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Markus Stocker

Between information technology and environmental science with a flair for economics, the clarinet, and the world of soups and salads.

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I think, today was an exciting day, at least from the question’s point of view “what moves stock markets?”

The facts. First, the Obama administration officially presented the plan to buy up to $1 trillion in risky assets. Second, stock markets around the world closed higher; at the close, the Dow Jones industrial average was 497.48 points or 6.8 percent higher at 7,775.86.

I believe, we can assume there is a causal relationship between the two events. It is probably safe to say, the presentation of the plan by the Obama administration caused the remarkable positive jump at Wall Street, and beyond.

Less clear, at least to me, is why stock markets soared.

Intuitively, I would argue, stock markets reflect public opinion. People daily express their opinion on the value of a particular tradeable entity. Bid and ask make the price. Millions of them make the continuous curve over time we know from quote charts. As such, I believe, one can see a stock market as a system that aggregates public opinion.

The plan presented by the Obama administration is, of course, not a tradeable entity per se. (Though, it would be an interesting experiment, perhaps for a prediction market.) The public doesn’t bet on the plan but, as I would intuitively argue, public confidence for the plan translates into bets, reflected by stock markets. Accordingly, today the world must have been a very confident place.

I wonder, if I need to review this reasoning.

I read through 100 reader’s comments submitted to the NYT article, “U.S. Lays Out Plan to Buy Up to $1 Trillion in Risky Assets.” Out of 100 sequential comments, newest first, starting from comment #381, I rated 61 to be (1) related to the plan and (2) to range from skepticism to no trust to outrage about it.

In the following, I’ll prescind from (political) bias inherent to newspapers, statistical correctness, etc. and simply assume the sample of 100 comments approximates public opinion. Thus, the absolute majority is, at least, skeptic about the effectiveness of the proposed plan.

Above I first argue, stock markets reflect public opinion and the proposed plan today affected stock markets. Then I argue, the majority has little or no confidence in the plan. Should we conclude, indexes soared because of public opinion and its little confidence? I would expect the trend to be exactly opposite, i.e. negative, if confidence is low. Should we conclude, public opinion didn’t affect indexes? Probably.

Let’s go back to the facts;  at the close, the DOW was 6.8 percent higher. I still hold on the assumptions, stock markets reflect opinions and confidence causes indexes to go up. Who, if not the public, has been confident today then?

I believe, the financial industry in general and Wall Street in particular. I came to this conclusion while watching the news on TV earlier. It was interesting to explore public opinion; consider this,

I’m a financial institution. I have lots of toxic assets on my books. I set up a hedge fund. This fund bids 75c on the dollar for my toxic assets. The hedge fund, which I own, pays 3%, the rest is provided by the Treasury. The stuff leaves my balance sheet. But I still own in through my hedge fund. This plan is a massive transfer of wealth from the taxpayer to the insolvent banks in disguise. (Comment #331, John Henriksen, Copenhagen, Denmark.)

So, what moves stock markets? Moving capital, of course. But is it the aggregated capital moved by millions of small investors or the capital moved by the financial industry itself or, perhaps, the combination that makes the difference? Is the power held by millions of independent small moves or by a few massive transactions worth million of dollars activated within the financial industry, or shared? Are small investors, even aggregated, only puppets of the theater stage directed by the financial industry?

I believe, what we have seen today is the confidence of the financial industry. It is probably true that the plan is a recycle of the “cash for trash” plan already proposed by the Bush administration. I believe, Geithner as well as Obama know it and they exactly know, the best bet to get out of the recession as soon as possible is to please the financial industry in general and Wall Street in particular. Ultimately, the public will benefit from this move too.

For now, let’s adjourn until we face the next recession. Afterall, today we have no clue anyway, perhaps we’ll be smarter next time.