Major economies are stuck in the ‘rigging’

Is this the month the stock market will crash?

Admit it, that's what you, me, the politicians in Washington and the folks on Wall Street are wondering after all the triple-digit losses sometimes followed by gains of equal amounts over the past few weeks.

The whole reason this is coming up is because we are now in the haunted house of October, which has jinxed investors with crashes in 1929, '78, '79, '87, '89, '97 and 2008. I might have missed a couple, but you get the idea.

Tuesday's 273-point decline in the Dow Jones industrial average was a reminder of how quickly things can go bad in these rah-rah days of computerized trading and desperate investors who have parked their assets in stocks because that's the only place they might — emphasis on "might" — earn decent returns.

So far this year, the stock market has been a dud with the Dow up just 2.5 percent — much of that coming during yesterday's 275-point Dow bounce back.

Investors barely have a profit in the major indexes, and they could have gotten the same returns if they had bought a 1 percent certificate of deposit. And they would have slept better, too.

Don't worry, this column is going to end on a soothing note if you are anxious about the stock market. Heck, I'll even give you the punch line now: the stock market is rigged so you might not have to worry. (There's that word "might" again.)

But first, the bad news and there is a lot of it.

We know that the world economy isn't doing so well. The International Monetary Fund this week downgraded its forecast for global growth with particular concern about Europe. It now sees growth of about 3.3 percent this year, down from a 3.4 percent forecast in July.

Next year's economic expansion will be 3.8 percent, until the IMF decides to lower that one, too.

There's a second big problem in Europe. Germany seems to be seriously opposed to a quantitative easing-like purchase of bonds by the European Union. And since Germany is the most stable of the nations in that unstable region, the European Central Bank will have to listen.

So investors are losing hope that the desperate countries over there — Italy, France, Spain, Greece, to name a few — are going to get better soon.

Here in the US, economic growth has also been only moderate, averaging in the 3.5 percent range. And those numbers only hold up if you believe the data coming out of Washington. (Even the most casual readers of this column know that I count myself among the nonbelievers.)

A second major problem on this side of the pond is that earnings for companies in the S&P 500 index are growing faster than their revenues. If your profits are expected to be up 6.4 percent in the third quarter (as Thomson Reuters is predicting) but revenues are expected to rise only 3.9 percent, it means companies are still cutting costs.

Just ask anyone who has lost a job, or is stymied in finding one. Cost-cutting isn't going to help the economy expand any faster.

There are a lot of other things that could make October nasty:

• The Federal Reserve might have an excuse to raise interest rates sooner rather than later now that the US jobs picture looks a little better. Still, as the minutes released Wednesday of the last Fed meeting show, "some" of our central bankers are still worried that the economy is weakening. (The operative word "some" was conveniently ignored by the markets yesterday when they took the minutes as dovish in tone.)
•   Nothing good is likely to happen in the Middle East anytime soon.
•   The Ebola-related health chill is hurting travel, airline and hotel companies.
•   Consumer credit is taking a big hit as Americans cut back on spending.
•   Russia could cause more problems in the Ukraine.
•  There's little faith that Congress or President Obama can do anything about the economy.
•   "Flash traders" could wake up one morning and decide they don't want to own stocks anymore and — pop! — goes the bubble that's been building in the stock market over the past few years.

I'm at the punch line: market-rigging.

As I've written before, Robert Heller in 1989 proposed that the Fed should rig the stock market in times of turbulence. Heller was on the central bank's board right before he proposed this, so

he wasn't just some chump writing a column.

Heller said the Fed shouldn't do this lightly, but when necessary it could purchase stock index futures contracts to stabilize the markets. I believe Heller's plan has been used over the years — including during the dark days of the Great Recession.

This sort of plan seems to be very much alive. A few weeks ago we learned that CME Group, the exchange in Chicago, had an incentive program under which foreign central banks could buy stock derivatives at a discount. This program doesn't include the Fed, but really, how hard would it be for Fed Chair Janet Yellen to call her counterparts in Germany, France, or Japan and say,
"Hey, I could use a little help here!"

You might be as morally opposed to rigged markets as I am. But who doesn't think world governments will choose this last resort if October, November or December really gets ugly?

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