Due perhaps to prior articles I’ve written on the idea of the stock market being rigged (see here), a recent piece from the New York Post was sent my direction titled, “Stock Market Rigging Is No Longer a ‘Conspiracy Theory’”, by John Crudele.
The story set forth by Crudele is a very popular one—the stock market is rigged by central banks, foreign and domestic, and companies that “have been aggressively buying back massive quantities of their own shares.”
Just to be clear, this type of “rigging” of the stock market differs from the one I originally proposed in 2011 where high frequency trading may use a combination of network analysis and common DoS hacking techniques (mentioned in later articles – see here) to influence prices and gain an unfair advantage.
Though the above is still not well understood, the rigging that Crudele mentions is one that almost everyone now believes in. Don’t get me wrong, I am not an apologist for central banks or large corporations buying back their stock, however, I do think there is an important piece to this puzzle that we all know and understand but conveniently neglect when this issue is discussed.
Let’s go through it point by point.
Why are large institutions, sovereign wealth funds, corporations, etc. all buying stocks? Is it to rig the market and keep it going higher? No. They are doing this, largely, because ultra-low interest rates make stocks more attractive.
This leads us to the second question: Why are interest rates so low? Once again, is it because the Fed and other central banks are trying to rig the market and keep it going higher? Although this is a popular refrain among many investors and financial commentators, it ignores the environment we find ourselves in.
What environment is that?
One in which economies have been struggling with a massive unwind of an unsustainable multi-decade capital investment boom in China and other emerging markets on top of a collapsing credit bubble and economic recession the likes of which we haven’t seen since the Great Depression.
We can’t consider where interest rates should be and whether institutional or retail investors are responding appropriately or not without the historical context of what led us here. That context, mind you, is unlike anything we have seen in our lifetimes.
So, I argue, the Fed and central banks are not so much as “rigging” the market as they are dealing with the consequences of many years of imbalances that built up over many decades. Are they entirely to blame for that? If you are a conspiracist, then the answer is probably yes. If you are a historian, you realize that economic outcomes are shaped by much more than just monetary policy.
Like most things in life, the stories we tell only grasp a small part of the big picture. The picture we face today is not so much about central banks rigging markets as it is about cause and effects over long periods of time.
So put aside your conspiracy theories. Sometimes the most obvious answer is the correct one. The Fed will raise rates when the economy picks up and inflation starts to resurface. When will that happen? When the data says so.
