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Is the US Government Pumping Up the Stock Market?

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The truth? No one is driving this train.

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By now everyone has seen some version of the statements made by Charles Biderman, of TrimTabs, suggesting that the government manipulated the stock market.

"We know that the US government has spent hundreds of billions of dollars to support the auto industry, the housing market, and the banks and brokers. Why not support the stock market as well?" Biderman said in a statement last week. "We have no way of proving this," Biderman said, "but what we do know is that it was neither the economy nor traditional sources of capital that created the boom in equities."

And so, with no way of proving it, we're left with the simple conjecture that because nothing can possibly explain the rally from last March, a conspiracy must be afoot. Quod erat demonstrandum.

However, when one takes a closer look at the TrimTabs argument, the main problem is that it only holds when looking at the S&P 500. When you look at all other worldwide risk markets -- currency crosses, commodities, corporates of all stripes, securitized assets, equities -- they all went up in price. It was a global move to risk. And simply put, there's no way that the Federal Reserve was able to "engineer" such a thing globally.

Moreover, they all went up in price, more or less, at the same time, so it's not as if the US government "catalyzed" the, say, SP futures overnight and somehow that got people to buy, say, the Mexican peso, the Thai baht, or stocks in whatever corner of the globe you want to look.

Someone I respect agreed, for a moment, but then suggested that it wasn't the Fed acting alone, but rather every central banking authority... worldwide, acting in concert. Well, bubba, you got me there. If you shouldn't fight the Fed, you for damn sure shouldn't fight all of them at the same time, and especially not the ones that deal in currencies and languages most of us have never heard or seen up close.

So, what to do? Well, before we slip into the straitjackets just yet, let's back up a bit and study what really has been going on.

The irony is that the manner in which financial markets have acted not just since March but from 2000 to now -- worldwide -- actually decreases the plausibility that there's some active conspiracy to manipulate markets. The fact that risk markets have moved together can only support the idea that global risk appetites are the only source.

In the end, the same risk-seeking/averting tendencies that generate the larger move is generating the predisposition to "rig" in the first place and therefore conspiracy/rigged/non-conspiracy/fair are all one, of the same cloth. Ultimately, in complex systems the "conspiracy" will be subsumed by the evolving dynamic.

What's being described here is a cortex response to limbic system-driven behavior. The mental model that everyone has -- that Socionomics rebels against -- is that there's some exogenous cause for all events. For example, "the stock market only goes up when earnings and employment are good,'' is one version of this causality, and because earnings and employment are still bad, the only cortex-based reason we can come up with for the rally is that someone/something is controlling prices to make them disengage from the usual mental model we have of cause-effect.

Manipulation or not, I fail to see how thinking about conspiracies one way or the other helps us make decisions. But I do see how it provides a convenient target for unloading responsibility for decision making and the results of those decisions onto a vague, unseeable force.

It's much easier psychologically to place responsibility on a coordinated plot than to accept that in a complex dynamic system inexplicable things will happen without discoverable causality. This is the chief reason that Socionomics, which puts forth the hypothesis that social mood drives social action, not vice versa, is so easy to understand yet so difficult to accept. Turning this back to markets, embracing the endogenous aggregate time preference reason for the market rally is simply not as "cortex-available" as a conspiratorial narrative and causes too much cognitive dissonance.

We love our narratives and, unfortunately, as reality unfolds in a non-linear fashion without regard for cause and effect, we're as prone to attaching a tidy story to events to "clean them up" as the Ancients were when they sacrificed goats and virgins to angry sun gods at every solar eclipse.

From a social mood standpoint, it's no accident we've seen more conspiracy theory articles in the last year than the previous decade. During a falling transition we should expect to see a growing belief in conspiratorial explanations for events, a hearkening back to simpler times, and the indulgent fantasy that something or someone is ultimately in control. The awful truth -- that no one is really driving this train -- is a terrifying thing to have to come to terms with.

Kevin Depew joins Todd Harrison and 30 other professional traders every day on Buzz & Banter to share trading ideas and market insights with subscribers. Get your FREE 14 day trial.
No positions in stocks mentioned.

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