Political Arguments: A Market-based Test for Truth

How do you know if something is true or not?  Look to the public markets in liquid assets.

Why are the public markets for liquid assets a good test for truth?
1.  A lot of people are participating in the public markets.   A lot of people trying to figure something out is usually better than a small group of people.
2.  Public markets allow a lot of people to express their opinions with the movement of money.
3.  Most actors in the financial markets have a fiduciary duty to someone else to maximize profits.  Therefore, actors who don't invest purely for financial gain could get sued and lose.  This makes people more honest in their activity with the market.

If this explanation doesn't convince you, check out these examples:

1.  Obama is waging a war against domestic oil and gas production.
If this were true, we would expect drilling services company stocks to go down.  If Obama was really was waging this war, the stock of companies such as Schlemberger (SLB) and Halliburton (HAL) (yes, the Dick Cheney company) would be down - big time.  Schlemberger and Halliburton have most of their business in domestic production, but they don't own oil or gas, they just drill for it on behalf of other companies.  If no new wells are drilled and we slow down domestic energy production, then SLB and HAL should be down big-time right?  Since Obama's inauguration, SLB has gone up 90.47% and HAL has gone up 137.5%.  Let's compare this to how the S&P 500 has done over this time (this is the right comparison to compare specific performance with market performance).  The S&P5 500 has only gone up 60.78% in that same time frame, which means that both SLB and HAL have outperformed the market.  Therefore, the market has determined that this narrative is false.

2.  Obama's corporate tax policy rate reduction is good for the economy.
I was watching the market that day and it really didn't react at all to the news.  Obama probably wanted the news to boost the market since lowering rates would hopefully motivate domestic companies to repatriate cash that was earned overseas.  Repatriated cash can be used to pay dividends or share repurchases which boost stock prices.  The market didn't react much, possibly because they (1) didn't the tax rate would be low enough and (2) they didn't think it would pass though Congress (sensible policy is now impossible).

3.  Democrats are bad for business.
The stock market almost always goes down the first 3 days after a Democrat gets elected to the Presidency.  But it soon recovers and does pretty well over the full term.  I will say that highly doubt the President has that much influence over the economy.  It might be the case that Democrats usually get elected at the bottom of the business cycle and get to ride the train up.  Certainly, Bill Clinton and Barack Obama both benefited from this.

4.  The housing market is recovering.
Look at REITs (real estate investment trusts) that invest primarily in residential real estate.

The keys are:
1. Determine the statement you are trying to verify
2. Figure out how this should affect the market.
3. Pick the right proxies of the market to prove or disprove the statement.
(Oil industry health-XOM, CVX; Banking sector recovery-C, JPM, BOA; Greece matters?-see how the DOW and S&P 500 reacts when news is released)

The main limit to this theory is information.  If the public does not have good information, they can't act in an efficient manner.  This is the basic cause of market failures...Bernie Madoff, Enron, WorldCom...other BS.  Uncertainty is also a limit on this theory.  This is why our SEC regulation focuses heavily on disclosure of critical information to public market participants.