The American stock market has been beset by a spike in volatility and downward pressure since the beginning of the year. Some of the riptide declines began with the unexpectedly light employment report for last December, issued early in January. While private research reports had documented net job increases well above the 200,000 or so that had been reported by the Labor Department over recent months, the government estimated only 74,000 were added. For those market speculators waiting all 2013 for the oft-predicted 10 percent downward correction in stock prices that would give them a chance to get in to the market after missing its 30 percent increase over the year, the disappointing jobs report offered their first chance to send their minions onto cable TV to promote the well-worn "sky is falling" thesis that would lead investors to quickly "take profits" and get out of the markets "while they still can."
This ploy amounted to just another well-promoted renewal of the "Armageddon trade" that spooked investors -- and opened doors to speculators to buy stocks cheap before the inevitable snap-back when Armageddon forgot to happen in 2009, 2010, 2011, and 2012 (based on doomsday scenarios for the Euro, the European "PIIGS" states, China and even the US). This time investors -- fooled not just once but four times by the chicken-little game -- didn't swallow the jobs report whole and refused to panic. This was largely because the dismal report was found to be based on statistics collected for only one week in December, and the coldest one at that -- which artificially held down all sorts of employment but only temporarily.
But the speculators soon got another gift that keeps on giving -- this time from the always volatile "emerging market" sector overseas -- specifically in this case, the rapid depreciation of the currencies of Argentina and Turkey, which had been living beyond their means for years but only recently exposed as such by the Fed's December decision to begin "tapering" the monthly money-printing that had found its way to the hot-return markets like those two countries, among others. Black market rates for exchanging the Turkish lira and the Argentine peso into dollars spiked precipitously, their Central Banks rushed to raise local interest rates and adjust exchange rates to counter the panic in the streets. Then speculators rushed in first to the currency markets to pressure the country authorities further to test where even more tumultuous - and profitable --breaks could be triggered! But the speculators also quickly saw that there was an even bigger game in play, and one they could play on a very low-cost/high returns basis - namely, playing the whole US stock market against itself for a quick buck on the short side with a relatively very small investment, just like in the good old days of the Euro-panic of 2010 through 2012.
The initial US market reaction to the Argentine-Turkey tango -- which gave the speculators their renewed opening -- was a flight to the quality of Treasuries, which took the ten-year note up to levels that reversed the 'normalizing' price decrease (and rate increase) expected in the wake of the Fed's tapering and mimicked a pattern usually associated with the onset of recession fears. Then came multiple 100+ declines in equity markets as they picked up the 'all is not well" scenario laid out on cable coverage starving for something that looked like dramatic change. All this manufactured doom and gloom has created a perfect scenario for the speculators' favorite playbook. Here's how it works:
A big problem in a really consequential market, like a collapse in Chinese growth, would merit a drastic equity market response, more than even the 10 percent correction that short sellers and the many hedge funds that missed the 2013 rally altogether because of their antipathy to any "Obama' market or whatever. But that's reality; speculators deal in fantasy. Chinese GDP is equal to a large percentage of US GDP, more than the top ten U.S. states combined. But Argentina, Turkey, Hungary -- that's a whole other story. Argentina's GDP is just the size of Arizona and Missouri combined; Turkey's is the same as Virginia's and North Carolina's combined. And Hungary is supposed to be an earth-shaking currency problem? Its GDP is the same size as Kentucky's. But these global minnows allow the speculative whales to play an ultra-efficient market manipulation game at very low cost.
The "sky is falling" speculators just briefly "invest" a relatively small amount of their dollars to take a market position that drives down these little countries' currencies even farther, take a mega-short position in the Dow or S&P averages. Then like the Armageddon psychology promoted by the cable TV "experts", do the rest of the work for them, driving down equities to return big and quick short-position profits that more than make up for the losses incurred on currency manipulation, and opening the opportunity to buy favored equities - which they know will not be hurt by a Hungarian devaluation or whatever - on the cheap for 2014.
They played the same game back in the day when Greece or Spain were going to bring down the Euro, or the world: a few bucks pushed to spike the rate for "Credit Default Swap" insurance on Spanish debt, for example, could be relied on to drive down the entire global equity market, at least for a few days. Panicking equity investors gave up perfectly good positions as the TV folks quickly marshaled their forces to cover the coming global market calamity (which of course never happened), the speculators sold out their CDS positions at a loss but reaped a harvest of short-sale profits and then bought in cheap to reap the later equity rallies of 2010, 2011, 2012 and 2013.
Spain and Greece, however small in their own right, were at least tethered to a really significant currency and the Euro-bloc economy. But Turkey, Argentina, Hungary -- they are really the tail that now wags the global equity market dog.
Market suckers have been taken in by these speculative games for four years running; why should 2014 be any different, especially with CNBC cheering them on by not explaining what's really going on? Sure Armageddon talk ups the ratings, but maybe CNBC should ask itself: when we succeed in scaring everybody but the speculators and hedge funds out of the market, who's going to be left to watch us?
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By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University
Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.