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August 28, 2008

Conspiracy Theory Psychology
by Mike Shedlock

In recent posts I have taken a look at various conspiracy theories on the rise of the dollar, the shortage of silver, and the manipulation of gold. Here is a synopsis. (Warning, some of these are very lengthy)

I discussed US dollar manipulation claims in

August 08 Trichet Puts Spotlight on the Euro, Dollar
August 09 U.S. Dollar Rally Continues
August 11 Currency Intervention And Other Conspiracies

In The Great Gold, Silver Conspiracy Explained I took a look at many manipulation claims in the gold and silver market, notably the COT report, large short activity, trader concentration, and other so called "Smoking Guns".

In Jon Nadler, Senior Analyst Kitco, Chimes In On The Precious Metals Conspiracy I noted that one conspiracy theory about gold lease rates that blew sky high when the alleged manipulation was actually a bad data feed on lease rates.

Occam's Razor

I am a big fan of Occam's Razor which states "All other things being equal, the simplest solution is the best." In other words, when multiple competing theories are equal in other respects, the principle recommends selecting the theory that introduces the fewest assumptions and postulates the fewest entities.

Competing Theories

Theory 1: The US government, foreign governments, central banks, various broker-dealers, and a consortium of 10 large US banks are all acting together in some massive conspiracy to suppress the price of precious metals for 15 years running, and not a single insider has stepped up to expose the fraud even though housing fraud stories from insiders are being disclosed at a rapid pace, and government, CIA, and other intelligence leaks have been running rampant throughout that entire timeframe.

Theory 2: There was huge selling by over-leveraged hedge funds in response to fundamental changes in regards to the US dollar vs. the Euro.

Silver Monthly Chart

Simple logic would dictate that nothing ever goes straight up or straight down. There are always pullbacks in any bull market. Interestingly, one of the arguments for manipulation was based on how fast silver fell compared to the moving averages. On a monthly chart one can see that silver was miles above the monthly moving averages and did no more than fall back to it.

Conspiracy Theory Psychology

This post is not about rebutting theory number one (it has been adequately trounced already). Rather, this post about why someone might be inclined to believe Theory #1 vs. Theory number 2 when simple logic and Occam's Razor would suggest otherwise. Let's start with the question "Who benefits from conspiracy theories?"

Who Benefits From Conspiracy Theories?

The answer is those promoting the conspiracy theory as well as the faithful follows. In this case, those promoting the idea that gold or silver is never over-priced and is therefore the best investment in the world no matter how far or how fast the investment had run are the primary beneficiaries.

We saw the similar thinking in the dot-com bubble in 2000. Back then it was called "The Gorilla Game". No price was too high to be paid for a "gorilla".

Those fervently holding beliefs that no price is too high have a psychological need to rationalize losses and/or explain pullbacks. No logical argument about dollars, interest rates, or even consolidations can possibly be sufficient to explain to a "true believer" how or why whatever it is he is promoting is falling in price.

Disciples need to address the faithful flock whenever price action does not go their way. The best way to achieve this is to scream manipulation as loud as one can whenever anything goes wrong. This gives rise to various Plunge Protection Team (PPT) theories where every tick of data is argued over. It also spawns rationalizations such as theory number 1 above.

Anyone holding an alternate theory (no matter how rational) is shouted down, sent nasty emails, publicly ridiculed and the like.

The faithful followers benefit as well. They listened to the disciples and they want to know what is happening and why. They do not want to hear they made a mistake or they chose the wrong person to follow, or they were over-leveraged. Instead they want to hear they were right. This is particularly true for the relatively new faithful such as those who bought silver at $20 when it's now at $13.

The way to convince oneself that one is right is simple: Blame the boogeyman. Doing so relieves all psychological pressure associated with admitting one is simply wrong.

Conspiracy Theories Are Sexy

Also note that conspiracy theories are sexy. People like the mysterious. It gives creative minds something to think about and discuss at parties. "I made a mistake" is so boring compared to discussions of who and how and just what is behind the PPT attempting to rally stocks and suppress the price of gold and silver. One can discuss the latter for hours on end while the former is over in 15 seconds to 2 minutes flat.

Who needs the latter at a party? In this case a "party" can be a perpetual discussion in cyberspace on the internet. Fun stuff indeed.

Are There Conspiracies And Manipulations?

Of course there are conspiracies and manipulations. I have listed many of them.

Blatant Manipulations

Term Auction Facility TAF
Primary Dealer Credit Facility (PFCF)
Term Securities Lending Facility (TSLF)
SEC rule changes options expiration week
Selective enforcement of naked shorting rules
Discount window changes in options expiration week
Shotgun marriages arranged by the Fed
The bailout of JPMorgan / Bear Stearns

If people want to rant about something they should be ranting about those. However, support for the above actions is overwhelming because people view the above as supportive of the stock market up. When it comes to conspiracy theory psychology, no one sees the manipulation or conspiracy when the manipulation is done on their behalf.

Planned Conspiracy To Prop Up The Dollar

No doubt conspiracy theorists will be all over this headline in the Guardian: US, Europe, Japan planned March dollar rescue.

The United States, Europe and Japan had planned to intervene and rescue a weak U.S. dollar in March, business newspaper Nikkei reported on Wednesday. Officials from the U.S. Treasury Department, Japan's Finance Ministry, and the European Central Bank reportedly drew up a currency contingency plan to be undertaken over the March 15-16 weekend, Nikkei reported, citing sources familiar with the situation. The monetary officials also agreed on a framework for coordinating dollar-buying intervention, the report said.

No coordinated intervention took place, however, as the dollar began recovering shortly after U.S. authorities brokered the buyout of Bear Stearns by JPMorgan Chase & Co.

Is that a conspiracy? Of course it is. And I do not doubt it for a second. But also notice how quickly it came to light! More importantly, had the plan actually been executed people would have been convinced the government manipulated the dollar higher. Ha!

We now can clearly see just how shortsighted that theory would have been. The simple truth is that history now shows the dollar was ready to rally on its own accord.

Such is the nature of why it sometimes appears that manipulations work. The reality is manipulations never work, except in the extreme short term. They only appear to work if the government manipulators are lucky enough to get their timing exactly right, by accident, just as the event they wanted to cause was going to happen anyway!

Following is another conspiracy story that came quickly into light.

Bear Stearns Case Study

Bear Stearns is an interesting vase study in Conspiracy Theory Psychology.

There are still all sorts of rumors still flying around about options manipulations, naked shorting, and rumor mongering that did in Bear Stearns. It's ridiculous. What did in Bear Stearns was massive over-leverage in highly illiquid real estate securities that came to matter at exactly the wrong time.

Ironically there was a Bear Stearns conspiracy, but that conspiracy was not to sink Bear Stearns as everyone believes, but rather to blatantly interfere in the free markets to prop it up. The Fed, the Treasury, and various banks were all openly involved in the conspiracy, and the Fed was willing to break all sorts of rules to get a deal done.

If one looks close enough the shotgun marriage between Bear Stearns and JPMorhan, the proper conclusion is that the marriage was arranged not to bail out Bear Stearns but rather JPMorgan. The reason is that JPMorgan was the counterparty of much of Bear Stearns' debt. JPMorgan was also a counterparty to credit default swaps bet on the demise of the Bear.

Thus, Bear Stearns is an example of an outright conspiracy, with public perception twisted a complete 180 degrees from reality! The Bears Stearns manipulation happened in plain sight and people still got it wrong as to what happened and why.

Indeed, most conspiracies and manipulations, including every item in the list above, happen in broad daylight in full view of the public, and with public support. They are not even viewed as conspiracies. On the other hand, the most talked about conspiracies, notably the manipulation of gold and silver, are nothing but self-serving hype.

In summation, when things are going well people have a psychological need to take credit for their own ingeniousness. And when things are going poorly, people have a psychological need to blame manipulators, conspiracies, naked shorts, or in simple terms, the boogeyman.

So, people take credit for everything that goes right, regardless of how lucky they might have been, while absolving themselves of blame for everything that goes wrong, no matter how convoluted a theory it takes to do so.

Such is the nature of Conspiracy Theory Psychology.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Michael "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Visit http://www.sitkapacific.com/ to learn more about wealth management for investors seeking strong performance with low volatility.