Market Manipulation?

The recovery of the stock market in 2009 was impressive. The Dow Jones hit bottom in March at 6,547 and recovered to close the year at 10,428, an intra-year gain of about 59%. This occurred despite deteriorating economic conditions. Yes, third quarter GDP was positive (although revised downward to 2.2%). The fourth quarter is likely to come in positive as well.

While government and their rented economists tell us that we are in recovery, virtually all growth is from direct government spending or government-induced spending from programs such as Cash for Clunkers.

There are limits to how much the government can continue to spend. More importantly, there can be no recovery without private sector growth, and that has not occurred.

The private sector continues to shrink, as measured by growing unemployment and declining state income and sales tax collections. The Wall Street Journal reported:

State and local tax revenues tend to lag behind the downturns as well as the upturns in the economy because of the time it takes for collections to catch up with depressed store sales and diminished incomes. The third quarter was the fourth consecutive quarter in which tax collections were below year-ago levels. Through the first three quarters of 2009 state and local tax revenues totaled $875 billion, nearly 8% below the $951 billion collected in the first three quarters of 2008. In the same period, federal receipts were down nearly 19%. WSJ, pA3, 30dec09

So why is the stock market going up? Perhaps the stock market sees a recovery further out and is pricing that in. Or, perhaps the stock market is being manipulated.

The latter is a possibility according to Trim Tabs, a respected stock market data service. According to Charles Biederman, CEO of the service:

The most positive economic development in 2009 was the stock market rally. (But) We cannot identify the source of the new money that pushed stock prices up so far so fast. For the most part, the money did not from the traditional players that provided money in the past.

There is speculation that the Plunge Protection Team, a group consisting of high government officials that was formed after the 1987 crash, is manipulating markets. I am not one to believe in conspiracy theories, but the existence and purpose of this group has always been troubling. It has been baffling to many as to why our stock market has performed so well in the face of such dismal economic conditions.

It is reasonable to believe that the government would prefer to have the stock market doing well. It is puzzling to understand how and why it has done so well since March. To understand the concerns of  Biederman and others, as well as the means available to the government, the article linked here may be of value.

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