A Deadly Addiction

In my October 6 post, I warned that the belief that the Federal Reserve can indefinitely manage markets and the economy is deeply flawed. In this article, I want to explain how decades of increasingly aggressive market intervention — undertaken in the name of stability — have distorted price discovery and left policymakers with few viable options as the next downturn approaches.

It is ludicrous to rely upon the Fed to do the right thing in all economic situations. They have proved repeatedly that they are incapable of timing their excursions into the credit markets to promote open and free markets without ending in calamity. The Fed’s growing market interference has left few good choices. We now stand on a precipice that will be excruciatingly difficult for all those who are not prepared when the economy truly tanks. The Fed’s more aggressive manipulation of the financial markets has led to increasingly larger and more intrusive actions. This will not end well for the undisciplined novice.

The Institutional Origin of Modern Market Intervention

DATE: 03-18-88

31 — Money and Finance
Working Group on Financial Markets

By virtue of the authority vested in me as President by the Constitution and laws of the United States of America, and in order to establish a Working Group on Financial Markets, it is hereby ordered as follows:

Section 1. Establishment.

(a) There is hereby established a Working Group on Financial Markets (Working Group). The Working Group shall be composed of:

(1) the Secretary of the Treasury, or his designee;

(2) the Chairman of the Board of Governors of the Federal Reserve System, or his designee;

(3) the Chairman of the Securities and Exchange Commission, or his designee; and

(4) the Chairman of the Commodity Futures Trading Commission, or her designee.

(b) The Secretary of the Treasury, or his designee, shall be the Chairman of the Working Group.

Sec. 2. Purposes and Functions. (a) Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation’s financial markets and maintaining investor confidence, the Working Group shall identify and consider:

(1) the major issues raised by the numerous studies on the events in the financial markets surrounding October 19, 1987, and any of those recommendations that have the potential to achieve the goals noted above; and

(2) the actions, including governmental actions under existing laws and regulations (such as policy coordination and contingency planning), that are appropriate to carry out these recommendations.

(b) The Working Group shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible.

(c) The Working Group shall report to the President initially within 60 days (and periodically thereafter) on its progress and, if appropriate, its views on any recommended legislative changes. Sec. 3. Administration. (a) The heads of Executive departments, agencies, and independent instrumentalities shall, to the extent permitted by law, provide the Working Group such information as it may require for the purpose of carrying out this Order.

(b) Members of the Working Group shall serve without additional compensation for their work on the Working Group.

(c) To the extent permitted by law and subject to the availability of funds therefore, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions.

The provisions of Executive Order 12631 of Mar. 18, 1988, appear at 53 FR 9421, 3 CFR, 1988 Comp., p. 559, unless otherwise noted.

Ronald Reagan’s 1988 rather benign-sounding executive order set the stage for market manipulation, which grew in scale over time. I personally witnessed this many times as this group, now generally referred to as the ‘Plunge Protection Team‘ (PPT) (While not an official name, this term came into common use to describe the coordinated actions of this group during periods of market stress.), engineered market recoveries that were not based on improving conditions. They were based primarily on futures-related buying by the operators of this function to promote a rebound in the stock market when they felt it was appropriate.

This facility was created to protect against market disruptions, such as the crash of 1987. In my October 6 post, I detailed how my clients at the time and I made millions from that event by utilizing puts on the S&P 500.

My model issued a sell signal in September of 1987 and then a crash signal in October of that year. This coincided with the rate increases adopted by the Federal Reserve, led by the newly appointed Fed Chair Alan Greenspan. Since the Fed was widely blamed for causing this crash by raising interest rates preceding it, I believe they decided to mitigate the damage to their reputation and look for means to ameliorate market declines. So, in addition to adjusting interest rates, the Fed now had an additional weapon in its arsenal that, combined, led to its overwhelming influence on the markets and economy as time went on.

In summary, we clearly noticed Fed involvement. Later, I will spend much more time on the very important interventions that have led us to the current state of affairs. There were a few fluctuations in the market and the economy after the crash of 1987, but mainly the markets were relatively calm in the early part of the 1990s, notwithstanding the first Gulf War, which did see a sharp but temporary selloff in the indices.

Then, in early 1991, my model signaled a new buy signal, and the market took off. Other than a brief retracement in 1994, the market did pretty well, as we expected and were positioned for, until the summer of 1998. That is a period that was referred to as the Asian Contagion. There was also a minor Russian debt default in place at the time. My model, prior to that timeframe, had issued a ‘caution’ signal, and I directed my subscribers and clients to exit all stock positions except those that would be most tax-disadvantaged.

We avoided financial pain during the substantial selling during that period in 1998. In 1999, the model issued a new buy signal, and the stock market really took off. We made substantial additional profits until the model issued a sell signal at the end of 1999, just before the all-time high in the DJIA, which occurred in January 2000. I have posted, in the October 29, 2025, article on this site, some of the directives and newsletters that were published at the time, so that you can see for certain that large changes in the market and economy can be forecast in advance if you have the right tools.

The notion, adopted and promoted by the investment community, is that no one can predict the direction of the market, so it is better to stay invested at all times. But, as you can see from the investment results depicted in the chart in a previous post, achieved by that approach compared to the model, that notion is specious. If you think about it, the only reason the investment community wants investors to be in the market at all times is because that is how they generate their income!

In future posts, I will examine the specific interventions over the past two decades that have brought the financial system to its current state, why those actions worked for a time, and why they are now far more likely to amplify — rather than contain — the next major decline.

Disclaimer: The information provided is for educational purposes only and should not be construed as investment advice. Financial markets involve risk, and past performance is not indicative of future results. Readers should consult a qualified financial professional before making any investment decisions.