Those looking for absurd government manipulation can find it here: Pakistan Sets Floor on Stock Prices to Stop Plunge.

Pakistan set a floor for stock prices on the benchmark exchange, moving to halt a plunge that has wiped out $36.9 billion of market value since April.

Securities can trade within their daily limit of 5 percent “but not below the floor-price level” of yesterday’s close, the exchange said on its Web site, without giving details.

The exchange is working to restore confidence after President Pervez Musharraf quit on Aug. 18 to avoid impeachment, and ruling alliance members nominated rivals for the presidency. Investors stoned the exchange last month after it removed a 1 percent daily limit on price declines.

My Comment: This is further support for my Conspiracy Theory Psychology thesis that most conspiracies and manipulations are not only in plain view, but are actually supported by the masses.

“This could cause liquidity to dry up because who wants to buy if they can only pay a higher price?” said Daphne Roth, Singapore-based head of equity research in Asia at ABN Amro Private Bank, with about $30 billion of Asian assets. “Risk appetite is low and investors are avoiding markets where there is political instability.”

“Freezing the index would not be a good idea,” said Habib- ur-Rehman, who manages the equivalent of $91.5 million of stocks and bonds at Karachi-based Atlas Asset Management Ltd. “Direct intervention in market movements would lead to further complications as we have seen in the recent past.”

Pent Up Demand To Sell

This ridiculous “solution” cannot possibly work. All it does is create a pent-up demand of trapped buyers waiting to exit, while drying up liquidity. This will soon lead to a situation where there are no buyers. What then? Will the Pakistan government buy up shares of market participants who want out? If not, people will be trapped with no access to their money. What a nightmare.

On the other hand, it is possible although extremely doubtful, that the market was ready to stabilize on its own accord. In that case the action may “seem” to work. The reality is that it will have done nothing of the kind. In fact it would slow the reversal, creating suspicion that the market was not really rallying on fundamentals but because of a prop job. Thus no matter how one looks at the situation, this was the dumbest possible response.

By the way, we have seen similar ridiculous proposals in the US in regards to putting moratoriums on foreclosures. The results would be equally disastrous.

Government stupidity is the most liquid of all assets, spreading everywhere at the slightest provocation. Look for more of it and you won’t be disappointed.

Mike “Mish” Shedlock
Click Here To Scroll Thru My Recent Post List