Dissecting irrationality is a hobby of mine, and the trading community offers fertile material. Take for example the endless trust of the tape’s absolute rightness (yep, a theme here) alongside the endless carping over one government action or another and how it’s destroying the market. The short version of how silly this is goes as follows: if the tape responds only to itself, it doesn’t care what the government is doing. And if government action is driving the tape, well then the tape isn’t a gauge but rather a consequence, and can hold no intrinsic rightness at all.

As a skeptic, I doubt the soundness of the tape–and, by extension, the supposedly free market–at judging anything. I also doubt government’s ability to get things right, but I will take the actions of officials held at least marginally accountable by a marginally vocal and voting populace over the untethered reckless and fraudulent behavior of the free-market bong-hitters who engineered this shitstorm as a decade-long ode to deregulated greed any trading day of the week. (How’d the tape–and so many traders in it–miss that engineering? But I digress.)

The reason the two ideas sit side-by-side in so many minds, of course, has nothing to do with logic, and everything to do with ideology. People who believe one should makeĀ  more money off the money one has made or inherited (and if someone made money, then it was, quite literally, at someone else’s expense–in this ideology, somebody “worse” at, uh, making money–but I digress) tend to slap at the hands of grabby government, and believe that the market rewards what they already believe–money is an earned reward or a taken punishment, and capital is raised by raising profit, and lowered by failure to grow. Market smart, government dumb, because markets rule, and government just screws them up, is the short version.

But applying that ideology as an explanation of trading-market action is an example of the fallacy known as begging the question (itself an ill-used phrase, but that’s yet another digression). You do not prove that policy adversely affects economy by saying, “The capital markets are being destroyed/propped up by the government!” because if by definition they are free–the 1P here–they can’t be destroyed or made whole by anything but themselves. The basis itself is questioned by the conclusion. (It’s also questioned by the fact that said market is a government construct, but oh well.)

As a skeptic of all kinds of conventional wisdom, I have plenty of opinions about recent government action and market behavior, but they are plenty boring and for the most part irrelevant to this blog. What is key here in my ongoing crusade against the rightness-of-the-tape farce is that the volatility of recent market action–I’m going to be talking about 2009 only here–has sparked endless bitching about how badly the government is handling this crisis, how the Treasury and Fed teams under Bush and now Obama are making things worse than they need to be, etc., etc.

Maybe. But maybe not. The revelations that banks may have been strong-armed into taking capital infusions and the many cozy connections between government money and kingpin banks, to this ideology, and while those two revelations might inspire concern for all sorts of reasons, to tape-believers they are outrageous. It must be tricky to be outraged at both and still maintain a clean ideology (the ideology says the government seeks to thwart the free-marketeers, while in fact these stories add up to a government playing both for and against the market, at the same time!), but they’re really only looking at the stories as counter to their broader belief, which is that government should just step the eff off, except for a little regulation here and there (not by bankers but by… failed bankers? after all, working for the government is working for the enemy), and let that righteous dude The Tape sort it all out.

What a buncha nonsense.

The tape (by implication, in many ways a proxy for the market itself) is just a fluctuating unknown-ratio measurement of past, present, and future. A whole hell of a lot of fluctuation, as any fool watching price action in real time should be able to conclude, is made up of guesswork, of both the consensus and contrarian varieties. It’s an adding-machine tape of perceptions held and strategies employed. A battlefield, sure, and with tactics of equally deep pride and folly, but a bible?

As I’ve said here before, its timeframe has absolutely nothing to do with policy’s timeframe. Take, for example, stimulus spending: how long until its effects kick in in the tape, if they do? Or have they already? When will the market have fully absorbed its primary, secondary, tertiary effects? Good luck herding those cats. But it’s not only the timeframe, it’s the scope of action: investing and trading are about profit fabrication in pursuit of life-liberty-happiness-etc., but government gets to just skip that minty middleman, and go straight to ensuring LLH.

Real-time mass culture foolishly believes that because there is so much real-time judgment flying around, we’re better at making real-time judgments, primary and secondary. (Another question begged.) Real-time ticks have perfected the tape! The proliferation of round-the-clock media and internet prognostication is not proof of its necessity at all, any more than an advertisement is proof of a product’s value. The fact that we won’t shut up with our opinions, and that we are constantly bombarded with the opinions of others, does not mean we are better equipped to gauge the utility of any one opinion. And skilled judgment of one kind doesn’t imply skilled judgment of all kinds; e.g. being a good tape-swami and therefore a good trader–a formidable and uncommon skill–doesn’t mean you know shit about the economy and where it’s going.

If tape players are collectively and in real time passing judgment on this government rather than the relative health of industry, then the tape is even more distorted than it appears on the surface, because we’ll only know how well today’s policy did solving yesterday’s problems after many tomorrows, when the tape will look as (in)coherent and (in)accurate as it always does in hindsight. And in the meantime, new things will happen that will further distort our ability to read today’s tape objectively, and that will make the stimulus spending look like a much better or much worse idea than it “actually” “was”. Not to mention that we’ll never get to go back and redo it all.

This year’s volatile market action has included a violent drop and a violent rip, and throughout it all the chorus of man-the-government-is-doing-this-sooo-wrong has continued more or less unabated. Of course, when the indexes were dropping, that was the government’s fault; why it has climbed so relentlessly is blamed on any number of factors from short-covering to green shoots, but needless to say, credit to the government in equal measure to the scorn heaped on during the drop (and the mid-January to early-May V is quite symmetrical) is nowhere to be heard. Neither market judgment of the economy, needless to say, has been proven to be of value (presumably, the state of things has not so radically altered as to be badly broken and then table-thumpingly sound inside of three months), and with the benefit of sizable retrospect, one or the other side of the V is going to look pretty wrong, whether policy has saved the market, doomed it, or had no effect whatsoever.

The second part of this post will examine this year’s market movement from a fresh and completely unsound chart perspective, looking at the inflection points on Feb 9 & 10 and March 6 & 9 for what they are–moments of herd mentality shifts, trader- not tape-driven, with zero truth in them, and only the most tangential and ideological relationship to government–and at a scenario where the tape would actually have been righter. Start counting the seconds.