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Asset Flows & The Plunge Protection Team Conspiracy at Trader’s Narrative

2009 was the year of bonds. At least when it came to fund flows. US investors went wild for fixed income shifting mountains of assets from money markets, where they had sought safe harbor. This trend continued right up to the very end of the year.

Here are the total annual fund flows:

  • US Equity Mutual Funds: -$40 billion (outflow)
  • Foreign Equity Mutual Funds: +$30 billion (inflow)
  • Bond Mutual Funds: +$380 billion (inflow)

Back in September 2009 I showed a chart of the monthly US equity and bond mutual fund flows. Here’s the updated edition:

fund flows 2007 - 2009 ICI equity bonds

In 2008 a total of $151 billion was withdrawn from US equity mutual funds so I suppose a mere $40 billion is actually some sort of improvement. And to show just how much of an outlier we’re dealing with, in 2008 bond funds attracted less than a tenth of the assets they did last year ($27 billion).

Curiously, US investors were smart when it came to investing abroad. While they shunned the domestic stock market - even as it melted up continuously - they didn’t give the same cold shoulder to foreign equities:

fund flows 2007 - 2009 ICI equity foreign domestic

While they had withdrawn $82.4 billion from foreign equity mutual funds in 2008, in 2009 they poured $30 billion into them (almost the same amount they took out of US equity funds). The only time that we saw pure panic and indiscriminate selling was during October 2008. During that month, everyone fled to the safety of money market funds swelling their assets to almost $4 trillion.

The Plunge Protection Team?
Earlier this week Charles Biderman of TrimTabs put out a report in which he claimed that the Federal Reserve (or the US Treasury) was behind the rise in the stock market. After all, he could find no evidence of support for the rally from either retail or institutional investors. It is common to find these sort of outlandish conspiracy theories in the dank corners of the internet but seeing it originate from a Wall Street research firm like TrimTabs is surprising.

Putting aside the fact that Biderman provided absolutely zero evidence and that extraordinary claims require extraordinary proof, the question I have for those that believe in the “Plunge Protection Team” is this: where the hell were they during the brutal bear market?

If there is a secret group working within the Federal Reserve and/or the US Treasury to artificially maintain stock prices elevated… they all deserve to be flogged for gross incompetence. After all, if they do exist and if they do have at their disposal virtually unlimited amounts of liquidity (courtesy of the digital printing presses of the Federal Reserve) then how could they have missed the almost 60% decline in stock prices? Were they on an extended group holiday and just happened to return to work in early March 2009?

These type of conspiracy theories, along with Sprott’s recent allegation that the whole US economy is one giant Ponzi scheme, are what some call bricks in the “wall of worry”. And they provide a fascinating counter argument to the extreme bullishness that we’re seeing from sentiment surveys. Overall, this rally continues to be one of the most despised that I’ve seen in my time in the stock market.

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2 Responses to “Asset Flows & The Plunge Protection Team Conspiracy”  

  1. 1 Peter

    re Plunge Prot. Team

    dont forget that there was a change in the administration just before the stock market bottomed. it really did look very alarming in Feb. perhaps the new administration figured that they have to stop the selloff AT ANY PRICE, and thats when the PPT idea could have been instated. after all, give how our world works now (the Western World) dominated by the media, internet resulting in an almost real time feedback loop for anything, what better way you have to shore up confidence than to shore up the stock market itself

  2. 2 GreenAB

    “where the hell were they during the brutal bear market?”

    some thoughts:

    1.)NO ONE can stop panic selling, not even the fed is bigger than the market. maybe for one day but not the giant wave of deleveraging.
    so maybe did try it earlier but weren´t succesful.
    no one knows.

    2.)to be successful with market manipulation you need to have the big players on your side. that requires a lot of coordination and preparation (=time).

    3.)if banks cooperated in such a scheme they must have certainty that it wouldn´t cost them if things go wrong. by bailing out citi/bac, changing accounting rules, creating the PPIP, creation of various lending facilities (PDCF started accepting stocks as collateral in late 2008), QE - the powers that be made it perfectly clear that the financial system will be saved at all (taxpayer) cost.

    4.)buying stocks would be the last measure of desperation.
    before that the fed spend a lot of ammo (cutting rates, creating lending facilities, changing collateral requirements) during the bear market.

    5.)if you aren´t bigger than the market in order to be succesful you need to catch the market on the wrong foot.
    which means that you need very pessimistic sentiment to squeeze the shorts. you don´t get that with 3 or 4 months of a bear market.

    if one wants to believe it happende before:’s-savings-problem-and-the-consumption-constraint/

    “…But this is just a guess, and the example of Japan after the 1987 crash and the subsequent reversal in US dis-savings suggests that while a credit bubble can keep the game going in China for a few years longer, ultimately the surprise may be on the downside. On that subject let me note something that an unnamed official confessed about the impact of the US crisis on his country’s economy:

    “We intended first to boost the stock and property markets. Supported by this safety net – rising markets – export-oriented industries were supposed to reshape themselves so they could adapt to a domestic-led economy. This step was supposed to bring about an enormous growth of assets over every economic sector. The wealth effect would in turn touch off personal consumption and residential investment, followed by an increase in investment in plant and equipment. In the end, loosened monetary policy would boost real economic growth.”

    It sounds plausible and like it might work. Except that it didn’t. The unnamed official was not an anonymous friend of mine at the PBoC. According to Tomohiko Taniguchi, in Japan’s Banks and the “Bubble economy” of the Late 1980s, the speaker was an official at the Bank of Japan and he made the comments in 1988, during a period when Japan was routinely referred to as a “creditor superpower” (and a country, by the way, with enormous foreign currency reserves, and whose currency would within one or two decades, everyone knew, become the world’s reserve currency).

    After the 1987 Crash in the US, many expected the Japanese markets also to crash. But they didn’t. After faltering briefly, the Ministry of Finance ordered the Big Four brokerages to support the market, and support it they did. Within a few months the Nikkei was testing new highs, leading a Ministry of Finance official to boast that manipulating the stock market was easier than controlling foreign exchange. Check Edward Chancellor’s Devil Take the Hindmost for an illuminating take on the Japanese bubble economy of the 1980s…”


    -why is the fed fighting to keep the books unseen?
    -what does the BAC and yesterdays AIG news regarding the fed pressuring both companies tell about the leaders?
    -whats the explanation for the constant big pre market gains?

    do you have data on previous bear market rallys?
    has there ever been one of the giant proportions that was accompanied by mutual fund outflows?

    thank you!

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