This story does not end well. Just ask Bill Miller. Remember Legg Mason’s Bill Miller? His claim to fame was that he beat the S&P 500 for 15 years in a row. In year 16 (2000), he got slaughtered so badly that his 16-year ROR went well below the S&P 500 ROR over 16 years. (Thanks to John Titus – Best Evidence – for reminding about the Bill Miller story)
All Bill Miller did was heavily overweight his portfolio with a handful of the market’s highest beta stocks, like AMZN. He rode the massive wave of money-printing dumped into the financial system by Alan Greenspan. He was basically the lap-dog of Goldman Sachs, who gave him inside information about what Greenspan was doing.
I was discussing the degree which the stock is completely controlled by the Fed and the U.S. Treasury’s Working Group on Financial Markets – aka the Plunge Protection Team – with my colleague and friend, John Titus. I showed him this chart – click to enlarge:
We both had a good laugh about it and then John remarked that the pattern over the last three years is basically this equation: 1 – e^(-x), where e = 2.718281828 and x is time. This is the pattern embedded by the NY Fed rocket scientists – click to enlarge:
That fact is impossible to deny when you look at it like this – click to enlarge:
As John put it: “it looks like the Fed just copied the same mathematical pattern repeatedly over the last 3 years.”
However, it looks like the Fed might be losing some control. Without going through the burden of doing the statistical work involved, I would bet good money that volatility of the SPX is quite a bit lower during the period of time to the left of the vertical red line. Notice that the period of time after the red line is marked with the S&P 500’s first drop below the 200 day moving average in two years.
Without doing the calculations, you can see visually that the “up and down” moves of the market are bigger and more frequent than the period of time to the left of the red line. That combined with the fact that the SPX suffered by far its biggest plunge and dropped quickly below the 200 day moving average last October combined with the fact that the market always “coincidentally” breaks whenever stocks start to fall hard after the NYSE opens (three electronic routing exchanges “broke” today right after the open) leads me to conclude that the Fed is starting to lose its ability to control the stock market with the kind of precision shown in that first graph over the last 3 years.
And with that in mind, John Titus provided me with the instrument he envisions the NY Fed using when it is dialing up its control over the market – we present to you the Fedtronix – click to enlarge: