The Casino of Oz - How Markets Really Work

Today I am taking a little detour from my furniture musings to talk about financial markets.

Please bear in mind that I am no expert on this topic, despite having a university degree in political science and economics. But I am writing this to point out what seems to me the obvious; namely, that all is not as it seems in the financial world.

Following the financial meltdown of 2008 I have been following the markets with intense scrutiny on a daily basis.

In the midst of the debacle that followed the collapse of Lehman Brothers in September 2008 came the implosion of the Icelandic banking system - due mostly to the unwinding of the carry trade and the appreciation of the Japanese Yen. This made me realize how intertwined the global monetary system truly is.

Around the same time the short squeeze on Volkswagen shares by Porsche (who, in turn, may well have triggered the crisis in the first place by loaning their VW shares to the very hedge funds that created those positions) caused the paper value of VW to skyrocket into the stratosphere literally within hours, as hedge funds scrambled to cover their exposed positions. For a brief time VW became the most valuable corporation on the planet, and on one trading day during this madness the closing of markets in Germany and Europe caused a midday tsunami of electronic capital to leap the Atlantic and come crashing into North American equity markets. In my mind the lesson from watching that spastic market gyration is that in this day and age of globalization money is now moving with the fluidity of water.

In fact, it would probably be more accurate to say that today with the advent of electronic banking money is now a hologram of virtual reality than can move at the speed of light.

By late 2008 it was becoming near impossible to following the wild gyrations of markets, as valuations whipsawed back and forth - often on a daily basis. On October 27th 2008, for example, the Hang Seng in China nosedived 12.7%, only to shoot skyward by 14.35% the following day. Two days later it rocketed higher again - this time by another 12.82%. It seemed like pure chaos.

In an effort to keep on top of it all I began to journal this activity on a daily basis. Starting with the Nikkei in Tokyo I recorded movements of stock markets such as the Hang Seng (China), Straits (Singapore), DAX (Germany), CAC (Paris), FTSE (London), DOW and NASDAQ (New York) and TSX (Toronto). In addition I also began keeping notes on the spot price of Oil, Gold and Silver, as well as the exchange value of the $Cdn. vs. $US, plus the broader $US Index that measures the $US against a basket of global currencies.

For me this turned into a fascinating exercise, because I am now literally tracking the activities of global markets on an ongoing basis - rolling across the globe. By 9:00 p.m. (my time) the Sun is rising in Asia and the first tickers of activity begin in those markets. By the time the Sun rises on North America the Asian markets are set to close, while European markets are ramping up to full bore. North American markets then open by mid-morning, and by the time I sit down for lunch the European markets are winding down for the day. By 4:00 p.m. North American markets are closed, and for the next 4 to 5 hours there's a lull as the Sun tracks across the Pacific. By 9:00 the cycle repeats itself as the Sun rises on Asia yet again.

From this vantage point I have developed some interesting perspectives on money, and how markets really work.

For example, following the exposure of Bernie Madoff's Ponzi scheme in 2008 it has become de rigueur for many to call the stock market nothing more than a Ponzi scheme. I don't feel that's entirely accurate. Although in my opinion pension plans and the Social Security system can be most accurately described as Ponzis in the true definition of that word, I think it is more apt to look at stock markets and equities markets as giant games of 3-Card-Monte.


3-Card-Monte is one of the oldest street cons in the world, and it takes 3 people to make the scheme work. First there's the "dealer", who uses sleight of hand to always hide the money card. Then there's the "shill", who is the guy working in secret with the dealer to hustle the third person - known as the "mark" - out of his money.

In the world of high finance this con has been cleaned up to look more respectable, but the game is virtually the same. The dealer is now called a "full service global investment banking and securities" firm. For the sake of simplicity let's call the dealer: Goldman Sachs. And I envision the wheeler/dealers at firms such as Goldman Sachs as being effectively a bunch of gamers who are electronically gambling with other peoples' 401Ks.


The shills in this world of global finance would be one of the talking heads on television, such as Jim Cramer over at CNBC.
The "mark", of course, would be any suckers such as you and me who would be willing to gamble our savings at the Wall Street casino.

It would be too lengthy to explain how the scam works in today's world, although Matt Taibbi at Rolling Stone magazine has done an excellent job in articles such as "The Great American Bubble Machine". In it he describes Goldman Sachs as a "great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money."

For myself I can honestly say that despite all the hours I have put into trying to figure this stuff out, I really don't understand charts such as this one.

Although there are financial experts who can look at the lines, bars and squiggles shown here and speak eloquently about things like Moving Averages, Elliott Waves, Bollinger Bands, and Stochastic Oscillators, the very best that most of them can do is explain exactly what happened to markets YESTERDAY. I'd be more impressed if they could analyze these same charts and tell me exactly what's going to happen TOMORROW. That's how the real money gets made.

Of course, that won't be happening any time soon - at least not for you or me.

But despite of how little understanding I have about the way financial markets really work, I do believe I have learned a couple of things along the way. And the key thing I have learned is that not is all as it seems. To put it bluntly, I am convinced the whole thing is rigged. It is so rigged, in fact, that it even goes way beyond the stuff Matt Taibbi has been writing about. In my mind there's a massive game of 3-Card-Monte going on within an even bigger game of 3-Card-Monte involving global currencies - and this is obviously going to take some further explanation.

In my efforts to journal the ups and downs of global markets in the past two years I have noticed "irregularities" that cannot be logically explained. In some cases trillions of dollars have appeared out of no where, or simply vanished into the aether - without explanation. The very fact this is happening makes me seriously question the integrity of currency pool that we collectively consider to be "money".

When the market meltdown happened in 2008 the U.S. Government put together an $850 billion bailout for the financial sector. There were many criticisms of this, including the notion that this money printing would end up being inflationary. Of course, this could only be inflationary if the money actually leeched into the system. Instead it appears that the banks have simply parked the cash on their books and not loaned it out.

But what's extremely disturbing about this whole dynamic is how "money" can be created and destroyed out of thin air, just by tapping some keys on a computer at the Federal Reserve and injecting or removing these numbers from the system. Anyone else trying to pull this off would be convicted of counterfeiting and fraud.

But what's worse is that this holographic currency seems to appear, and disappear, from global markets as if by magic. And I've only noticed it at certain times when it becomes a little too obvious.

For example, I mentioned earlier how money seems to move around the world like water seeking the path of least resistance. A downdraft in one area will usually cause an upsurge somewhere else. Typically you'll see this on a day when the stock market goes down. Capital will rush out of stocks to park itself in the perceived safety of cash - typically the $US. Therefore on days when there's a radical drop in the value of the stock market you will usually see a corresponding rise in the value of currencies such as the $US.

During the Icelandic meltdown the rise in the Japanese Yen was offset by the implosion of the krona (the Icelandic currency). During the Greek debt crisis the drop in the Euro was offset by the rise in the $US. During the stock crash of late 2008 the $US soared as investors fled out of stocks and into the haven of cash. Of course during that same stock crash the Yen also soared, for similar reasons, which in turn also created the crisis in Iceland.

But the point is this: all in all there are always corresponding movements in the rise and fall of equities and currencies in the world, or at least there's supposed to be in a closed loop system. Just like a zero sum game: a rise in one area should be matched by a corresponding decline elsewhere. Wealth isn't supposed to appear or disappear out of thin air.

There is ample evidence that things aren't working out the way they should, and here are some recent examples from 2010.

On January 20th China's announcement that it was going to restrict bank credit caused a shock to ripple through global markets. Investors freaked, and everything dropped like a stone: Oil -$1.40; $Cdn. -$1.51; Gold -$27.40; Silver -$0.92; Nikkei -0.25%; Hang Seng -1.81%; Straits -0.68%; FSTE - 1.67%; DAX -2.09%; CAC - 2.01%; DOW -1.14%; NASDAQ -1.26%; and the TSX -0.71% as investors anticipated the onset of a significant economic slowdown. The only thing that "rose in value" was the $US as measured on the $US Index (which measures the $US - which is used as the world's reserve currency - against a basket of other currencies). The conclusion one would make from trading on this day is that the flight of capital from all equities and commodities resulted in a corresponding rise in the value of the $US. On the surface this seems totally logical.

On February 4th the markets got spooked yet again over concerns about sovereign debt in Greece, Portugal and Spain. On this day even bigger drops took place as the following happened: Oil - $3.84; $Cdn. - $0.91; Gold - $49.00; Silver - $0.97; Nikkei - 0.46%; Hang Seng - 1.84%; Straits -0.72%; FTSE - 2.17%; DAX - 2.45%; CAC - 0.03%; DOW - 2.61%; NASDAQ - 2.99%; TSX - 2.30%. Once again investors fled to the perceived safety of the $US.

Oddly enough, despite an even bigger market drop in the value of markets on February 4th, the corresponding rise in the value of the $US Index was only 0.58 compared to 0.75 on January 20th. That seemed rather strange, but I figured maybe investors were starting to flee to a something other than the $US this time around. What that "something other" could be was and still is a mystery to me.

Then on March 17th Ben Bernanke announced that the Federal Reserve was going to keep interest rates low in an effort to stimulate economic recovery. This triggered a market frenzy, with all sectors rising: Oil + $1.23; $Cdn. +$0.36; Gold +$1.70; Silver +$0.17; Nikkei +1.17%; Hang Seng +1.72%; Straits +0.79%; FTSE +0.43%; DAX +0.89%; CAC +0.48%; DOW +0.45%; NASDAQ +0.47%; TSX +0.08%. Oddly enough, instead of capital rushing out of the $US and into other investments the $US actually rose by .05 on the $US Index.

If this extra investment money wasn't coming out of the $US, where was it coming from?
For all anyone knows, it appeared out of thin air.

Then comes Easter weekend, which coincided with the beginning of the second fiscal quarter. Thursday April 1st was the first trading day of the new quarter, and was also the day before the Easter long weekend when European, North American and most Asian markets were closed.
On Thursday April 1st all markets rose as follows: Oil +$1.11; $Cdn +$0.73; Gold +$11.60; Silver +$0.36; Nikkei +1.39%; Hang Seng +1.40%; Straits +1.92%; FTSE +1.15%; DAX +1.33%; CAC +1.52%; DOW +0.65%; NASDAQ +0.20%; TSX +0.94%.

On Friday April 2nd most global markets were closed, with the exception of the Nikkei which recorded a small gain on light volume.

On Monday April 5th trading resumed with another round of continuing gains: Oil +$1.75; $Cdn +$0.55; Gold +$7.70; Silver +$0.23; Nikkei +0.47%; Straits +0.86%; FTSE +1.15%; DAX + 1.33%; CAC +1.52%; DOW +0.43%; NASDAQ +1.12%; TSX +0.29%.

It was pure euphoria, but most amazing of all was despite all this wealth rushing into markets around the world, somehow it wasn't coming out of $US - at least not as measured by the $US Index - because over those trading days the index actually rose by another .18 in value.

But oddly enough even that is easy enough to explain. The $US Index does not measure the value of the $US in absolute terms. Instead, it measures it in terms relative to other currencies. So, when the $US rises on the Index it doesn't mean it's rising in real value, so much as declining at a lesser rate when compared to the other currencies it gets measured against. Think of it as a bunch of skydivers jumping out of the plane at the same time. Just because one skydiver is higher in the air doesn't mean he's rising. Instead, he's just falling a little more slowly than the others at that point in time.

Taken together these simultaneous market moves on days of extreme activity makes it look to me as if there's someone (or some group) behind the scenes who are using those frenzied trading days as an opportunity to take down all global currencies down together in lockstep, like some kind of controlled demolition.

As crazy as that sounds the facts and figures are what they are, and they don't add up.

Of course one could counter my contention by saying that if currencies were truly falling in value then we would see inflation and, instead, what we're seeing is deflation (albeit in terms of asset deflation). Yes, that's true, but what I'm talking about is not inflation or deflation, but hyperinflation - which is a totally different animal. Hyperinflation is a loss of confidence in currency, and rather than try explain it I suggest you read the following article from a fellow named Zero Hedge.

It is my belief that the game of 3-Card-Monte being played out by the likes of Goldman Sachs is mere penny ante to what's really taking place being the scenes. In the bigger game the gyration of global equities markets are little more than a sideshow to hide what's going on with currencies. And like a true con it is taking place right before our very eyes, with most people not even seeing that they're getting duped.

If you think I'm totally off base with what I have written here, then you should consider what happened in New York on Thursday May 6th. At around 1:00 in the afternoon the DOW suddenly plunged by over 1000 points in a few minutes of time. Over $1 trillion of equity simply vanished into thin air - POOF - just like that. Minutes later the market began to "correct", and the DOW spiked back - ending up down about 346 points overall on the day.

Some analysts trying to figure this out claimed that a "fat finger" of someone inputting data accidentally typed in some wrong figures, thereby causing incorrect totals to appear on the board.

I happen to think there's a more reasonable explanation - namely that the man behind the curtain sneezed and in so doing he accidentally turned the dial a little too far to the left. Realizing his mistake, he dialed it back about 650 points and kept it stable there for the remainder of the day.

Take your pick on which wildass theory to believe - the "fat finger" or "the sneeze".

Either way there is one irrefutable fact, and that is that it IS possible for someone to make a trillion dollars disappear at the blink of an eye - either by tapping the wrong keys on a keyboard, or turning the dial a little too far in the wrong direction.
With a little luck and a good financial planner perhaps it is possible to gamble your way to success at the Wall Street casino. But I'm keeping a close eye on the chips, because allegedly the House always wins.