At the Edge of the Abyss

April 5, 2000

The collapse of both the Nasdaq and the Dow Jones Industrial Averages on April 4 indicates how fast equities can be wiped out.

The three-hour recovery also indicates how the futures market — low, low, low down payment! — can be used to reverse a market plunge.

An article by John Crudele of the NEW YORK POST (April 5) indicates that at 1 p.m., EDT, there appeared out of nowhere sustained buying activity in the futures market.

One minute the Nasdaq was down 11 percent — say it out loud, “Eleven percent in one day” — and then it suddenly rallied several hundred points in the matter of an hour….

Then, traders said, someone started buying large amounts of stock index futures contracts through two major brokerage firms — Goldman Sachs and Merrill Lynch…. Goldman wouldn’t comment on this and Merrill did not return a call for comment….

“I think some one or more persons saved the market today. There was a suspicious urge to buy stocks at an opportune time,” says one trader. “Why drive the Dow up 350 points in a half hour? That’s never serious buying. That’s someone trying to establish prices,” he adds.

I’m especially suspicious when the market suddenly rebounds at nearly the very same moment that a member of the Clinton administration — economic advisor Gene Sperling — is on TV telling investors not to worry.

The futures market is where you get the most bang for your buck if your timing is perfect.  If you had unlimited funds to stabilize a falling stock market, you could achieve this result cheapest by using financial futures.  You would have to put so little money down as a deposit.  This is vastly cheaper than buying the actual stocks.

The risk seems great.  The market may keep falling. But, as I said, if you had unlimited funds, you could keep pumping up the market with sustained purchases in the futures market.  This is what the anonymous trader said.  It was sustained buying.  It was not someone who was buying on the dip.  Someone was buying to reverse the dip.  This was not bottom-fishing.  This was establishing a bottom and raising it.

The investors who failed to meet their margin calls on April 4 lost a lot of money.  They lost their positions, which were sold out from under them.  Margin giveth and margin taketh away.  To sell out in the wave of panic margin calls, only to see the market reverse itself at 1.p.m., would be a devastating experience.  The victims will not soon re-enter the market.

The intervention provided confidence.  It was one more example of the seeming inability of people to lose money in stocks if they buy and hold.  There is always someone who comes to the rescue through the financial futures market — someone who simply does not fear massive losses in case he bets wrong.

It is as if someone were not investing his own money, as if he could create all the money he needs to sustain his position in the futures market, someone too big for the shorts to challenge.

This sense of confidence is what has raised the price/earnings ratios on the Dow to 40, and in the Internet stocks to 200.  Investors are willing to take low earnings and no dividends on the assumption that increases in stock prices will compensate them.  The investors believe that the stock market giveth but never taketh away.

The man on the green horse will always ride up, buy futures contracts, and then disappear into the night without selling his contracts, despite massive profits.

It’s nice to have a buyer of last resort whenever the stock market tanks.

It’s especially nice in a Presidential election year.


Recessions eventually arrive.  They are preceded by stock market reversals.  These reversals take place about six months before the recession hits.  The election is seven months away.

I keep wondering if Bush will win, only to head into recession.  That would not be good for the Republican Congress in 2002.  It might be a replay of 1930.  Then came 1932.

The night before the half-a-day crash, I read a new novel by my friend Jim Cook, FULL FAITH AND CREDIT.  It’s a novel about a financial collapse that begins in the U.S. stock market and spreads.  I couldn’t put it down.  It spells out in detail what events could trigger such a collapse. It’s a creative scenario.

The heart of the collapse is debt.  It’s universal. People are no longer saving.  They rely on stock price increases to do their saving for them.  If the market reverses, private investors who got in late and who bought on margin will not have sufficient reserves to meet margin calls.  We say that on April 4.

The Fed is the surely lender of last resort.  The question is, is it the buyer of last resort?

For a brief report on how the FED uses money creation to sustain the banking system, read Murray Rothbard’s essay, “The Mysterious Fed.”  It is not favorable to Greenspan.

Dancing at the edge of the abyss doesn’t bother investors these days.  They assume that there will always be last-minute intervention by some unknown benefactor, whose only goal is to reduce investors’ uncertainty.

This confidence is rewarded by institutional buying, which then enables the charitable benefactor to sell his futures contracts quietly and piecemeal into a rising market at a terrific profit.  Nice work if you can get it.

But the public benefactor had better have deep pockets and a perfect sense of timing . . . or else the legal authority to create money.