Non-Economic Buyers

"Start buying Anacott Steel in the offshore accounts--and keep it quiet."
--Gordon Gekko (Wall Street)

Buyers of securities in financial markets can be economic or non-economic in nature. An economic buyer is motivated by profit. Basically, he buys lower to sell higher.

A non-economic buyer is motivated by an agenda other than profit. For example, some may view stocks as cool to own or a status symbol. I know some people who bought stocks after 9-11 as a show of 'patriotism' rather than as an economically motivated endeavor.

Other non-economic buyers might have a larger agenda. They might believe that by buying assets and keeping prices higher than they otherwise would be, others will take those higher prices as a signal that the general environment is 'ok' and proceed to engage in other behavior that the non-economic buyer would like to see.

The Fed's QE programs are this type of non-economic buyer. Buying bonds keeps price high and rates low. Fed Chair Bernanke is on the record as trying to promote a wealth effect (a phenomenon which has little empirical support).

Like all buyers, non-economic buyers need money with which to purchase securities. They can use their own, of course. For example, a syndicate of bankers including J.P. Morgan began buying stocks with their own funds during the Crash of 1929 with the primary intent of supporting price and instilling confidence in the market.

But the personal pockets of non-economic buyers are only so deep. If the trade goes against them, they may run out of ammo to support his agenda. Moreover, knowing what we know about human nature, loss aversion is likely to run high even for those with non-economic motives.

For big agendas, non-economic buyers need other people's money (OPM) to express their desires. If losses are realized, well, that's the other guy's problem.

Once funds have been obtained, then buying can be done directly. The Fed can print money (the purchasing power of this money comes out of your pockets) and buy Treasuries on the NY Fed's bond desk. Everyone can see it. In fact, the Fed wants people to see it.

Covert buying is also possible. This might occur when a non-economic buyer doesn't want to alarm people that intervention has been seen as necessary, or when intervention is against the law.

By law, the Federal Reserve is prohibited from buying stocks (it is legal for central banks in other countries to buy stocks, btw, and they have been doing so). But this does not mean that the Fed is not doing so. It would be easy to disguise the buying. Create a labyrinth of offshore accounts or work with Goldman to park the buys. Off balance sheet...

This central bank has already shown that it will employ desperate measures in desperate times.

Before this is over, I would not be surprised to learn that the Fed was buyin' 'em during the present periods.

position in SPX