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Conspiracy Theories?

Tuesday, October 31, 2006 | 03:33 PM

Rev Shark looks askance at the many theories floating around about Government intervention in the Equity and Energy markets: Debunking Conspiracy Theories:

"With the election just a week off, there is a lot of talk in certain quarters about how the market is being "manipulated" for political gain. The theory is that the Republicans are driving the market up in order to give the impression that economic conditions are good, which would in turn cause voters to support the incumbent party. That certainly explains the market action and has a great appeal to the conspiracy theorists but is it realistic? I have a great aversion to the idea of conspiracies simply because I don't believe that its possible for a large number of politicians and bureaucrats with big egos to keep anything a secret."

The most cogent analysis I have seen about the sudden drop in Energy prices comes via Tim Iacono's Friends in High Places? Iacono's argument is backed by the details of how and when the widely followed Goldman Sachs Commodities Index (GSCI)dropped its gasoline exposure in half. What was originally made out to be a minor shift in the types of gasoline blends turned out to be a major reduction in exposure for the GSCI -- and done in a rather surreptitious manner.

Goldman made a little change in their commodities index, and that caused $6 billion in unleaded gasoline futures to be dumped onto the NYMEX. Read it and decide for yourself how "improbable" a manipulation of the energy markets actually is.

Quite frankly, while I detest the intereference in the political process, I must admit to admiring the ingenuity and audacity of Goldman Sachs. As far as I can tell, either it was a brilliant ploy to impact the energy markets two months before elections, or the index is run by a bunch of naive, ham-fisted idiots, blissfully unaware of what they wrought so close to mid-term elections. So my own answer about energy manipulation turns on the question whether Goldman Sachs is a sharp collection of rocket scientists/traders, or a bunch-o-morons.

As to manipulations in the equity markets, I am undecided about that. I will note that several people far more experienced than I -- and far less cycnical, too -- have been commenting about the "Preternatural bid underneath." I may have to assemble some of the more cogent commentary along those lines.

Of course, the Fed does control money supply, and while it is understandable their providing additional liquidity during the rate tightening phase (i.e, more money supply as rates go higher) the most recent firehose of cash hitting the past few months since the pause is a bit harder to rationalize . . .