“There will be no ‘glad confident morning’ for free-market principles for a long time to come.”
-- Samuel Brittan, Financial Times

Man, did I pick a bad time to head overseas. By the time you read this, it’ll be Tuesday morning. But I’m writing to you on Sunday night, as Monday will be all but wiped out by 16 hours of traveling.

I almost wish I could delay my trip. The markets are going nuts even now, on news of the Lehman bankruptcy and Bank of America’s buyout of Merrill Lynch. The futures are showing the Dow down 307 and the S&P 38 full handles -- on a Sunday night!

My trading and investing positions are all squared away. I just wish I could be in the turret to watch, instead of bouncing around at 30,000 feet.

Anyhow, if we get another “Black Monday” -- 1987 redux and all that -- now you know the reason I haven’t touched on it today (Tuesday). I was on a @#$! airplane. Believe me, the first thing I’ll do when I get to Paris is check the markets...

Moving on to a question inspired by our dialogue from last week: Where is the plunge protection team? Are they still a factor these days?

(And as a brief aside, where is the president of the U.S.A.? Does anyone else find it odd that, with the worst financial crisis since the 1930s in full swing, the supposed leader of the free world is doing his best “Where’s Waldo” interpretation? It’s all very strange... Theories? Insights? Send ‘em: justice@taipandaily.com.)

The Visible Hand of Uncle Sam

For those of you not familiar with the Plunge Protection Team, or PPT, the group has been whispered about for years. As the story goes, the PPT was assembled in 1989, two years after the ’87 crash, as an extension of the President’s Working Group on Financial Markets. The PPT’s main job, so it is said, is to head off market crashes.

If you want more hard evidence on the PPT’s existence, you can check out a free report by Sprott Asset Management titled “Move Over, Adam Smith: The Visible Hand of Uncle Sam.” (Sprott is a publicly traded Canadian firm with billions under management. You can find the report by typing “Sprott plunge protection team” into Google.)

So, while some still question the PPT’s validity, we know there is reason to believe it could be real. We also know that other governments have not been shy about market manipulation. One of the most prominent examples comes from a surprising place: Hong Kong.

Hong Kong is often lauded as one of the most laissez-faire places on earth -- a capitalist’s paradise. Milton Friedman had a special place in his heart for Hong Kong.

And yet even here, in this free-market Shangri-la, the government couldn’t resist stepping in when the chips were down. As the Federal Reserve Bank of Dallas reports, “In August 1998, at the height of the currency turmoil, [the Hong Kong government] purchased $15 billion worth of local blue-chip stocks.”

The Dallas Fed goes on to note, “The unprecedented intervention seems to have worked. Nevertheless, the intervention broke the Hong Kong government’s laissez-faire tradition and drew significant criticism.”

No Constraints

So if Hong Kong can do it, why not Uncle Sam? The HK government caught a lot of flak for trashing its free-market principles, but so what? If the system is saved it was worth it, right? (Or was it?)

In our case, here in 2008, a measly $15 billion might not do the trick. In fact, it might take more like $500 billion to get the U.S. market feeling chipper again. Maybe a trillion, just to be safe... who knows?

That sounds like a whole lot of dough. But remember, too, that there all kinds of levers the Fed can pull. The Fed is very good at working with smoke and mirrors. And why shouldn’t they be? The whole fractional reserve banking system is based on the concept of creating something out of nothing.

On Sunday afternoon I watched a great Charlie Rose interview with Larry Summers and Robert Rubin, two former secretaries of the Treasury. (You can find it here via Google video.) These guys are heavy hitters in every sense of the term. When Rubin or Summers speaks, Wall Street listens, and their antennae are very attuned to the goings-on in high places.

So my ears especially perked up at this exchange:

That’s a pretty eye-opening statement. Summers begins by acknowledging that no one has unlimited resources, not even the Fed or Uncle Sam. By the time he finishes, though, we see clearly that moneyisn’t the limited resource in question here -- credibility is.

As long as it’s “the right thing to do,” the Fed and Treasury will do what it takes to keep the system functional. Money, or should I say paper money, is no object.

So if saving the system means playing bizarre games with Uncle Sam’s balance sheet, accepting toxic waste assets as collateral, and printing up hundreds of billions or even trillions to inject into the system, so be it. The only restraints are pragmatic.

The main concern, as former Treasury Secretary Summers puts it, is one of “appropriateness, confidence, and feasibility.” Who cares about rule of law or historic precedent. In other words: Could it work? Will the public buy it? Will our foreign creditors tolerate it? Then let’s do it.

In this type of environment, the ethos of the Plunge Protection Team (PPT) is alive and well. It doesn’t matter whether the old form of the group exists, or what new and more potent form the PPT may have taken on. Either way, these guys are large and in charge, with Bernanke and Paulson at the forefront. The PPT is running the show now.

In sum, we’ve reached a point where government intervention in markets is so open, so blatant, that high-ranking ex-government officials with a finger on the pulse of Wall Street are now happy to admit that “We will do whatever it takes, money no object, principles no object, with the only real constraint being whether we can pull it off.” (My blunt interpretation of Summers’ artful reply.)

So that’s the answer to the question. Where is the plunge protection team, you ask? They’re right out in the open. No need to skulk in the shadows anymore. Like a one-time mafia front that somehow boot-strapped itself into a respectable enterprise, the intervention business is all but respectable now.

Manipulation Goes Global

There are still rules to the game, of course. The powers that be can’t just write Wall Street a $500 billion check, for example, and send the Dow rocketing to 20,000. (If they could, they already would have). The trouble with a bold-faced move like that would be dollar free-fall and banana-republic-style hyperinflation. You’ve got to boil the frog slowly if you want him to stay in the pot.

In the long run, the Fed and Treasury are beholden to America’s foreign creditors, just as a public company is beholden to its largest and most powerful shareholders. (John Q. Taxpayer is a captive audience and thus has far less clout.)

The good news for Uncle Sam is, most of the global players are in cahoots. They’re on board with the PPT agenda.

Why? Because central bankers far and wide have the same narrowly aligned interests. None of them wants a catastrophe on their hands. Wrenching change doesn’t suit anyone at this point. And so, in the name of stability, market manipulation has gone global. The spirit of the plunge protection team hasn’t just permeated U.S. markets. It’s everywhere. You can see the heavy hand in all the examples that follow:

• China’s highly suspicious role in the recent U.S. dollar rally (a move that looks about as staged as a professional wrestling match).

• Multibillion-dollar central bank interventions in defense of various emerging market currencies. (After working hard to keep ‘em down, the same bankers are now working hard to keep ‘em up.)

• Fannie and Freddie mortgage debt spared to protect global stakeholders (as discussed last week).

• Sovereign wealth funds (SWFs) showing more of an interest in preserving the global financial system than in turning a profit... their prime directive being to keep the home government elected, which means keeping the apple cart upright.

• Wall Street’s open call for more support and more bailout cash, with little to no attempt to hide the “visible hand” of connected players running the show.

• The Fed’s orchestration of a brilliant hit job on commodities and hard assets, in an effort to defang the inflation monster and shore up beaten-down financial stocks.

Those are only a few examples. That last one needs more explaining, which I’ll get to in a future episode.

The long and short of it is we’re living in a manipulated world in which the spirit of the PPT, if not the genuine article, is kicking butt and taking names. The only real constraint, as Summers admits, is how much can be gotten away with in the name of preserving the status quo.

In the short run, betting against the powers that be is almost always a foolish move. But in the long run, Mother Nature is patient... and government manipulation efforts always fail.

That’s one reason why I’m drooling over various hard-asset opportunities right now. Cash on hand will prove a valuable thing indeed. I’ll give you more on that line of thinking soon...