6 Theories On Why the Stock Market Has Rallied → Washingtons Blog
6 Theories On Why the Stock Market Has Rallied - Washingtons Blog

Tuesday, March 9, 2010

6 Theories On Why the Stock Market Has Rallied

There are at least 6 theories about why the stock market has rallied some 70% off its lows a year ago, even though nothing has been done to actually address the root causes of the financial crisis.

What The Dumb Money Believes

The dumb money believes what CNBC and their trusty stock churner ... er, broker ... says: that the government has fixed the economy but it just has to "kick in" (and that unemployment is just a lagging indicator, nothing important. See this, this, this and this).

Therefore, these folks believe that stocks are hugely undervalued, and that if they buy while most people are still afraid, they'll make a killing when the market goes to the moon.

Temporary Juice

Others believe that it is the quantitative easing, low rates, bank bailouts, stimulus spending, and other portions of the "wall of money" which the feds have thrown at the economy are creating a temporary pump to the stock market.

But they think that - when the spigot is turned off - the market will tank.

The Situation is Inflation

Others believe that - regardless of continued loose monetary and fiscal policy or real stock valuations, we're in for some serious inflation.

Stocks tend to preform well during inflationary periods.

For more on inflation versus deflation, see this.

Machines Run Amok

Tyler Durden explains that all of the stock market gains have occurred after hours when mystery buyers purchase stock futures in low volume environments (and see this).

Vincent Deluard - a strategist for TrimTabs Investment Research (25% of the top 50 hedge funds in the world use TrimTabs' research for market timing) - said last month:
We've never seen this before – such a huge rally, and the little guy is out.
Some argue that it is high-frequency trading or momentum-chasing trading algorithms doing the buying, and that the market will tank when they change their game.

Fed Futures

Others argue that the government is itself buying stock futures.

Some believe that the Feds aren't buying, but that they have intentionally showered the big banks with money, and encouraged the banks to buy. In other words, they argue that the Feds are indirectly promoting a stock market rally.

Fraud Central

Karl Denninger believes that the market has rallied due to the systemic, fraudulent overvaluation of assets.

As Denninger wrote yesterday:
[A reader wrote] the FDIC to ask about [allegations of fraudulent valuations]. This was their response:

That’s the value the bank had them on their books on their year-end financials, but the true value is much less. It is similar to someone in Las Vegas saying that their house is worth $300,000 because that’s what they paid for it three years ago, but the reality is, if they had to sell it in today’s market, they’d only get $250,000 for it. The FDIC has to sell assets in today’s market...

Or tomorrow's market.

The simple fact of the matter is that there it is, right in front of you.

A raw admission that the banks are carrying these loans at dramatically above their actual value.

Yes, this means that essentially all balance sheets must now be considered fraudulent, and thus the valuations assigned by the market to them are also fraudulent.

Extending this to the stock market as a whole you now have a market that is intentionally overvalued as a direct and proximate consequence of fraud, permitted and endorsed by the government, of somewhere between 25-40%.

Now you know why the market rallied off the SPX 666 lows to where it is now. 1139 (where we are now) * .60 (a 40% haircut) = 683.40, or awfully close to that 666 bottom.

Of course this "valuation" expressed in the market can only be maintained for as long as the fraud is. If the ability to maintain that fraud is lost for any reason then values will instantly collapse back to reflect reality.

Note: Obviously, I believe this is a bear market rally which will eventually fizzle out. If the bulls are instead right, then that will make me the dumb money. But I think it much more likely that the rally will change direction in the not-too-distant future.


  1. False dichotomy, er... hexachotomy?

    It's a volatile mix of 2, 4, 5, and 6.
    #1 is, as you put it, dumb.
    I don't see inflation so much as currency confidence disappearing (if it comes to that) so I don't believe its 3.

    Who knows in depression 2.0?

  2. sleight of hand casino markets...

    house of cards economics...

    theres those who use toothpicks to try and support it...

    all the while being under sea level...

    and waiting for the winds of change to blow the whole damn charade over...

    not if, but when it will happen...

    it is inevitable...

    history has already shown us...

  3. Well thought out, but your argument falls apart on the first point. Dumb investor money. If by that, you're referring to retail investors and accompanying self directed retirement fund, you'd note that most of those people don't buy stocks; they buy mutual funds. Those mutual funds then direct money in the markets, according to their prospectus' etc.

    So if you examine where the inflows and outflows have been occuring, "dumb" money has POURED into bond funds and has ignored most of this run-up.

    You point that out in your fourth point, though:

    "We've never seen this before – such a huge rally, and the little guy is out."
    So maybe it's a combination of the other factors, except Tyler Durden is pointedly wrong when saying there has been no action during the days, that all the moves have been made in the after-hours. That's patently false as well. You can read his blog, or you can look at what the markets have actually done.

    Past that, I'll leave it to you to revise, if you see fit. And no, i'm not a shill, promoter or any other garbage that detractors get called on sites like this... :)

  4. While this "particular" version of an economic crisis hasn't explicitly occurred in the U.S. before 2007-2010, we have experience similar downturns that have been "corrected." The only problem with the correction was the means to bring it to fruition (a temporary one at that).

    WAR. Every little hiccup in the economy has eventually been band-aided over with a nice little regional conflict or small-scale war (not including WW2, Vietnam, or perhaps our current outing in the Middle East).

    The problem however is where do we go now to pillage and rape the U.S. citizenry's economic woes and anguish away?

    Iran is pretty much the only kid left on the block that could be pushed around, unless Argentina is suddenly found to have a massive nuclear weapons cache. I think we can rule out Russia and China, since that would slightly change the game a la WW3 and a 200 year nuclear holocaust.

    So, I hope we all enjoy our continued imperialist agenda, with all the nice blow back and new domestic problems it produces.

  5. rbear commenting

    The US economy has to reset to a lower level. Debt has clearly driven the economy to levels that are unsustainable by business and the consumer.

    The US government, in its desperate bid to stay in power is ignoring the facts and doing its very best to re-inflate. There is no capacity in the economy to accept the re-flation so it will fail. Deflation is inevitable and it will reset the economy despite the governments efforts. Their actions are just pushing off the process into the future. The harder they try to stave off the reset, the worse the actual reset will be.

    The problems in the US mirror the same in many other economies of the world. There is a lot of resetting to do!

  6. One other factor pumping up the market is all the unemployed people out there. Many I've talked to have told me that they are "living off the stock market". These people are using their savings to play the stock market in hopes of using the gains to stretch things out until they get a job.

    One common thread seems to be that while they are all aware that the market could crash, individually they think they are too smart and will be able to sense it and pull out before the drop. Okay. I hope so.

    If it all turns out to be speculation and the market crashes all these people are going to be in real trouble.

  7. We are where we are because we should never have been where we were - a blind panic sell-off exaggerated by machines trading instead of humans.
    If, instead of 666 we had gone to say 800, then, instead of a 70% retracement,1140 is "only" +42%.

  8. The debt will be reset by inflating it away and people will start over probably never obtaining the level of relative wealth enjoyed before. As to why the market continues to rise? The answer is simple, it already has begun to reflect its absolute value relative to inflated assets (yet to come). It will not wait to be taken down by psychological disasters and news, no instead it is forward looking and is reflecting the worth of future assets as valued in a world market place.

  9. No one knows which way the market is going to go.

  10. Dear @Sir, @Madam,
    Thank you!
    Yours sincerely.

    mindcon, STOP INFOWAR AGAINST CIVILIANS!, mindcon.wordpress.com, 2010,

  12. markets up because cash aint worth its same value tomorrow, nor is property!
    rather a company bound by laws than a fed controlled currency

  13. If by that, you're referring to retail investors and accompanying self directed retirement fund, you'd note that most of those people don't buy stocks; they buy mutual funds.


→ Thank you for contributing to the conversation by commenting. We try to read all of the comments (but don't always have the time).

→ If you write a long comment, please use paragraph breaks. Otherwise, no one will read it. Many people still won't read it, so shorter is usually better (but it's your choice).

→ The following types of comments will be deleted if we happen to see them:

-- Comments that criticize any class of people as a whole, especially when based on an attribute they don't have control over

-- Comments that explicitly call for violence

→ Because we do not read all of the comments, I am not responsible for any unlawful or distasteful comments.