Conspiracy Theories: Great for Entertainment, Not a Source of Investment Advice

 |  Includes: DIA, QQQ, SPY
by: Jeff Miller

I have been working on my preview pieces for 2010. By nature, these are broad survey articles, even when you provide some argument and detail. Some things get left on the cutting room floor, even though the ideas are important.

I am going to do some short pieces mentioning -- one at a time -- some things to think about and some things to ignore during 2010.

The Conspiracy Theories

Let me start with conspiracy theories.

Writing about conspiracy is a great way to generate a loyal following, get plenty of page views, and a vibrant discussion on your blog. It is a source of entertainment, catering to the prevailing viewpoint of a highly-motivated subset of readers.

The investment value is a different matter. We need some Twilight Zone music here....

A trip to the alternate universe is hazardous to your investment health!

The most recent example comes from some market observers who are struggling to understand the market rally. Here is the key quote:

Are Federal Reserve and U.S. Government Rigging Stock Market? We Have No Evidence They Are, but They Could Be. We Do Not Know Source of Money That Pushed Market Cap Up $6+ Trillion since Mid-March.

and this...

What if Ben Bernanke, Timothy 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?

The Reality

There are three important points for any intelligent and rational investor.

First, the market rally reflects the reduction in risk. I have been following the market valuation as compared to corporate bonds. The forward earnings yield has remained in line with the highest-yielding corporate bond rates. The risk spread on corporate bonds moved lower as the deep depression possibilities came off of the table.

There was an obvious and major reduction in risk. I suppose that real wacko's might believe that the government was also secretly buying corporate bonds, but the reduction in risk spreads was essentially world-wide. It does not require any conspiracy theory to explain.

Second, the argument lacks evidence and plausibility. Shouldn't there be some minimal level of evidence for such assertions? Consider the following:

  • Complete Fed transcripts are available with a five-year delay. There is evidence in these transcripts of interest in stabilizing markets. Market crashes undermine the economy, a legitimate concern in the Fed's dual mandate. There is NO evidence that the Fed stimulates market rallies. I cannot prove a negative. The burden is on the conspiracy buffs to find evidence. The record is there for study, if you are interested in actual data.
  • Extensive and nearly contemporaneous Fed minutes are available for every FOMC meeting. Once again, there is nothing to suggest and market manipulation.
  • Each meeting is attended by more than 50 people. Some of these people leave the government and move into the private sector where they may, and often do, criticize decisions. There is no conspiracy support from these sources.
  • The various government "bailouts" have all been extensively debated in Congress, with plenty of criticism. There are staff members of all persuasions. You cannot keep this stuff secret.

Finally, if this is true, why fight it? If one really believed that the government was using the leverage of futures purchases to buy stocks, what would be your investment conclusion? Would you fight it, as the conspiracy mongers have been doing for many months?

A Final Thought

There is a constant flow of information, catering to a natural public skepticism about government and data. If you want to belong to the alternate universe, you have already made the decision not to invest. You are probably not reading the material on this site since I work in the world of actual data and evidence.

If you want to make sound investment decisions, you should treat the conspiracy sources the same way you would a spy movie -- as an entertaining work of fiction.