could manipulate markets?  The Chair of the Federal Reserve has answered that question, but is it the correct answer?

To paraphrase Henry Higgins in the play My Fair Lady, “Why can’t the Fed Chair invest more like a Maestro?”



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