Playing in a Rigged Casino

Addison Wiggin – September 1, 2011

  • China, Europe, U.S.: Manufacturing stalls no matter where you look… as stocks enter the two most perilous months of the year
  • Blogger denounces market as “rigged casino”… Our editors on why this is nothing new, and how to succeed in spite of “manipulation”
  • Modern art: “Creative genius” auctions off a stack of paper currency… and gets less than face value! (Heh.)
  • Meta-mail: Readers bitch about other readers… plus an inquiry about what Hugo Chavez’s plans mean for gold…

   There’s sand in the gears of the world’s manufacturing machine.

No matter where we look this morning — Asia, Europe, the United States — the pace of “making stuff” is looking sluggish.

   In a globalized economy, we now have a curious phenomenon: The synchronized release of manufacturing numbers, globally, on the first of the month.

Conveniently, they’re measured the same way: A number higher than 50 indicates an expanding manufacturing sector. Lower than 50, a contracting one.

   The numbers for August? In a word: Meh.

  • China: Up slightly from 50.7 to 50.9, according to the China Federation of Logistics and Purchasing. A separate survey from HSBC is also up, from 49.3 to 49.9
  • Eurozone: Down from 50.4 into contraction territory at 49.0, according to Markit — a two-year low
  • United States: Down from 50.9 to 50.6 — the worst reading since July 2009.

   In the uniquely bent logic of Wall Street, the U.S. number is fodder for a rally — because it beat expectations.

The “expert consensus” of economists polled by MarketWatch called for a contractionary reading of 48.8. The actual number of 50.6 was higher than even the most optimistic economist’s guess.

The resulting rally isn’t much to write home about: What was shaping up to be a down day before the open is essentially flat instead. The Dow hovers at 11,600.

   Bent logic aside, you can’t say the stock market lacks a sense of irony.

After a sell-off in late July that turned into a rout early last month, the Dow ended August back in positive territory for 2011 — barely. The S&P 500 and the Nasdaq were not so fortunate; both remain down about 2.5%.

Now begins September — traditionally the market’s worst month of the year. Since 1928, there’ve been more down months in September than any other month. The worst was in 1931, when the Dow dropped 30%.

Heh… then comes October — when outright crashes seem to come. Think 1929, or 1987.

   As if that’s not enough to give ordinary shareholders the willies, there’s the growing sense they’re playing a game of high-stakes poker… with marked cards.

“The fraud, the phony bids and offers and the high-frequency ripoffs have driven everyone away,” wrote financial blogger Karl Denninger, giving voice to this sentiment after he examined the negligent volume in S&P futures early in the trading day last Friday.

“Go ahead politicians,” he then said in a post that went viral this week, “tell us how important ‘Wall Street’ is to the economy and to you. Let the thieves and liars continue to pollute the markets and screw everyone. Volatility is as high as it is precisely because people are tired of getting buttraped and after a few instances of it they simply say ‘screw this,’ take their money and go home…

“Don’t even try to ‘invest’ in this market, folks, and if you decide to trade, realize that you’re playing in a rigged casino and the entire force of the government is not only behind rigging the casino but explicitly endorses and permits the rigging to go on and continue, despite being fully aware of it.”

   “There will be no reason for subscribing to your publications,” writes a 5 reader who brought this blog entry to our attention, “if all of us, and mostly you guys, do not do all in your power to see that everyone is made aware of the fact that the game and casino you tout are crooked.”

“I have been an investor for the majority of my 64 years on this Earth. As far as I know, there has never, in all of history, been a time when the markets have been so corrupted.”

“The CFTC and the SEC are nothing more then gatekeepers for the thieves that are now in total control. You give advice that may overcome the thieves on occasion, but you will not, in the long run, overcome the bastards that are becoming more voracious every day.”

It’s a serious question, deserving serious consideration. We’ll hear from four of our editors today for perspective.

   “I can’t help but think,” says Chris Mayer, “that these views echo those of the pre-World War II era about market manipulation.”

“Especially as they relates to market ‘pools,’ which were usually piles of money put together by the well-heeled and connected with the intent of making money in the markets. Kind of an early hedge fund.”

Chris, whose bookshelves overflow with decades-old tomes about the market, cites a book by Fred Kelly, called Why You Win or Lose, published in 1930:

“There is widespread myth about a pool’s miraculous powers. In the minds of amateur speculators, every pool is rarely gifted at foreordination and omniscience and has a magic wand with which it can put the price of a stock wherever it sees fit.

“And so today,” says Chris, “every amateur plunger sees forces moving things around just so he can lose money. It’s a human reaction to make stories for things we don’t understand.”

   “The market has always been rigged,” Chris goes on, “against the little man who thinks he is going to whip in and out of stocks and trade with the big boys.

“The only real advantage an individual investor has is his ability to sit on his hands. He doesn’t have to report to anyone quarterly or monthly about his results. He doesn’t have to play the performance game. He can buy what he likes at what prices he wants and wait to sell them at prices more favorable.”

“I think there are many other stocks in which you could just sit and be much richer, say, three years hence.”

   “Yes, it’s a miserable world out there,” says sympathetic Byron King. “The markets are rigged and the government is corrupt. There, I said it. Oh, wait… one more thing. Life’s a bitch and then you die!

“It’s not even like the regulators are crooked in the classical sense of taking bags of cash. It’s more like the old idea of ‘honest graft’ — the revolving door, where somebody graduates from law school and goes to work for the SEC, say. Then after a few years, it’s off to Wall Street and a nice payday.

“Then after a few years of doing deals, and on the side raising funds for a senator or presidential campaign, it’s back to the SEC or Treasury. Then a K Street job, lobbying the SEC, Treasury or Congress. Then with a new administration, it’s to a much higher assistant secretary of this or that job.”

   “So if you don’t want to be part of the rigged marketplace,” Byron goes on, “supervised by crooked overseers, then what do you do? Put your money in the bank? At zero interest?”

“Go offshore? You still have to report that, or the offshore bank will narc you out.”

“Real estate? OK, but it’s all about location, location and location. Plus, you never really own it, because the government wants taxes and you have to pay to play.”

“Buy gold and silver? Sure…. I discuss physical metals all the time.”

“But I want to ride the broad trend in energy scarcity and tightening mineral supplies. That means I want to get in early, and at low share price, before the ‘quants’ and traders figure out that a company is a target.”

“I want to be in the right sectors — energy and mining — during a global economic buildout. There is a rising tide out there, and energy and minerals are a big part of it.”

“Over time, markets go up, markets go down. Over a long enough time, the good plays go up more than they go down. Good stuff is scarce in this world. Eventually, people will pay for the good stuff. This last point is your advantage in subscribing to Agora products. We pick out the good stuff.”

   “Most investors don’t understand what program trading actually is,” says Jonas Elmerraji, turning our attention to the high-frequency trading (HFT) robots. “That includes professionals.”

“The vast majority of program trade volume is one of two things: arbitrage (which is good because it keeps values in synch with each other) or algorithmic trade execution, which is all about getting big orders (like mutual funds) in at the best price without influencing prices (and resulting in poor fills).”

“Both of those behaviors are essentially market neutral. There are very few cases in which computers are speculating with/against each other.”

“When people lose money, they blame program trading. It’s been happening since 1987.”

“Ultimately, for investors, stock prices have a fundamental backstop: a price below which equities look so cheap an investor can collect absurd returns from dividends, or dismantle the company for an instant gain.”

“If it were really just computers left, anyone who tried would be able to get absurdly rich without any effort at all. The market doesn’t work like that.”

   “Institutional advantages are nothing new,” says tech maven Ray Blanco, bringing us back full circle. “Decades ago, all retail investors could manage was to phone in a trade from halfway across the continent.”

“Big institutional traders, however, sat right on Wall Street with immediate, intimate access to the best information and the most up-to-date pricing information. Later, when electronic trading was born, it was institutional traders that first had access to those resources. However, even in that environment, wise investors could still earn hefty profits and build fortunes over time.”

“As long-term investors, we are scarcely affected by short-term high-frequency shenanigans. As small-cap technology investors, we are even less affected. HFT algos tend to lurk in larger, higher-volume equities.”

“Yes, HFT unfairly stacks the deck against small retail traders sweating behind their computer monitors, but HFT doesn’t affect long term trends — or profits.”

[Ed. Note: It is this longer view we ask you to take today. Rigged markets, government red tape, depreciating currency — in spite of all that, there’s still no shortage of quality businesses out there, full of people working their tails off to meet the demands of the market and create new wealth.

Whether they’re pulling energy or metals out of the ground, or developing life-changing technologies you and I can’t even imagine now, there’s money to be made by investing with the best of these players. That’s what the editors of our stock-picking services do every day.

Right now, you can secure access to every one of them.

The Equity Reserve is open to new members this week. For a low one-time fee, it gives you access to five entry-level newsletters and four premium advisories. This one-time fee is actually lower than the one-year subscription cost if you paid full freight for each of the services separately.

And in a move we’ve never made before, new members will have access to a Safety and Survival Summit coming next month — at which you can hear from our editors face to face about their latest outlooks and strategies.

Only 300 seats are available, so it pays to move on this now. Even if you can’t join us for the summit, you can still instantly benefit from full access to our stock services at an incredibly low one-time fee. We can’t keep this offer open indefinitely: Check it out here.]

   Gold has held above $1,800 for more than 48 hours now. At last check, the spot price was $1,822.

   We’re not sure what it indicates, but CNBC conducted an online poll this week asking, “Do you support a return to something resembling the gold standard?”

12,747 people have voted since the poll went up Monday. Sixty-seven percent have answered “yes,” 26% “no” and 6% “not sure.”

Our friends at The Gold Standard Now, who brought this to our attention, label the results “unscientific, but intriguing.”

The Gold Standard Now is investment banker Lew Lehrman’s public-awareness project. Lehrman, along with Rep. Ron Paul, were the lone dissenters on the U.S. Gold Commission established by President Reagan 30 years ago.

The commission delivered two things of lasting value — the Gold and Silver Eagle program at the U.S. Mint… and the “minority report” written by Paul and endorsed by Lehrman. It’s an engaging read, and we’ve made it possible for you to get a copy free.

   As far as absurdity goes, we figured nothing could top our artist cum terrorist depiction yesterday.

We were wrong.

Australian artist Denis Beaubois recently created a work called Currency, 2011.

Only an artist could turn paper currency into this good of a deal

The exhibit consists of AUD$20,000 cash, “stacked and bound in two piles, and accompanied by a list of the notes’ serial numbers,” as described in the newspaper The Age.

An interesting gambit: Beaubois assumed that by the mere act of the artist gracing the currency with his fingerprints, it would command a premium. Of course, that’s not how he described it: Rather, he sought to portray “the tension between the economic value of the material against the cultural value of the art object.”

In any event, it didn’t work out. At auction, Currency, 2011 commanded a winning bid of AUD$17,500.

Yep… less than face value.

But please, don’t shed a tear for Beaubois. The Age reports he funded the project with a grant from the Australia Council totaling… AUD$20,000.

Talk about socialized risk. Mr. Beaubois ought to search the want ads for job postings with central banks around the globe. We’re confident he’d rise in the ranks quickly.

   “I laugh at the juvenile sensitivities of the occasional reader who gets so riled up at the first hint of political expression,” reads a reader email about recent reader email. Uh-oh… We’re getting meta-mail now.

“Get real,” he goes on. “If one can’t handle information or financial guidance that is offered to many times overcome the equine droppings thrown at us by the political control-freaks in Washington, then perhaps a cranial return to the sand might be more comforting.

“I, for one, say keep your expression of opinions natural, honest and free. We’re still America.”

   “Lacking a complete picture of the range of reader responses The 5 elicits,” writes another, “I have noticed an uptick in mindless, vitriolic rants usually reserved for online news article forums and organized demonstrations designed to shut down a medium.

“To that, all I can say is congratulations! For whatever good or bad it may bring, it looks like you are now on their radar.”

“Anyone who has read The 5 for any amount of time understands that you are an equal-opportunity publisher to the effect that no core ideology, party line or social ‘norm’ is exempt from the usual irony and sometimes scorn. As they say, if you don’t like it, wait five minutes and tomorrow’s another day, another insight and another jab in the ribs for the latest thing that makes (most of) us collectively scratch our heads.

“What disturbs me most is the loss of good old-fashioned, thick-skinned, argue intelligently about it with passion and then acknowledge the differences civil discourse. Now it seems we see too much rote regurgitation of talking points dumbed down to the least-common parroter. ‘Screw you?’ No, when all of the intelligent, thought-provoking sources, like The 5, are drowned out in the chorus of drivel, we are all screwed.”

   “Nonsense,” writes a reader in a riposte to the reader who said Americans are in danger of waking up to find the nation’s best and brightest having moved on to other shores.

“Those who can have already left. Those who cannot leave have become entrepreneurs. Those who cannot become entrepreneurs for one reason or another have become attorneys.”

   “A friend who is gold knowledgeable (he has systematically bought in the late '80’s and early '90’s) raised an issue that is a bit scary. Specifically, he was commenting on Chavez’s decision to take possession of all Venezuelan gold stored outside Venezuela.”

“My friend’s concern: What if there is a run on gold and holders demand possession? Runs on currency deposits in banks are no problem: The Fed will just print more money. But you can’t create more gold. I don’t know if entities that store gold for third parties do anything with that gold (e.g., lease it for use as security by others, use it as collateral). Is there any reason for concern?”

The 5: Sure. Just as the banking industry has hopelessly fouled up the chain of title on perhaps millions of U.S. homes, it may well have created a situation in which more than one claimant has a legal right to the same ounce of gold.

This is why you’re best off holding gold in your own possession, or in “allocated” storage. Our favorite form of allocated storage is what we call “Offshore Gold Storage Programs” — detailed in a special report that goes to every new subscriber to Apogee Advisory.

   “Several readers of The 5 have thanked you for putting them onto gold during the past decade. I would like to thank gold for putting me onto you.

“I first discovered The Daily Reckoning as a link on a gold bullion dealer webpage where I make purchases. That started it. I began reading every Daily Reckoning, and then subscribed to Bryon King’s publications, and then started reading The 5, and then bought Dice Have No Memory (loved it) and now have Laissez Faire books on my reading list.

“I guess you could say physical gold led me to something just as valuable.”

The 5: Or more. “An investment in knowledge,” says a remark attributed to Benjamin Franklin, “pays the best interest.” You can make a deposit at Laissez Faire Books — and get an instant 20% off — by following this link.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. “When the market is wildly wrong,” says Patrick Cox, “there are almost always profits to be made.”

Patrick wrote this on Tuesday in relation to a company he thinks will change the world. “I got a call from a friend who bought a bunch of shares after my last alert pointing out that they were down for illogical reasons.”

Indeed, its share price was beaten down big-time last Friday. But Patrick didn’t complain about market manipulators: He urged his readers to average down. “Within a day, the stock went up over a dollar, and my friend is sorry he didn’t buy more.”

As you likely know, Patrick doesn’t do short-term trades. He urges you to buy “transformational” companies early on and hold on tight while they bring world-changing technology to life.

If this approach feels right to you… if you’re comfortable buying unknown, but high-quality companies with immense profit potential, manipulators and the government be damned… you really need to join the Equity Reserve and get full access to our full range of stock-picking services.

No other package of services in our business delivers this kind of value. And it comes with an exhaustive list of privileges and benefits, some of which we’re offering now for the first time. If you’re heading out early for Labor Day weekend, do yourself a favor and take a few minutes to review that list now.

rspertzel

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