Market Rally Explained by Fed/Treasury Conspiracy
Ah, the first grand conspiracy theory of the new decade. That’s what my email tells me anyway. A friend informed me about a story that a major Wall St. research shop has publicly said it thinks the Fed and Treasury are behind the massive stock market rally of 2009. According to sources (the WSJ’s MarketWatch and Financial Times), founder and CEO of TrimTabs, Charles Biderman, claims that the money required to raise the market so much could not be accounted for, hence the government must have done it. I’m paraphrasing of course, so let’s see what he really said:
“We cannot identify the source of the new money that pushed stock prices up so far so fast. Historically, the market cap has risen about 10 times the amount of net new cash invested in equities. For the most part, the roughly $600 billion net new cash since March needed to boost the market cap $6 trillion did not come from the traditional players that provided money in the past”
The crux of Biderman’s argument relies on the claimed historical fact that market cap rises about 10x the net new cash invested in equities. That is, if an additional $50 billion finds it’s way into the stock market, the total valuation of the stock market should rise by about $500 billion. TrimTabs collects data in an effort to measure how much money is flowing into or out of different investments. They claim they can’t account for the estimated $600 billion of new money needed to support the $6 trillion rally from March to Dec.
Biderman claims the money didn’t come from Corporate America buying back its own stock because companies actually issued some $133B. It didn’t come from retail investors through mutual funds because such retail investments only received $20B in inflows. They “doubt” it came from retail investors buying individual stocks (instead of funds) because they deem retail investor sentiment as neutral. Foreign investors did contribute $109B according to TrimTabs while pension funds did contribute $100B though. So roughly $500B is unaccounted for, therefore if the money
“did not come come from traditional players, it must have come from somewhere else. We know that the U.S. 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?”
In characteristic conspiracy theory fashion, they go on to cite several out of context statements by high ranking officials, none more recent than 2006 though. Well, the first and foremost reason this is probably nonsense is that an effort of this size, magnitude and importance would be impossible to keep secret. Wall St. is notoriously rumor driven. Nothing is kept secret for long, both truth and rumor are constantly whispered everywhere. Information yields profit, hence the value of proprietary research. With whom do you think the Fed would be buying from? Someone would have to sell them stock futures, so don’t you think someone outside the cabal would then know? It is ridiculous to think ALL the sellers could keep it quiet. After all, there would be lots more to be made from this information than a simple commission.
Biderman goes on to illustrate the typical rationalization for missing a rally:
Think back to mid-March 2009. Nothing positive was happening, and investor sentiment was horrible. The Fed, the Treasury, and Wall Street were all trying to figure out how to prevent the financial system from collapsing. What if Ben Bernanke, Tim Geithner, and the head of one or more Wall Street firms decided that creating a stock market rally was the only way to rescue the economy?
To me, this sounds like Biderman was bearish throughout the rally while cognitive dissonance became uncomfortable, resulting in reaching for explanations other than “I was wrong”. It works something like this “my analysis says definitively that xyz shouldn’t happen; therefore the following magical explanation explains both…” Occam’s Razor would dictate the simplest explanation is probably correct which would be “my analysis may be wrong or incomplete.” (For full disclosure, I have no idea whether TrimTabs was or was not bearish during the rally, I’m merely hypothesizing from the tone of the articles.)
So what would explain the rally? It doesn’t take much. Here are a few explanations, pure and simple (but not necessarily mutually exclusive):
- A plain old rally– the rally has been strong indeed, but it is not unprecedented. The Dow fell 5,000 points in just 6 months; 6,000 in 9 months. Who was left to sell? It doesn’t take much to create a rally at that point and doesn’t necessarily take “new” inflows to funds. Funds were the ones selling! They had cash. They put cash back to work.
- Hedge Funds– Biderman says “we have no way to track in real time what hedge funds do”, but dismisses their impact anyway by saying they “doubt their buying power” because the posted a $9B outflow. Well, a $9B outflow on $1.5 trillion in assets is a rounding error. It is especially unimportant since hedge funds can use leverage on a whim. They are also notoriously nimble and will change their directional bet very quickly.
- Direct retail investors– Again, Biderman “doubts” their impact. Yet I have anecdotally watched individuals buy individual stocks this year. If you were nervous (who wasn’t), perhaps it was time to sell your mutual fund and buy some Exxon, Johnson & Johnson, Berkshire or other blue chips you know can survive Financial Armageddon?
- The 10:1 “new money” required to lift the collective market cap is suspect– Biderman suggests this 10:1 ratio is what the historical data tells us. I wonder how far back that data holds? It is becoming more or less reliable? What is its range (has it been 20 or 40:1 at times? Is it consistent?) Given the ever growing number of ways to employ great leverage, how reliable is this ratio? We have stock market futures today, not so 40 years ago. We have double and triple leverage ETFs today, not so just 5 years ago. We have a massive off-exchange market in derivatives and a large hedge fund community with significant assets. I find other reasons to suspect this 10:1 assumption, not the least of which is that every dollar of stocks bought precisely equals one dollar of stocks sold. (The reconciliation for why stocks go up or down despite this truth is beyond the scope of this post- another time perhaps).
It isn’t that the government absolutely couldn’t be involved in the market which I find fault with. It is his vague reasoning, incomplete fact pattern and leaps in logic. It simply doesn’t hold up. After all, Biderman admits “we have no way of proving this”. If by chance he is right, we should expect a MAJOR scandal to break any moment.
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