A free market no longer exists. The government’s multi-trillion attempt to ‘fix’ the recession has dealt whatever was left of a free market a death blow. And the scam-financed rally in US stocks off March lows shows that the government is able to pull off an impressive shift in the markets despite a slew of appalling economic data points.

Take a bow, Mr Geithner… Well done, Mr Bernanke… Hats off, Mr Obama… You want us to believe that banks are recovering, housing has bottomed, stimulus works and borrowing leads to prosperity. And so far, you’ve mostly got your way.

As economic commentator James Quinn put it recently on PrudentBear.com, Obama, Geithner and Bernanke, aided and abetted by Sheila Bair, Barney Frank and a Democrat-controlled Congress “colluded to commit taxpayer funds to enrich bankers that brought down the financial system, without getting congressional approval.”

They also have delayed foreclosures and have tried to artificially prop up the housing market. They have poured billions of stimulus pork into the states praying for some of it not to be wasted. They have confiscated billions in taxpayer funds, bestowed them on reckless banks and forced them to lend it to anyone with a pulse, again.

With a little help from fake Q1 earnings reports from the major US banks and some unusually heavy-volume program trading from their pals in Goldman Sachs, these Washington operators have helped US stocks stage one of the most impressive rallies in history.

As we’ve been saying all along, this is a game changer. This view was recently echoed by underground investor and equities trader Naufal Sanaullah, who writes at ShadowCapitalism.com (emphasis added).

Since the “false precedent” of Lehman, the way to trade the stock market is not by using any rational “should-happen” thesis, as a free market no longer (even tangentially) exists. Government’s intentions are behind the big moves, and save a direct line to Bernanke, Geithner, & Co, it is difficult to be able to safely directionally bet one way or another. The best way to academically and fundamentally trade securities in this environment is to filter all judgment through the prism of government incentive. 

According to Sanaullah, this means preparing for a “mini crash” in US equities as a means to suppress US Treasury yields and save the dollar from obliteration…

The logic is simple. Investors piled into Treasurys following the 2008 and 2009 wipe outs in stocks. This organic demand pushed up the prices of bonds and suppressed yields (necessary to keep mortgage rates low and support the housing market). But as risk appetite has returned, investors have sold US government paper to finance stock purchases. And this has led to rising long-dated bond yields and pressure on interest rates.

The Fed has stepped into the breach with its “quantitative easing” initiative – it has been buying back US Treasurys with freshly printed US dollars in an attempt to support demand for Treasurys and therefore keep yields low. But it’s now obvious that the Fed, and the Treasury, need organic demand for bonds to return to avoid a complete meltdown in government debt financing.

A continuation of the upward trend in yields would not only kill off any hope of a recovery in US housing (due to the implications for mortgage rates), it would require the government to impose higher taxes and sooner-than-expected cuts in entitlement programs such as Social Security and Medicare.

So whereas in March the government was incentivized to puff up the financial sector (the biggest immediate threat at the time), now it is incentivized for equities to sell off and for investors to return to bonds.

The S&P 500 at just under 943 points at the time of writing, just below its January 2009 highs of about 950. This level could prove difficult for stocks to break through. Only time will tell…