March 19, 2014

Is the game rigged?

Of course the game is rigged.

If you didn't learn that with derivatives and sub-prime... and the subsequent bailouts... you should've learned it with LIBOR or the rigging of FOREX or the laundering of money by HSBC or the admission by Andrew Huszar, the man charged with implementing QE, that it does nothing to fix a structurally unsound U.S. economy, but instead is a tool to enrich the already uber-wealthy.

If none of that did it for you, Wall Street's biggest pitchman, Jim Cramer, was out last month with a sobering thought:

You're looking at 10%–15% losses, consistently, every time the flow of stimulus is halted.The most telling sign the game is rigged is how the market responds whenever there's talk of tapering the rigging, of ending the 'quantitative easing' that has been pumping phantom dollars into the system for the last five years.

It happened in June 2013, when the DOW shed almost 700 points on mere whispers of "winding down" the flow of money.

It shed another 1,200 points in February 2014 as the Fed underwent a changing of the guard and "taper talk" continued.

The picture that paints isn't a pleasant one.

It's an image of a gradually inflating stock market, powered entirely by an unstoppable stream of fresh, crisp $100 bills, each one slightly less valuable than the one that came before it.

In any normal environment, this would be the sort of thing that adds value to precious metals.

But that can't happen when gold is rigged, which many have speculated is the case for some time. Now gold-rigging is not speculation but fact.

A paper out in February by New York University's Stern School of Business Professor and Managing Director at Moody's Investors Service Rosa Abrantes-Metz found that:

“The structure of the benchmark is certainly conducive to collusion and manipulation, and the empirical data are consistent with price artificiality. It is likely that co-operation between participants may be occurring.”

At the center of it are banks that have already been caught rigging other markets, like Deutsche Bank, HSBC, and Societe Generale.

Mortgages were rigged. Interest rates are rigged. FOREX is rigged. Stock trading is rigged. Gold is rigged.

Got it?

Recent Evidence: Results of Rigging

I've shared with you over the months some of the results of this rigging already by way of broad economic statistics and opinion polls.

But there are a few other things I need to shed light on so you can fully appreciate how there's no way this can come to a fruitful end.

You see, this abandonment of the principles that once made the American system great is affecting people of all ages.

The Federal Reserve Bank of New York admits that almost half of recent grads are “underemployed,” working at a low-wage job that doesn't require a degree. Yet they still have to pay off an average student loan debt of $20,000 apiece.

About eight million people are working part-time because they can't find full-time work.

Older generations are no better off, with nearly 27% of those aged 65-74 still in the workforce — an increase of 30% in a decade. The Bureau of Labor Statistics estimates that will rise another 18% by 2022, at which point a third of American seniors will be in the workforce trying to make ends meet.

And what do you get for working more and more in this New America? Less and less, of course. The portion of U.S. gross domestic product (GDP) being paid to workers is 42.6%. That's an all-time low, while corporate profits are at an all-time high.

The number of workers in the retail sector now outnumbers those in the manufacturing sector for the first time. They're flipping burgers instead of framing houses.

While only 21% of the jobs lost during the recession were low-wage jobs... over half the jobs created since then have been low-wage. Conversely, 60% of the jobs lost were middle-income jobs... but only 22% of new post-recession jobs are middle-income.

The top three U.S. employers in 1960 were General Motors, Ford, and AT&T.

Today it's Wal-Mart, Yum! Brands (Taco Bell/KFC), and McDonalds.

And these new trends are expected to continue for the next decade, with the Bureau of Labor Statistics forecasting the creation of 8.8 million jobs that require a high school diploma or less and only 3.1 million new jobs requiring college education.

As more people asking if you'd like fries with that have a college degree... where are the former fry-askers going to go?

What is the end result of all this recent financial rigging and market manipulation?

As Nobel Prize winning economist Joseph E. Stiglitz recently penned in the New York Times:

“... trust is becoming yet another casualty of our country’s staggering inequality: As the gap between Americans widens, the bonds that hold society together weaken. So, too, as more and more people lose faith in a system that seems inexorably stacked against them, and the 1 percent ascend to ever more distant heights, this vital element of our institutions and our way of life is eroding.”

It's the erosion of trust that's the ultimate result of everything that's ensued since 2008. And that's going to have serious implications.

What Happens When the Trust Goes?

A couple things...

One is the response of the people, as evidenced ever since that man set himself on fire in Tunisia, setting off the Arab Spring. You can see the same thing in Egypt, Turkey, and most recently in Venezuela and Ukraine.

People are rising up as their trust in their leaders and political systems disappears.

It's not hard to see similar sentiments surfacing in the U.S. Last month, USA Today even ran an op-ed by Glenn Harlan Reynolds, a University of Tennessee law professor, entitled “Americans Rising Up Against Government,” which concluded:

Though people have taken to the streets from Egypt, to Ukraine, to Venezuela to Thailand, many have wondered whether Americans would ever resist the increasing encroachments on their freedom. I think they've begun.

So that's the first thing. Citizens get fed up and start to fight back.

The second thing, which I think has more immediate consequences, is that our debt holders lose trust in our ability to pay them back.

This is happening now, and it threatens the very foundation of the U.S. dollar, which gets its value from trust and nothing else.

For example, at the beginning of December 2013, China held $1.317 trillion in U.S. Treasuries. By the end of the month, it only held $1.269 trillion, meaning it dumped some $48 billion in U.S. paper in one month. That's the second-largest amount ever.

If China's dumping the U.S. dollar... what is it buying?

The answer, of course, is gold. A lot of it.

In fact, last year, China was crowned the world's largest gold market for the first time... taking advantage of depressed prices to stock up.

Chinese consumers bought 1,066 tonnes of gold in 2013 — the most gold demanded by one country's consumers ever.

China was also the world's top miner, producing 437 tonnes last year. It also imported 1,108 tonnes, a 33% rise in one year. 

And they’re not even close to finished.

How much gold are they going to buy?

Here's an example...

The U.S. holds 76% of its foreign reserves as gold.

For the Chinese, who hold $3.4 trillion in foreign reserves, they'd need some 58,000 tonnes, or about one-third of the total gold ever mined in the history of the world, to match that 76% ratio...

They can either watch the value of their dollars erode along with the trust that backs it, or they can go on a massive gold-buying spree.

And so far, they're opting for the latter.

The Wall Street Journal reported this month that China is now the biggest driver of gold prices, noting:

China alone can take up the equivalent of half of the global gold mine output, while a possible recovery in Indian demand could also act as a boost for the yellow metal as long as the Indian authorities reduce import tariffs on gold.

The future of the U.S. is so bleak that our largest holder of debt is cutting its losses and trading in that debt for gold as fast as it can.

Got it?

 

Call it like you see it,

Nick Hodge

http://www.outsiderclub.com/game-is-rigged-gold-is-rigged/861

 

Nick is the Founder and President of the Outsider Club, and the Investment Director of the thousands-strong stock advisory, Early Advantage. Co-author of two best-selling investment books, including Energy Investing for Dummies, his insights have been shared on news programs and in magazines and newspapers around the world. For more on Nick, take a look at his editor's page.

http://www.outsiderclub.com/game-is-rigged-gold-is-rigged/861