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August 28, 2004 Contrarian Round Table contributors discuss the topic:
"MARKET
MANIPULATION: IS IT A GOOD THING, A BAD THING,
George J. Paulos Market Manipulation I have always been intrigued by the similarity between the words “economy” and “ecology”. Both words are based on the same Greek root “oikos” which means house, implying that both the ecology and the economy are environments that we live in. These two environments have other similarities. They are both complex and chaotic systems with a myriad of interrelationships. Both environments are inhabited by humans who are subject to their forces. They are both only dimly understood by science, yet are both actively manipulated by people. Our ecological and economic environments are often hostile and unforgiving. So we attempt to tame our surroundings. It is natural for people to re-engineer their environment to make for more pleasant and predictable living. We spray swamps to eliminate bugs, we dam rivers to prevent floods, and we manipulate currencies to protect our domestic businesses. All these activities are intended to promote better living but they all have secondary effects that may result in crisis. Many environmental activists fondly recite the old saying “It’s not nice to fool Mother Nature”, implying that interfering with the natural order of ecological relationships is courting disaster. In an extremely complex environment such an ecological system, it is almost impossible conduct a manipulation of just one isolated component because all components are dependent. The alteration of one process may lead to cascading effects in other processes that were previously believed to be independent. Chaotic systems often react in this way and lead to unintended consequences when interventions are attempted. These consequences can be witnessed in the continuing high rate of species extinction and global warming. Economic systems are remarkably similar to ecological systems. Both systems are Darwinian in their natural form. They promote strong individuals and communities by weeding out the unfit. They evolve over time to create more complex and specialized organisms that fill specific niches. Economic organisms are called businesses. They form and grow to meet the changing needs of society. Businesses are most effective when they are left to pursue their interests without interference from the authorities. But totally free economies can be brutal places. The marketplace is unforgiving to failure. Virtually all societies regulate their economies in one way or another. Most of this regulation is in place to ensure that the brutality of the free marketplace is not unduly experienced by any single individual or community. Subsidies, tax policy, unemployment insurance, and a plethora of other regulatory tools are used to smooth out the economic bumps and promote egalitarian outcomes. Over time all of these policies lead to unintended consequences that make economies less efficient. Financial markets can be considered the “virtual” economy. Stocks, bonds, commodity contracts, and currencies are not the economy but they represent economic entities and exhibit the same Darwinian nature. Financial markets are also highly regulated and manipulated for ostensibly the same reasons that economies are. Lock limits, circuit breakers, trading halts, short-sale rules, and many other market manipulation tools are in place to smooth the bumps and protect investors from the dreaded market crash. Unfortunately, many of these measures also lead to unintended consequences by mis-pricing securities and encouraging excessive risk taking. In other words, market intervention makes markets inefficient. All of the economic and market manipulations listed above are overt. They are conducted in plain sight of all participants and are subject to strict rules. Because of this transparency, it is difficult for market players to gain advantage using them. However, many manipulations are conducted covertly without public disclosure. When market critics talk about “market manipulation” they are usually referring to these covert activities. Manipulation efforts such as Plunge Protection Teams, gold leasing, and other activities are conducted in secret with the goal of producing desired outcomes that are in the interests of the authorities. It is these covert market interventions that are the most sinister and harmful to the markets. Since they are not publicly disclosed, there are no strict rules on how these manipulations are conducted. This gives market players who have access to the intervention a tremendous advantage. Any widespread market intervention will ultimately be discovered by market participants. If the authorities continue the charade, then participants will start to believe that the markets are “rigged” and unfair. Such a loss of faith would be the equivalent of market pollution, easy to spoil but difficult to reclaim. There is a vigorous debate about whether such covert market manipulation is really occurring. Anecdotal evidence is building to support the accusation of widespread market intervention by government authorities and large institutions. Many investors now talk openly of the “Greenspan Put”, referring to the belief that the Federal Reserve in conjunction with market authorities is actively supporting the markets with monetary policy and/or direct intervention. I believe that we are starting to see the effects of such covert policies on all of the financial markets. Currency markets are essentially dictated by government actions. Bond markets tremble under the threat of Central Bank purchases. Precious metals sag under the constant influx of supply by overt government sales and covert leasing. Stock markets anticipate the anonymous big buyer in the futures pits who places support under prices when the markets dive. In all of these markets, the primary object of investor interest is supposed to be the condition of earnings, interest rates, inflation, or supply and demand. However with many of today’s investors, the primary focus of interest is the timing and intensity of interventions. Because of this, we see pricing in many securities that make little sense. There are always securities that are mis-priced, but this seems to be the rule these days rather than the exception. The goal of manipulation appears to be to maintain the current pricing structure and avoid the consequences of a dramatic repricing event. It would be overstating the case to blame all market inefficiencies on market manipulation, but the fact is that volatility and pricing are at historic extremes in many markets. Any market movement to correct these extremes seems to be mysteriously averted. Could this be the invisible hand of manipulation? I believe that in some cases it is. But in the long run, schemes to manipulate the market will always fail. The market is bigger than the participants and that includes the authorities. © 2004
George J. Paulos George J. Paulos is Editor/Publisher of Freebuck.com, a website devoted to wealth preservation and enhancement using alternative investing approaches including precious metals. He is also Associate Editor of The Gold Letter, a newsletter covering junior mining and natural resource stocks. John
Tyler Is The Market Manipulated? That the market is manipulated there is no doubt, however the greatest obstacle is our own fear and greed. Market manipulation, defined as moving the market other than for the purpose buying and selling of shares, is part of the market, has always been, and shall be forever more! When Dow theory was being formulated, it was a major principle that the major trend could not be manipulated: this probably still holds true. As regulators seek to curtail and penalize the more blatant forms of market manipulation, inventiveness to circumvent these increases. The question we should ask, is all manipulation bad? It helps assuage our own sense of inadequacy if we believe that there are malevolent forces at work. There is someone else to blame for our lack of success. Manipulation can serve many ends. I have made the case that the $US is pushed up by the BIS and the G7/G8 cabal (see ‘The Secret Oil Rescue'), and no cogent evidence has been advanced to contradict this view. In fact, the evidence continues to mount in support of this! The first chart looks awfully complicated, but all it does is compare the oil price to a number of currencies. We see a shift in various inter-currency relationships when the oil price starts to climb. This occurs in the face of basic market fundamentals (this is one of the typical hallmarks of manipulation) leaving some form of market manipulation as the root cause. Period A to early April 04: stable oil-or so it appeared- we had observed the HUGE backwardation in the far oil contracts, showing a tightening of supply. The Yen is rising at the expense of the Euro. Period B to late May 04: oil breaks out and the $US Index is give 2 hard pushes at the expense of all other currencies. Period C to mid July 04: it looks like the fight against rising oil prices is won and the other currencies revalue against the $US Period D to present: oil breaks out and the $UD is pushed up against all other currencies again!
Sometimes we need more sophisticated methods to see the effects of manipulation. In this example, we use the standard deviation of the spread between various bond backed Exchange Traded Funds. I came across this example when doing research for our subscribers. In the following chart, top window this shows a standard deviation measurement between the Bond related ETFs for various maturities. This is plotted against the TIP for reference. We do not use the TIP to help calculate the top window trace, as this would be “double dipping”. The relationship should fluctuate, but anything too big means that there is a bottleneck in funds flow between sectors of a highly derivitised and normally liquid market.
We are seeing a number of 2 sigma plus events, which are unusual. The first started when “the secret rescue” to cap the oil price began. The next was needed to “plug a leak”. However the third, or 4.5 sigma event was the “king hit”. This is the big run down in bond prices as bonds were sold off to provide cash to fund the secret oil rescue. A six-sigma event is a major economic meltdown, like the Russian crisis that took LTCM. Those who have a scientific background will find it ironic that the whole pattern looks like an interference pattern! Points 4 and 5 are the rapid moves back into bonds to rebalance the 4.5 sigma inequality. This is nerdish sort of stuff, and not much use for trading except to say that with regular 2 plus sigma events, it’s not easy to trade rationally, so stand clear! The bottom line is, had the $US not been manipulated, we would currently have US $60 a barrel oil! To summarize:
© 2004 John Tyler
Gale Bullock Market Manipulation…. Is it a good thing, bad thing, or is it… Inconsequential? Sol Palha, our Editor Guru, wanted the panelists to “dig deeper by looking at Nature,” for this Contrarian Round Table topic. “In the jungle not everyone can survive… someone has to be killed in order for the other species to survive.” -- Sol Palha How true that is! Being a Zoologist by degree, I call it Darwinian Theory. This relates to the origin of species, as well as the laws of the survival of the fittest. This also involves knowledge of Ecology, and eco-systems. Did you know that forest fires as an act of nature are a good thing? Probably didn’t. Neither did the Federal Government when it tried to limit burning in the Muir Woods out in the Peoples’ Republic of California near San Francisco. The FED’S [Federal Government] found out through Mother Nature, that a little lightening strike every now and then, is a good thing for those little tree saplings. Perhaps Mr. Greenspan, and his pack of thieves [criminals], stealing our money through legal tender fiat FRNs should have been Zoologists first, instead of economical, econo-metric central bankers? Perhaps taking some ecology, eco-system, and other related Zoology courses on micro and macro markets could improve the efficiency and efficacy of market manipulation? [1] Ship of Fools Take Boeing 747 to KC for Priscilla’s DVD Collection [2]Anyone who knows the name Bill Murphy, knows www.gata.org and www.lemetropolecafe.com. Mr. Murphy and his cohorts (including Reg Howe and Frank Veneroso and James Turk) have worked for years trying to expose the market manipulation and rigging of the bullion markets, based on the work of Summers and Barsky’s Gibson’s Paradox [3], which started under Slick Willie and the Airedale. Slick writes a book, the Airedale becomes a NY Senator, and they buy a mansion only the Hunt Boys in Kansas City could afford. We all know the FED through JPChase, Goldman Sachs, and a few other partners in crime, are able to rig the bullion markets, including gold and silver prices. www.gata.org sent a report [4] years ago to the Ship of Fools, aka, the US Congress, as to what was going on. All these guys hopped a 747 to KC to go to Priscilla’s to buy dirty sex DVD videos they can watch on their laptops, while they appropriate and ex-propriate both our money and our sons and daughters for pre-emptive wars for the sake of no-oil and perhaps a few strategic military bases in Mesopotamia, aka the Fertile Crescent. Gee, Whiz! Why is gasoline $2.00 a gallon? Some DVD, huh? With John Embry’s and associate’s report on the gold and bullion market manipulation just released on August 24, 2004 at Sprott Asset Management in Toronto, Canada, it appears that markets can be rigged, and quite effectively. [5] When markets are rigged folks get hurt economically from the investor to the workers within that industry. That’s a bad thing. Dirty Financial [Economic] Sex on Wall Street? Nahhhhhh!I like to think in terms of economics, sex, and money. Fits my Zoological background. That’s what Washington, D.C., is all about anyway, isn’t it? The combination of economics, sex, and money, combine to make power. Political power. The power to control. The power to tax and spend. The power to manipulate markets. The power the Federal Re$erve, our central bank [which is nothing Federal, nor a Reserve of any kind] has. To rig markets. To rig Wall Street. To destroy our money. To create the Working Group on Financial Markets (aka, the Plunge Protection Team) to hold up financial markets, including the DOW and the NASDOG [6]. Mike Bolser’s work at www.gata.org and www.lemetropole.com documents the Federal Re$erve’s use of the repurchase agreements to inject liquidity into the Wall Street market through key players to keep the Ponzi Shell Game going and the DOW above 10,000…. Or is that a leaky tank problem you flunked in Calculus 101, Dear Reader? Didn’t know Dirty Economic Sex and Calculus were related, did you? Nope, there’s not a lot of math involved in turning a trick, but the Ship of Fools, as well as Them There Boys at the Federal Re$erve would have you all believe it is Calculus ‘over your heads!’ However, it isn’t. But, it is smoke and mirrors, the Grand Great Oz behind the curtain. Hummmm…. Good, Bad, or Inconsequential?Slick Willie redefined “is.” John Maynard Keynes redefined “good” as fiat money ‘cause we are all going to die anyway. Milton Friedman redefined “bad” through monetarist policies of just printing more of the stuff. So far, no one has redefined “inconsequential,” -- to my knowledge anyway! Let’s make an attempt at redefining “inconsequential,” shall we? Suggested reading is Karl Marx’s Communist Manifesto, printed in the 19th Century. Welcome to Central Banking 101! Correlation has occurred! [7] How the Inconsequential Cookie Crumbles?Dear Reader [Jane and Joe Six-Pack, Wake Up!], would you like to take my cookie crumble test? If you and your Mom and Dad have a home paid for, and have no debt on it, you get a cookie – a Nabisco Vanilla Wafer. If you and your Mom and Dad have all vehicles paid for, you get a cookie -- a Nabisco Oreo, Double Stuffed. Now keep going! If the $50,000 REC Travel home for trips to Texas, LA, MS, AL, or FL is paid for, you get two cookies -- all Rocky Roads, Archway Style! If there are no left-over college tuition loans, you all get three cookies -- Archway Molasses! If you all were out of Wall Street in 1999 or early 2000, or before the greatest market crash in history, you get a whole Life-Time Supply of 5 pound bags of Nestles’ chocolate chips, and you can bake your own darling Toll House Cookies -- whenever you want! If you all are in debt up to your eyeballs, and in hock to the manipulative banking cartel, you may believe that investing in a rigged casino is the best way to get rich quick. However, in rigged markets, I take the position, it is better to be in cash assets, than try to play at the present time with the Big Boys – that is unless one has already done their own due diligence and know how to play Wall Street and the central banking cartel – knowing how to think for oneself, going against the spin of the Shills on Wall Street. Jungles as Global Markets? Greenspan & the Boys Bake Toll House Cookies….Going into the Kondratievian Winter Wave Cycle, under Austrian Economics, Von Mises, Hayek, Rothbard, and the other Economically Astute Austrians, the FED discredits in their propaganda, without cookies, or chips for us everyday folks to bake with. Placing the FED’s hands in your pocket or purse, is the Federal Re$erve definition of “inconsequential.” Mr. Greenspan and his Boys bake global economies. Sometimes, like in Argentina and Turkey, they burn the cookies pretty badly. The elements of spin-meistering that come from the mouths of the other Bad Boys is so hilariously funny that it is frightening knowing these cooks are in the kitchen, and that these Bad Boys are appointed, not elected by Main Street America. Dallas FED McTeer says we should all hold hands, buy an SUV like one of them Ale-Gate-ors, and everything’s hunky-dory. Bernanke just got a contract for a fleet of jet helicopters with printing presses on board for helicoptering FRNs [money], and his statement to the Global Markets that we have a printing press defies logic. The French did also at the time of the French Revolution, and they lost their ASS-ig-Nat [assignat is the name of the currency they inflated]! [8] The Green Man, as Sir Richard of Russell calls him, says stuff like real estate can’t be a markets bubble, since all real estate markets are local. Ha! He also urges folks to take out ARMs for their home and home-equity loans, ‘cause folks can save a lot of money. Ha! We think that’s like shooting yourself in the gonads, Zoologically speaking, with a Colt .45! As Dirty Harry [Clint Eastwood] says: “Go ahead! Make my day! Inconsequential? Perhaps that’s the way the Boys at the FED view it. The FED Boys are in the Jungle. Mr. Darwin will prove the fittest to survive. The only thing is, there is no electricity in the Jungle, nor any Oven, to bake cookies and rig markets. If it’s a gas oven, the combination of no gas and no electricity may shoot Ponzi in the foot with that Colt .45. If Ponzi misses and shoots his Gonads, Zoologically speaking, we suspect they will define their poor aim at targeting select markets to rig and control as being more consequential, than inconsequential. If so, that would not be a non-sequitur, would it not? Have Latin, Will Travel! Dénouement and Wrap this Thing Up with a Petty BowIf my Mom Alice in Kansas City driving a gold 1991 Lincoln Town Car [with 115,000 miles] can figure out the trickery of Mr. Greenspan and his Bad Boys at the Federal Re$serve on market manipulation, by reading my friend Ed Griffin’s Creature from Jekyll Island, anyone can. These Bad Boys rig the markets through the Federal Re$erve central banking cartel, as well as the Bank of NY, JPChase, Goldman Sachs, and the rest of the criminals. Free markets? No way baby! Ponzi Shell Game, you betcha! Park your money? 3% Treasuries fixed, with no link whatsoever to the Bastard [spurious, bloated, false] GSEs, which are going to one day blow up, melt down, and make both Enron and Long Term Capital Management look like a 5-year old’s Birthday Party Celebration. Inconsequential? I don’t think so! Hello Appraisal Institute! – are you listening???? Chips Ahoy! [9]
© 2004 Ole Bear
Footnotes: [2] The Priscilla’s chain in Kansas City is a chain of Adult Stores, and a pretty classy operation. These folks have some very high profile and very upscale stores, in some of the best target markets of Greater Kansas City. When you can drive to the Mall, and drive by Priscilla’s, they must be doing something right in their Book of Business. Their prices, we have been told, are far below those in the Greater Washington, D.C. area. It is economical to take a Boeing 747 for a Ship of Fools massive shopping trip – since they obviously didn’t know how to read the www.gata.org report on the Gold Derivative Banking Crisis. I know about the company, since my little sister, Rebecca, day-trades their stock quite successfully. Grin. [3] See also: Gibson's Paradox [4] See: Gold Derivative Banking Crisis at this link: http://www.gata.org/test.html [5] John Embry - "Not Free, Not Fair: The Long-Term Manipulation of the Gold Price" found at www.sprott.com. This is a 71 page [pdf] file essay, and is currently making international news. [6] See Google Search Link for Working Group on Financial Markets and Plunge Protection Team. [7] For the on-line Communist Manifesto. Part of the Marxian tenet for the Great Society [a reference to Guns and Butter, an economic policy of Lyndon Baines Johnson, former US President, who fiascoed in a tiny country call Viet Nam] was a central banking system. There are also some other corollaries among Marxian theory with respect to government and economics, which closely resemble what I seen with I turn my chair a full 360 degrees. It was Benjamin Franklin who said that the Founding Fathers created a Republic with the Constitution… as long as we could keep it. [8] See: Fiat Money Inflation in France: How It Came, What it Brought, How it Ended by Andrew Dickson White. This was written in the 1870s! What a micro-gem on the Histories of the Markets! [9] See: Creature from Jekyll Island: a second look at the Federal Re$erve, by G. Edward Griffin. See Also: What Mr. Greenspan Really Thinks?, by Dr. Larry Parks. The link will take you to the reading list page at www.fame.org, and you can view the [pdf] file online.
© 2004 Gale Bullock, MAI,
SRPA, SRA
Peter Spina
"MARKET
MANIPULATION: IS IT A GOOD THING, BAD THING, Market manipulation distorts free market values. If you do not allow for pure free market supply and demand fundamentals to dictate equilibrium prices, a price variance will occur. The gold market is a very great example of this situation. Over the past few decades, central banks around the world have been dumping their citizens’ gold reserves onto the market. This extra supply has bridged a huge gap between the gold market supply and demand fundamentals. During this process of central bank gold liquidation, the price of the metal was pushed to extraordinary lows, which forced many mines to halt production, companies folded. The cost to mine gold became uneconomical at market prices and supply shrank further. Exploration all but ceased. The industry became totally decimated during this two-plus decade long bear market. For those who have been observing the destruction of the gold market over the prior years, it became evident that a massive shift from true representative values had occurred. In other words, a very lucrative opportunity emerged which continues to this day. Therefore, gold market manipulation, harmful to true market pricing yet very profitable for those who enter the market once extreme discrepancies occur and are incapable of being maintained. Yet the manipulation of the gold price leads to distortion of other inter-market relationships. As gold is a measure against the value of world’s fiat paper, true currency prices are also distorted as the corresponding barometer is being purposefully managed, according to some respected industry observers. In an economic system of checks and balances, gold’s inability to reflect true market prices via known and unknown management by the world’s governing powers gave the ability to distort other markets as well. Market manipulation is harmful in reflecting true valuations. Even more harmful is this situation occurring when market participants are unsuspecting to the distortion. Transparency is a must if investors are to understand the true nature of the marketplace. I do not believe this can be said of the gold market still at this time. Investors should work and support the efforts of providing this transparency if they believe in free markets. Without this how can free people make educated choices? It simply is impossible. © 2004
Peter Spina
Sol
Palha
The Big
Fallacy
Let us be
thankful for the fools. But for them the rest of us could
not succeed. Yes it’s real and exists. It’s a neutral thing neither good nor bad and actually in a twisted way it is necessary. Let's start off by looking at a predator in the wild, a Jaguar. When there is plenty of food, all the Jaguars can feed well and relax as there is plenty to go around. If one looks at the situation from the prey’s side, it seems unfair. The poor deer is just trying to get a drink of water or eat some grass, but each time it has to play Russian roulette with its life. If the jaguar were eliminated from the equation, then you would have too many deer and this would result in over grazing and a severe constriction of the existing food supplies. So the Jaguar is needed to maintain the equilibrium. If suddenly the number of jaguars goes up, then we have another imbalance and the existing food supply is now threatened (not enough deer to feed all the jaguars). Once again nature intervenes and the weakest jaguars start to die off; only the strong ones remain. Applying the above analogy to the markets, we get the following: The masses are the Deer; they just want to find a way to grow fat without doing much. Even worse, they want to build lots of money for a time in their lives when they least need it. This period is called retirement. What is extremely amusing is that everything is sacrificed, good health, youth, pleasures etc. to put money aside for a time when practically nothing works as well as it once used to. If the masses are so happy to kill themselves slowly, why should it be terrible when the predators come in and do the same job but 100 times faster? The Jaguars represent a few sophisticated investors, big brokerage firm’s etc. Their function is to wait and watch the deer (masses) get nice and fat; then they strike their fatal blow. In this case, the markets crash when the masses are net long or suddenly take off when the masses are net short. Then you get times when the food supply is thin and so even the jaguars are now threatened as they start to turn on each other to survive. (By the way, this is what has been going on in the markets for the last few months). This is when you see big companies go down (Long Term Investment Capital is an example.) and many big investors suddenly find themselves penniless. The jaguars that survive this period of hardship emerge even stronger, leaner and will feed 10 times as much as soon as the supply of food is replenished to equilibrium levels. Taking it one step further, in the good old cavemen days we had to worry about wild animals attacking us and either we ended up killing them or we were killed in the process. So perhaps the markets are just an extension of the kill or be killed lifestyle our ancestors were once subjected to and whose genes we still carry. Fast forward: instead hunting or defending ourselves against wild animals, we are now hunting each other because the amount of food out there is limited. So the only way to survive is to make sure that the masses are kept fat and stupid. Thus, when the fatal blow is delivered, there will be ample food to get the predators through the coming winter. Basically when everyone screams that the markets are manipulated, they are looking for someone to come in a make sure everyone wins. In this case it's just another form of socialism as everyone will remain thin and will not feed well. We all know nothing is fair in life, that in most cases it's not your studies, but a matter of who you know that really helps you climb up the ladder. As the number of participants increases, so will the so-called level of manipulation because even more individuals are now competing for the same food supply. In the end this ratio is king; 90% must and will lose to sustain the remaining 10%. This ratio will never change; no amount of whining or screaming will help you. The only escape is to become a predator or perhaps a parasite and ride on the back of the predators. The best way to win this game is through education, training and pray that all your neighbors don’t do the same as then it will make your odds of winning even harder. Manipulation is here to stay. We are the only ones that will die off and die off with most of the lessons we learned. That’s why history repeats itself. Some examples of manipulation and how we keep quiet about them:
Conclusion You know the markets are dangerous. You know that most people lose and yet you still enter. Oh yes, you are going to be the lucky one that strikes gold. Yet you enter without educating yourself, armed with nothing but your innocence/stupidity you think you can take out all the seasoned predators; when you get bitten you scream. You have two options: stay out and live the safe life or jump in, but do so with the knowledge that you will be attacked several times and that you will most likely lose the first couple of rounds. However if you spend some time educating yourself before and while you are going through those painful experiences, you can emerge victorious down the line. Every war is nothing but a composition of battles and sometimes one has to lose several battles in order to win the war. So next time you get ready to scream, redirect this wasted oxygen to your brain and sit down and work on a plan. This way you might actually find a way to join the winners. Now we will demonstrate why market manipulation is really inconsequential. All that is necessary is a pencil and ruler and some understanding of the concept of trend analysis. (You have to spend time learning this. However, the concept is very easy and in the future we will be putting up some free lessons on our site) Let's look at the most manipulated market in the world, The Gold Market.
Source: www.prophetfinance.com If you are familiar with basic trend analysis, all the nonsense about manipulation can be put to rest with a stroke of a pencil. The red lines represent down trend lines and the gray ones represent up trend lines. So if you look at the last hyper bull phase, you will see two gray trend lines; one could have sold or shorted the gold markets the moment either trend line was violated. By the way we are using monthly charts, if one uses weekly or daily charts, the moves can be timed even better. Go long gold in 1977, sell end of 80 or end of 1981 when the main up trend line was broken. Go long again in the middle of 1982 and sell around the beginning to middle of 1983. Go long in 1985 and sell 1988. Go long in 1993 and sell in the middle of 1996. Go long again towards the end of 1999 and sell in early 2000. Finally go long toward the end of 2001 or early 2002 and hold. However, it looks like we might be close to generating another sell signal. Off course if you have no knowledge of trend analysis, then this will look a bit difficult, but remember you cannot play any game without learning the rules. Trend analysis is not that complex to learn and if you are going to play in one of the most dangerous arenas in the world, you owe it to yourself to spend more time learning and less time whining.
It is by the fortune of God that,
in this country, we have three benefits:
© 2004 Sol
Palha
Alan Lunt Who do I take the knife to?
Farmer and
sons, dust storm, Cimarron County, Oklahoma, 1936.
Photographer: Arthur Rothstein. Manipulation in the markets is no more different than what a farmer does with his dogs when he rounds up sheep and cattle. You could put a ring around the fact they, the sheep and cattle, are not happy. They bleat and moo their opposition to anything that will listen. The farmer has ruined the peace and tranquility of their day. But is this manipulation to their detriment or to and for the greater good of the mob. The farmer would say yes it is. Fresh grass and new scenery await. But from the mob there is always one or two who complain and try to get the better of the shepherd and the dogs. For their efforts they get a nip on the nose...... or rump. The one with the biggest stick wins for the time being. In the markets there are always those who try to get the better of the shepherd. In the case of the US this would be the administration of GWB. To be in politics takes money, big money, huge money, and there is a always a payback involved. So the money men are setting the scene for the future as they fund, or should I say buy, a candidate. That is blatant manipulation but it is perfectly legal. The biggest stick wins. Is it fair to the bears when the ESF steps in to hold and reverse a steep decline? You know as well as I do what the noise from the mob would be like. But hold on a minute, in the overall picture a steep decline is disaster for an economy; money lost, liquidity dissipation, unemployment and business failures. That is not the situation the moneymen bought when they funded their candidate; they don't want their money to be lost. The shepherd is also looking for the greater good of the entire farm, not just a sector of the farm. Every advisor, every commentator, every investor, every leader is trying to manipulate the market towards their own thinking. They accept everything that occurs in their favour as correct, and bleat loudly when that belief system is challenged. The logical conclusion is that the bears win half the time and the bulls win half the time. In this game 50% is not good enough to survive. What does that say about biases? The other aspect no one seems to be too interested in is that the market has been in the hands of the moneymen since the formation of the Federal Reserve in 1913. That was the aim of Senator Aldrich when the clandestine meeting was held on Jekyll Island. The life and times of the average man changed forever. The absolute worst situation I found myself in when farming was the winter drought of 1989. I had no access to irrigation. The animals and the man suffered together. I told myself that every day was a day closer to rain. I was right. It rained, then what followed were 23 frosts in 27 days, the ground froze and so did the grass. It was an agricultural Kondratiev winter. As much as I hate the printing of money and the subsequent consumer price inflation it is only logical that the Federal Reserve would turn on the irrigation. What they do when the frosts start is another matter. Mother nature has a way of returning everything to normal, but before she does so both extremes are tested. Be careful what's wished for, it may just rain.
© 2004 Alan Lunt
David
Gobel
Manipulation Sometimes it’s good to go back to basics to see clearly. For instance, money is a device to facilitate mutual cooperation. It is based on human memory and the human ability to believe that there is such a thing as “the future.” When you combine memory and belief, you can get faith and hope. The utility of money is founded on faith and hope. Historically, Money has proceeded from the utterly tangible and intrinsically useful such as sheep, land and salt, to the symbolic (i.e. you can’t eat it or plant it…gold, silver, jewels) to the abstract/hypothecated (paper money, big stones with holes, sea shells) and finally for the first time in history, we have virtual or invisible money (electronic bits in the cyber ether, ledger entries). At each step in the process of virtualization of money there are dramatically lower transaction costs and dramatically higher probabilities and ease of counterfeiting by either criminals or governments. In the first instance, there’s not much use in trying to counterfeit a cow. It’s pretty easy to discover that two guys in a cow suit are an udder fraud when there’s no milk coming out. So, the trust component of physical property / commodities is high…not much need for faith or currency laws…but transaction costs are also very high. At the other extreme, where we are today, money has become so hypothecated - so gaseous that it’s like the barely remaining grin left over as the Cheshire cat disappears – managed by rat’s nest of rules and regulations to ensure the continued legitimacy of the currency. Opportunities and temptations for market manipulation correlate with virtualization and speciation of money. Today we have literally 10’s of thousands of money creators tenuously connected with official mints of governments. Each of these creators contributes a variant species of money. Some examples of these species are: stocks, bonds, derivatives, credit cards, receivables factoring, loans, balance entries in computer networks, futures contracts etc. Let’s take a look at stocks as one example of money creation. Who creates stock? An entrepreneur gets an idea, gets two experienced business buddies to join in and incorporates a concern with 10,000,000 shares of stock. The stock has zero value, or for legal purposes, par of .0001. The founders then use their reputations from past success and a back of the envelope plan to get funding from angel investors. The stock is now worth 10 cents per share. The company has no product whatsoever. Why do angel investors invest in nothing? Because they believe in a highly abstract concept called a market. What does this “market thingy” purport to offer to angel investors? A collective group of individuals who have 1) More money than they need today who out of fear of and greed for the future are willing to bet excess money for the promise (see: mutual fund salesmen) of additional money in the future to fund a thing called “retirement” – otherwise known as “slow death”…i.e. I want the best slow death money can buy. (or see: www.methuselahfoundation.org) In aggregate this excess money (capital) presents an opportunity to take the original nothing (stock) that the angels bought from the entrepreneur and to later offer it with more nothings (the angel’s money electrons floating around in a network somewhere). By the time the stock gets to an IPO, there may really be some “somethings” in the company – perhaps some patents and a proof of concept with some reference customers who say they are gonna buy lots more of these somethings. So, long story short, the original par value of nothing has grown infinitely to perhaps $15 - $135 a share at the IPO. No one from the Federal Reserve or the mint has created any money. The company did it through “the market.” Legal counterfeiting. With these fundamental dynamics in place we can now examine and compare similar phenomena in nature…Earth - the ultimate venture capital incubator. Our story begins as the sun beats down on the ocean, where tiny sea plants (phytoplankton) objecting to the heat respond by releasing high quantities of cloud-forming particles on days when the sun's rays are especially strong. The compounds evaporate into the air through a series of chemical processes that result in especially reflective clouds. This, in turn, blocks the radiation that was bothering the phytoplankton. In other words, they make umbrellas made of clouds. These clouds move over land masses and drop rain onto savannahs where gravity collects the excess water into pools. Over time, an ecocosm emerges at the pool that attracts animals interested in the benefits of the pool – even though they did nothing to create the water or the ecocosm. As the herds grow, predators arrive who discover that when the herd’s heads are down while sucking from the pool, their backs are turned and are easy prey. The predator’s strategy is to get as much herd as possible, while the getting is good. Naturally such easy prey attracts more and more predators – eventually leading to organized and cooperative behavior – such as lions who hunt in packs. This makes it more and more difficult for an individual predator to compete – in fact, the pride will turn the individual predator into prey until they are removed from the competition. Thus, predation becomes institutional in nature. Of course the herd notices that some of them are getting “killed” from time to time, but they have very short memories (http://www.adm.uwaterloo.ca/infocs/Study/Curve.html) and frankly don’t really care about what happens to the “other guyzelles.” They herd simply because each member of the herd has a better probability of not being dinner when it’s hunting time than if they were alone. If the herd gets to drinking too much of the pool, the whole system adjusts as both prey and predators die off proportionately. Gradually equilibrium of prey/predator emerges where everyone gets what they individually decide they need. The herd gets its low energy / low yield slow, but steady food and the predators get their highly concentrated hits. As long as the predators don’t scare the herd so bad that they induce a stampede, everybody not dead is happy. If however, the predators go too far, they will induce a stampede and everybody in sight gets trampled, exhausted and totally terrified…interestingly, the pool is not mobile – so while the pool may have been depleted due to overdrinking by the herd, gradually the incubator function will cause more rain to fall and the pool will once again begin to fill. The stampede will become a hard wired memory in the herd and many will refuse to return…but some, who’ve been through it all before, will come back early and get lots of free drinks. The ecocosm of sun, clouds, rain, pool, herds and predators is - “a market.” Are our financial markets manipulated? Of course. The real question is: are they IMMORALLY or ILLEGALLY manipulated. One can answer the question simply by asking – Is it in the nature of predators to be nice and play by the rules? For a clear “spin-free” answer, try entering the following query into Google … "neither admitted nor denied" OR "admit or deny" settled Go ahead…do it now. What you get is a list of over 4,000 hits listing the very clear proof that market predators do what they do…and unlike most industries, Finance has a special “get out of jail free” capability built into the law…all they have to do is turn over a large portion of the carcasses – the settlement - over to the masters of the feast – and then they can go back to their predations. So, to review, entrepreneurs make stock out of nothing to generate money (which is nothing) to convince angel investors to contribute their nothings in exchange for nothing (stock) in the hope of getting lots more nothings. Gradually there’s enough nothings that sometimes there’s actually Something (product/service) that pops out. Then in the hope of getting lots of these and similar somethings in the future (which never actually exists – there’s only NOW), the herd invests their nothings in the hope of getting lots more nothings in the future to buy the somethings. Along the way day traders (piranha) and brokerages / investment bankers (organized predators) convince themselves that they provide a service to society by managing the pool, culling the herd and shepherding the sheep…and the master of the feast works to preserve the natural order of things. Now some of you may object to the characterization of so much activity is based on nothing. It’s wayyy too hard to take seriously. As anecdotal evidence, I offer up the curious case of Therese Humbert whose apparent wealth generated enormous economic activity in late 19th century France. “…In her elaborate Parisian apartments on the Avenue de la Grande Armée, Thérèse kept a strongbox. It was supposed to contain four documents. The first was the final will and testament of an American millionaire, Robert Henry Crawford, naming Thérèse as sole beneficiary…” Until it was found that she actually had – and had always had – nothing. See: http://www.nytimes.com/books/00/07/09/reviews/000709.09kaplant.html How can it be that almost no one on the planet has ever heard of perhaps the most powerful economic actor in late 19th century France? Because more than anything, those who sell investments in the Emperor’s new clothes can never ever admit and therefore remember that after all is said and done – the emperor was and is naked. There is no money. Therefore Markets are indeed manipulated – or rather, PEOPLE are manipulated. To spend their lives in pursuit of nothing. So, what is actually REAL? Curiosity, applied intellect, love, kindness, air, water, fire, perception, mountains, family, death, Life – the key thing is Life! If you were an oil well, as you aged, you would qualify for a tax deduction – an “oil depletion allowance.” Are you a depleting asset? Invest in real things - life first and foremost – while there’s still time.
© 2004 David Gobel
Wayne
Krautkramer MARKET MANIPULATION, OR INFORMATION MANIPULATION? We are inundated with market manipulation and conspiracy theories. I will attempt a logical inquiry into this phenomenon. For a good lesson in information manipulation, your best bet is to go to the stock market. Lest you think that Marty Schwartz is an isolated case, read the Ray Dirk’s story. Therefore, I shall confine my study to the commodities markets. The commodities markets are the oldest markets in the world. The various commodities provide significant amounts of data for analysis. If effective manipulation exists, one will be able to track its effects. We will define successful manipulation as having interfered with a commodity’s ability to exhibit the normal accumulation, distribution, and trending zones. This creates an objective benchmark for this inquiry. Any discussion of market manipulation must be reduced into the elements that might create the belief in the phenomenon. We must first deal with our need to believe in market manipulation. Since actual evidence of market manipulation is sparse, what is generating this tendency to suspect manipulation, or conspiracy? We must further define the process to differentiate between the attempt to manipulate the markets, and the actual manipulation of the markets. A further distinction is necessary. One must distinguish between those processes that are manipulatable, and those processes that are not manipulatable. For example, political and social processes are manipulatable, and may be nothing more than manipulation, coercion, and conspiracy. Physical processes are subject to the laws of nature, and any attempt to successfully manipulate these processes are possible only by complying with the physical laws involved. One could be found in the position of claiming the laws of nature manipulate the markets. This forces us to examine the true nature of markets. Are they controlled by man, or some bigger force? The final question is the definition of market manipulation. Are we speaking of the intra day price action, or daily price action? The weekly and monthly price charts will show a different picture. Trading ranges behave differently than trending markets. Do we have a tendency to believe in manipulation, and conspiracies? The answer is yes! The social world we inhabit reveals attempts to coerce, manipulate, and regulate in every facet of social interaction. The attempt to control outcomes to our benefit is part of our survival mechanism. It is indisputable part of existence in a society. However, this does not prove that these conspiratorial efforts are effective in manipulating markets. Aesop once said, "And the mice voted to bell the cat." Many activities are beyond the power of social pressure. The laws and pretensions of humanity are just foolishness when confronted with power of nature. Therefore, any intelligent discussion of market manipulation must properly differentiate between social creations, and those phenomenon that are based on physical reality and it’s laws. A steel mill would be an example of a process that is indifferent to the schemes of society. The only way to increase output is to increase the inputs, or evolve a new technology that requires a complete understanding of the principles of metallurgy. Wishing, hoping, dreaming, and screaming are irrelevant. Social activities and politics are the domains of emotions and perception manipulation, not the commodities markets! Again, J. L. Livermore has anticipated our question. Livermore said, "I sometimes think that speculation must be an unnatural sort of business, because I find that the average speculator has arrayed against him his own nature. The weaknesses that all men are prone to are fatal in success in speculation- usually those very weaknesses that make him likable to his fellows or that he himself particularly guards against in those other ventures of his where they are not so dangerous as when he is trading in stocks or commodities." The most important facet of market manipulation is the manipulation of information about the market. This is the rock that sinks most investor’s ships. George Soros made an interesting observation about market information.. He said, "Economic history is a never-ending series of episodes based on falsehoods and lies, not truth. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited." This observation comes from the greatest currency trader alive. I believe that he has thrown down the gauntlet regarding the value of the information you receive. Does market manipulation exist, or is it merely the lies and deceptions about markets that are the manipulation? George Soros has shared his experience. Leo Melamed, the founder of the International Monetary Market (Chicago Mercantile Exchange), gave a speech. In this speech, Futures, the Coveted Scapegoat, he said, "Derogatory comments, defamatory innuendos, inflammatory jokes, false accusations, misleading opinions, half-truths, out-and-out lies, that is the fate and burden of futures markets. Thus it has been throughout time, thus it will no doubt continue. And why not? From time immemorial, predicting the future has been a hazardous occupation." We are now ready to look at commodities. Copper is a good market for discussion. Copper is one of the most necessary commodities in the industrialized world. It is also one of the best economic indicators. If one looks at a 20 to 30 year monthly chart, copper is really a gift to a trader. It follows a trend that is very discernible. The weekly trend is also reliable. Gold is a little different in its movements. It has a mystique due to it’s prior role as a backing for currency. It was the backing for many currencies at one time. Richard Nixon "freed" us from the gold standard on August 15, 1971. Since then, there has been no currency in the world that is redeemable in gold. This has not really affected the trend of gold. It is still a good trading commodity, with very discernible trends. Gold is a very valuable metal, having unique properties in medical and electronic applications. It also functions as fine jewelry. It exhibits a well-defined frequency, and has very good liquidity, which is paramount for successful trading activities. The gold market’s liquidity is far superior to the copper market. It is possible that gold provides more trading opportunities now because it is not a currency equivalent. We must remember that the objective is to make profits. Let the rest make political statements. As we look at these markets, we can observe clearly defined patterns of accumulation, distribution, and the movements in between these zones. Learn how to identify these opportunities and let the market do the work. When one looks at these markets every day, reality seems to shift. There appear to be many opportunities for profit making. However, Tom Baldwin, the legendary bond trader, has publicly stated that he uses monthly charts. Tom Baldwin is a floor trader and is using monthly charts. Hello, people! The most successful individual bond trader in the world does not trade against the trend. Ed Seykota, who has the best track record in the world for general commodity trading, has publicly stated that day trading is the equivalent of feeding a slot machine. Seykota knows all about slot machines as he lives in Incline Village, Nevada. Leo Melamed has stated that "How much better and more fun it is to be a lover. A trader who is a lover is a trend player—the trend is his friend. He seeks out the trend of the market and romances it. He loves the market whether it is bull or bear; he follows wherever it leads. If it's in an uptrend, he's bullish or he leaves it alone; if it's in a downtrend, he's bearish or he stays out. He does not try to pick reversals or outsmart the world, he merely wants to follow the market's direction. When a lover increases his position, his original position is profitable and the market shows continued promise. Clearly, lovers also have losing positions, but they never allow it to become a fight with the market. Unlike the fighter, the lover never closes his eyes with righteous indignation, I will be right. Unlike the fighter, the lover seldom blames a loss on the market. He may be wrong, but never the market." Having placed day trading and trading against the trend into the appropriate file on your desktop (recycle bin), we have removed the major illusions of market manipulation. I should mention that there is a world of difference between finding a good market entry point, and the determination of the trend. Trading ranges act differently than trending markets. It was not that long ago when trading ranges were called On The Side. Professionals would move on to markets that were trending. Anything can happen inside of a trading range. Many times in a market's history, a trading range has turned out be a trend reversal. J. L. Livermore never bought or sold a market that was in a trading range. Richard Davoud Donchian, Bernard Mannes Baruch, and W. D. Gann also avoided trading ranges. Trading ranges are just another rock waiting to sink the investor’s ship. Remember, speculators can not buy hull insurance! Finally, we must deal with question of the nature of the market itself. Does man control the markets? The commodities markets are based on real, physical substances; the necessities of life itself. The contracts for the grains, the oilseed, the metals, and the exotics are based on the actual cash market for these commodities. The same is true for the petroleum contracts. Seasonality, the weather, plagues, and cycles are just some of the variables that control the supply of commodities. Nature rules this world. El Nino and La Nina have more impact than foolish legislatures, or cartels who would like to manipulate the outcomes. Your governments may appear to control demand, but nature is always in control of demand and supply. Nature even controls your governments in a very real sense. One good plague or natural disaster can devastate the human population. Perspective is very important when listening to the stories of manipulation, conspiracies, or even the purported power of government. This study excludes the financial markets. The new financial commodities are obviously of a different nature, and they have yet to stand the test of time! The results of this inquiry suggest that market manipulation in the commodities market is more myth than reality. However, information manipulation is rampant. Ed Seykota warns of this problem. Seykota is always terse, and simply calls all such information "funny-mentals". All the information you need is contained in the price and volume histories. I am aware that some will disagree with this conclusion, but it has the advantage of overwhelming evidence on its side. The greatest traders in the world agree with this conclusion. This has been true for many generations. E. H.Harriman, Philip Danforth Armour, August Cargill, J. P. Getty, J. P. Morgan, Gustavus Franklin Swift, and many other masters of markets add to the evidence. There is only the trend, and the Trend, and the TREND!
© 2004 Wayne N. Krautkramer Contrarian Round Table Series The Dow has never been in A true Bear Market Contrarian Round Table II- Central Bankers Contrarian Round Table III- Inflation good or bad? Contrarian Round Table IV- Bear Market Etiquette Contrarian Round table V- The Fed Contrarian Round Table VII- Fun with Fiat Contrarian Round Table VIII- Market Manipulation
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We would like to thank Mary Puplava of www.financialsense.com for helping put all the articles from the various writers together and producing a coherent piece of work. Without Mary the Contrarian round table series would not exist. t.