Stock Market an Instrument of US Foreign Policy

Performance is less of a riddle than many think, when viewed from a more strategic perspective

Stock Market an Instrument of US Foreign Policy
The Federal Reserve Building seen through a fence in Washington on June 17, 2020. (Olivier Douliery/AFP via Getty Images)
James Gorrie

What’s going on with the U.S. stock market’s amazing performance in these pandemic times?

Quite a lot, actually. In the second quarter, the economy contracted by an annualized rate of about 33 percent, while gasoline prices rose more than 12 percent, and manufacturing increased by more than 7 percent.
And yet, from March through August, the market has outpaced the economy dramatically. Some experts explain it by asserting that the market is disconnected from the economy; others say the opposite.
Even experts at the highest level don’t seem to have the whole picture.

All Psychology?

Nobel laureate and financial legend Robert Shiller thinks the market’s behavior has less to do with market and economic fundamentals, and more to do with crowd psychology.

But where’s the crowd in the market? Sellers (should) outnumber buyers.

Trading volume is uneven at best, and asserting that market behavior is driven by investors' assessments of “other investors’ evolving reactions to the news,” as Shiller does, rather than the news itself, would seem to detach market behavior well beyond the realm of economics or real live financial situations.

Sure, psychology has always played a role, but in down markets, people sell their stocks to buy groceries, especially when there are 30 million or 40 million newly unemployed.
Needless to say, there are a lot of conflicting data and opinions about what’s really driving the market, and that’s quite understandable.

Numbers Don’t Add Up

For one, the economic data has improved, but that can’t justify the record numbers we’ve seen lately. Sure, manufacturing orders are up over the past quarter, and unemployment claims are down, but those numbers alone aren’t nearly enough to justify or explain the market’s spectacular performance this year.
And even though the market saw some steep declines last week, it recovered all of its losses since March, at the outset of the pandemic, amid all the current and future uncertainty that surrounded it.

Future Uncertainty Abounds

That’s not normal. Typically, uncertainty is one of the main forces that drive stock markets downward and raise volatility.

This is especially true with future uncertainty, of which 2020 has seen plenty already and surely isn’t through it by any stretch of the imagination.

Where to begin with the 2020 future uncertainty list?

Actually, any place will do.

The CCP virus pandemic and the constant negative media surrounding it has provided an unprecedented level of uncertainty. Initially, more than 2 million Americans were projected to die from the disease, while shortages of medical equipment and medicines, and uncertainty regarding treatment were at a fever pitch, no pun intended.
Then, of course, the ongoing national election campaigns have split the nation, as have the Black Lives Matter/Antifa riots across the country, from New York, Minneapolis, and Chicago to Portland, Seattle, and others. The United States may well be on the verge of some version of Civil War 2.0. Some think we already are.

But wait, there’s been more uncertainty for the future—much more, in fact.

The drumbeat of China’s aggression against Hong Kong, and potentially Taiwan, is just the beginning of China-related uncertainty. There's also the technology–national security battle in the United States, from Huawei to TikTok and beyond.
Those multibillion-dollar shocks have certainly added to uncertainty in the business world, not to mention the potential delisting of up to 200 or more Chinese companies from U.S. stock markets. The likely massive disruption of millions of Americans’ retirement accounts and loss of value sure seem like they would add even more uncertainty to the markets.

And yet, still the markets rise to record highs.

How can that be?

Surely it couldn’t be due to all the 401(k) money that hasn’t been flowing into the market—tens of millions of Americans lost their jobs in a matter of months between March and June. Many were soon living off their retirement accounts—not adding to them. In fact, many still are.

It’s a Federal Reserve Market

The answer may well be, as any stock trader or savvy financial adviser will tell you, to “never bet against the Fed.” The meaning of that adage is clear: The Federal Reserve drives the market as well as the economy. That’s as true today as it’s ever been.
The Fed does have a tremendous amount of influence on the stock market. In fact, its influence is even more direct and more powerful today than most imagine.

There’s a very good reason for this, and it has little to do with market forces and much more to do with foreign policy. The U.S. equity markets are an effective instrument used by the federal government to work with or even reward foreign nations.

What’s more, since at least 2008, it’s been done rather routinely.
In a New York Post article dated March 25, 2015, writer John Crudele disclosed a very simple but powerful aspect of the market when he wrote:
“CME Group, the Chicago exchange that trades options and commodities, had an incentive program under which foreign central banks could buy stock market derivatives like the Standard & Poor’s futures contracts at a discount. ... S&P futures contracts are the vehicle of choice for rigging the market. They are a cheap and very powerful way to cause an artificial buying frenzy.”
Did you get that? S&P futures contracts are the vehicle of choice for rigging the market.

Crudele also pointed out, in a very modest way, just who the primary market players are: “Foreign central banks, of course, really don’t need a discount to buy S&P futures contracts. ... The rigging of US stock markets by foreign entities has likely been going on for some time.”

The U.S. government would be foolish not to leverage them to their advantage, just as it leverages the reserve currency status of the U.S. dollar to its advantage.

No conspiracy.

No sleight of hand or misrepresentation.

No doubt.

But Crudele is neither the first nor the only one to point this out.

In a July 13, 2015, Business Insider article, Wolf Richter wrote about the blatant manipulation of the Shanghai Stock Market by the regime in Beijing, and added, “[just like] the US, Japan, Europe, and other economies where central bankers and governments, among others, have manipulated the markets for years.”

Catch that? The U.S. government manipulates the stock market.

What’s more, apparently foreign central banks come to the U.S. stock market to make money and are helped by the Fed to do that. Similar political interests that drive the Fed also drive the European Central Bank.

But the U.S. market is the most effective, efficient, and prolific money machine on the planet, bar none. That’s no exaggeration and is precisely why the world comes to Wall Street.

It’s also a big reason why the markets are up when the rest of the country has been down. The world needs financial help, and the U.S. stock markets are there to provide it. No behavioral theories or investor sentiment observations needed.

And, yes, surprise!—The biggest players make the rules. That’s the way it is and how it always has been.

Just like the old adage that war is too important to be left to the generals, the stock market is too important and far too valuable a foreign policy asset to be left to market forces.

James R. Gorrie is the author of “The China Crisis” (Wiley, 2013) and writes on his blog, He is based in Southern California.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
James R. Gorrie is the author of “The China Crisis” (Wiley, 2013) and writes on his blog, He is based in Southern California.