Let's start with a story from Fernand Braudel's masterful 3-volume history of modern capitalism, credit and trade,
The Structures of Everyday Life (Volume 1)
The Wheels of Commerce (Volume 2)
The Perspective of the World (Volume 3)

Here's market manipulation, circa 1690. Trading ships took as long as three years to sail to the Indies for a load of spices, Chinese silk, etc. and make it back to Holland. These were highly capital-intensive voyages; ships and crew cost more than most could afford, so stocks or shares in the voyage were sold to accumulate the necessary capital.

If the ship sank--not an uncommon occurance--then the investors lost everything (unless it was insured--also an innovation of modern capitalism). But if the ship came in, yowza, the profits were stupendous.

if a ship was late, nervous investors began to sell at deep discounts, reckoning getting something for shares which might soon be worthless was better than losing their entire investment.

Enter the manipulators. On occasion, a trading ship would be sighted off France, on its way to Antwerp or other home port. If the trader could get that information before anyone else, he could snap up all the heavily discounted shares, knowing the ship was just days away from docking. He could then make a killing--via "insider trading."

The other basic mechanism is well described by master investor Jesse Livermore in the classic Reminiscences of a Stock Operator.

The basic idea is simple: if you have deep enough pockets, you can sell a stock short and bring it down below support levels, where many traders have place stop loss orders. Boom, the stock gets sold off hard as all those stops kick in. Wait a few days, then sell the bejabbers out of the stock again, dropping into below the next support.

More stops get blown, and now traders are wary--it's a "downtrend," one you have engineered, knowing how other traders operate.

If you can drop a stock below it's 50-day moving average, or the 38.2% fibonacci extension, so much the better--there are a lot more stops set around those levels, too.

This is easier than taking candy from a baby. And then when you've destroyed the stock and selling gets climactic, then you have sufficient liquidity to start buying/covering your shorts without moving the market much. At the bottom, you switch over and start accumulating, working the game on the long side in the same fashion. Drive the stock back above its 20-day moving average, and technical traders will start buying.

For an example, let's look at a small gold mining stock, Golden Star (GSS). Never mind what gold reserves the company has; let's just look at the chart:

This stock only trades 3.5 million shares a day on average, or about $4 million. If you're a hedge fund, given the leverage available to you, that is chump change.

Notice that GSS was about $3.75/share when gold was around $550/oz., and well over $4/share when gold was $700/oz. Now the stock is $1.25/share when gold is $800/oz. Huh?

No problem--just sell it short when it approaches key levels of support, and other traders will dump it. Rinse and repeat. It's perfectly legal to sell short and cover, and then go long; you could kill a little $300 million company like this with a mere $10 million sold short at critical junctures. (Note: I do not have a position in GSS at this time but am considering going long.)

That's the market, and it has always been open to manipulation by large traders. We small players join the game at a huge disadvantage. Jesse L. knew it, and described the game; we should take heed.

We should also be careful not to believe the accepted causal wisdom about gold and the dollar being 100% correlated. Lately, gold seems to move in lockstep with the dollar; if the dollar rises, gold tanks, and vice versa. This correlation is often stated as a causal factor, i.e. the reason gold dropped is the dollar rose.

Not so fast. I asked frequent contributor Harun I. for help in preparing a chart which displays the positive and negative correlation of the dollar and gold:

As you can see, most of the time gold and the dollar are negatively correlated, as per the standard causal line: when gold rises, the dollar is declining, and vice versa.

But it isn't entirely causal, because there have been periods in which a positive correlation occured, i.e. gold and the dollar rose or fell together. This suggests the relationship between the two is at times more complex than a teeter-totter, i.e. when one up then the other must be down.

What could trigger such a positive correlation? Just as pure speculation, how about a pervasive fear in the global financial system? The dollar might benefit from investors shifting cash to the U.S. from shakier economies and governments, as gold too benefits from a "flight to safety."

But let's also not forget the larger context, which is that the dollar and the credit bubble in the U.S. are both toast. As $1 trillion of credit default derivatives are getting called on Fannie and Freddie debt, let's recall the oozing swamp that is the derivatives market, as so ably described in the classic Fiasco: The Inside Story of a Wall Street Trader.

As for the mortgage market now being all repaired and happy, let's recall what author Richard Bitner described in Greed, Fraud & Ignorance: A Subprime Insider's Look at the Mortgage Collapse.

In short: the mortgage bubble is not coming back, regardless of what the new management of Freddie and Fannie say or do.

Lastly, let's recall that no economy, even the Imperial economy of the U.S., can sustain trade deficits on the order of 5-7% of GDP--and here we are, running trade deficits years after year at 5-6% of GDP. There is a cure to this imbalance, and it's called massive dollar devaluation, as described in this must-read book, The Dollar Crisis: Causes, Consequences, Cures.

Put these books together, and you get a simple but profound context:

1. Yes, manipulation exists; it is the warp and weave of the market and always has been. "Free markets" are a fantasy beloved by theoreticians who don't live by trading.

2. The mortgage mess was/is a hyper-credit bubble which cannot be re-inflated, which means Fannie and Freddie's "rescue" is meaningless in terms of "saving" U.S. housing from further declines.

3. No country can sustain massive trade imbalances forever, and the dollar's demise via catastrophic declines is already baked in as a result of years of structural trade imbalances. Cheerleading pundits are hysterically gleeful about rising U.S. exports, but if you look at the data, the current account deficit has barely budged: down from $750 billion to $700 billion, whoopie. That's still 5% of GDP, folks--unsustainable.

Modest reductions don't alter this fact. The only way for the imbalance to be rectified is via a decline of the dollar's value against our trading partner's currencies that is deep enough to cause imports to absolutely crater and make anything made or grown in the U.S. an absolute bargain.


Reader Comments:

Anne S.

A few words about one of the career choices the young man is contemplating. Points to consider, no advice is implied. I live in Europe and know nothing about the Coast Guard itself.

All military /police institutions or organizations are based on, and function through, a rigid hierarchical structure, as no one has yet figured out how to make such large bodies 'function as one', putting all the manpower smoothly in service of some super-ordinate goal, in any other way. They are the ultimate mechanistic bodies, each part has to do its part in a prescribed manner. Thus, they are entirely dependent on upper command, or central command. They are often very rigid and don't adapt well or quickly to systemic change or unforeseen circumstances. Individual initiative and personal creativity can't exceed certain set bounds, frames. Freedom is lost. Some sociologists have called them 'total' - as in totalitarian - institutions... What one makes of this - Charles correctly pointed out that certain personalities can't adapt to it - depends on many factors. What I am hinting at is that it is not always the best place to be. In some circumstances, certainly. Others, as they say, not so much.

Second, these institutions are 100% masculine, even if here and there some women are present. Now, I am not addressing the opportunity for hot dates, but stressing the fact that they have a very particular culture, far different from civilian life with its multiple contacts and muddles, and the need to ..well.. be integrated and useful in a very much looser network, meeting babies, the elderly, etc. Inevitably, they mold a person - even one who is very personal, thoughtful, and free in their heads. It is a rarefied - as in detached and particular - atmosphere (partly because the funds just keep on coming), despite the masculine nitty gritty, which runs from bawdy jokes to overt, permitted violence. In college 'human resources' terms, this is not an environment in which one develops people skills, though one may learn to efficiently fulfill a 'command' function within it.

In your blog today you said “Engineers work in cities; there are virtually no jobs in rural areas for engineers”. I would like to humbly point out one field where engineers almost always work in rural and even remote areas: mining engineering. Very few mines are located in cities and most production-oriented mining engineers are employed at mine sites and get to do hands-on work, rather than at the home offices of mining companies (which are in cities). As the easy-to-exploit resources have dwindled and global consumption increases (or even if it stays the same), the demand for mining engineers (and exploration and mine geologists) increases. Mining engineers and geologists usually have the opportunity to do a lot of international travel as well. Presently there is a severe shortage of young professionals in these fields for a variety of reasons.

had some time I didn't expect to have today since my anticipated appearance on Fox's Mike and Juliet Show to talk about the link between Accutane and depression was cancelled so I thought I'd write about my day so far. I guess someone told Fox that they are getting alot of advertising dollars from the pharmaceutical industry and what I had to say might not make some people happy. At first they asked if I would like to go on the show and "debate" someone. When I didn't seem too excited about that they said they would "get back to me" and then later left me a voice message saying that I wouldn't be going on the show but that I would be "credited" for my work. So I checked out the clip on the internet

mandjshow.com

and lo and behold Fox set up the story by starting out with a family's complaints about Accutane causing their son to commit suicide, followed by an attractive blonde dermatologist named Cheryl Karcher MD who sat there in her white coat and said "I'm SOOOO sorry for the Zimmers but there is no evidence that Accutane causes depression or suicide."

bio_Karcher

Well I thought to myself "who the hell is this person?" I mean she didn't even offer any REASONS for her opinion, and we are just expected to sit back there and say "OK!" Was she a researcher? What was the basis for her opinion? I asked myself. So I looked up her bio on the internet and found that she was a "nationally recognized expert" whose qualifications included acting as a consultant to the Miss Universe Contest! (yippee!). The bio went on to state that 'Articles detailing the results of Dr. Karcher's research have been published in numerous peer-reviewed scientific journals including The New England Journal of Medicine, The Journal of Investigative Dermatology, and The Journal of the American Academy of Dermatology.' Well I looked her up on www.pubmed.com and I couldn't find ANY articles that she had written.

I mean, viewers are supposed to look at the victim family and look at the doctor and say "OK, poor family but the doctor says there's nothing there, so I'll believe the doctor."

I have presented the evidence previously in this blog that Accutane is associated with depression and suicide. So if people want they can go read it themselves. I have never met anyone who wasn't on the payroll for Roche who has read the evidence who doesn't agree, and I have never met any dermatologist who could look me in the eye and tell me that she never had a patient become depressed or feel like they were in a haze while on Accutane.

So there you have it, folks. Out-FOXed again. That is how the media presents things to you. Nothing is ever "proven" and there are always two viewpoints that balance each other out.

So the next time you turn on your tube to feed yourself why don't you send FOX an email asking "Can you put some sugar on that crap you're feeding me?

I guess we got it, sort of, with Dr. Karcher.

MORN" G Charles : Altho ' this is very " GRIM " News , I feel & think that we have NOT YET seen Bottom ?? This ~ $6 TRL" N LOSS , yet to be written OFF , still has ~ another 10 to 20 % more to go , & maybe until ~ 2012 + to bottom ( a very slow, painful process !! ) . WE have gone from a NASDAQ ;, to Housing/ Credit ,; to Commodities / Oil & $USD$ ;, to ??? NExt BUBBLE ?? What is the next Bubble ?? Feels just like a .... " Nuclear (economic) Winter " !! This will be historically the " WORST , since 1930 s !!

financialsense.com

Some recent headlines:

"Only 25 per cent of Detroit's students graduate from high school."

"123 people were murdered in Chicago this summer, only 65 U.S. troops were killed in Iraq over the same period."

The Feds take over the largest lenders or guarantors of debt in the world and this is viewed as a very positive thing.

I must have gotten some bad acid along the way and took a trip and never returned. If I mentally stand back and look at this stuff I have to admit it is really funny. Humans are really a bunch of clowns.

It seems that the sun spot cycle is at an extremely low point that has coincided with some very cold periods in the past. The " Little Ice Age " and the very cold period in the 1800's. The Avian Flu seems to be doing well. These at least give me a small amount of hope.

The purpose of life is to live it, if it can be enjoyed all the better.

I mostly agree with you that the upcoming US election is essentially a tweedledum/tweedledee non-choice, but I think the Democrats would try to, at least, slow the handcart's speed as it races toward Hell.

Clive Crook of the Financial Post had an interesting take on the attitude of the Dems in general which will possibly result in their getting beaten again in an election that should be a gimme given the Republicans record over the last seven years. The link is:

Clive Crook

He says in part:

Democrats speak up for the less prosperous; they have well-intentioned policies to help them; they are disturbed by inequality, and want to do something about it. Their concern is real and admirable. The trouble is, they lack respect for the objects of their solicitude. Their sympathy comes mixed with disdain, and even contempt.

Fortunately for the rest of the world, I think the US days of unilateralism are over. Your lenders have too much firepower on the monetary front and can prevent another Iraq by controlling your purse strings.

It's as if China, Russia et al have come to a reasonable decision. "Look! America still THINKS it can act unilaterally and they still have the potential to be a dangerous adversary, but we have them in a corral now. They still like to buy our junk, so we'll continue to lend them money to do that, and given their massive national ego, we'll let them swagger and bluster and pretend that they are still number one. But, if they look like getting out of line (see Georgia!), we'll gently remind them that they are penned in now and will remain so."

High Class article to that young man.

P.S. You didn't need a mentor. Well, I guess you are right, but look how good you are now! Can't get much better.

The reasons someone becomes a soldier are varied. At an individual level I would suspect they are little different from those given by warriors from across the planet from now to ages past. One can read “The Seven Military Classics of Ancient China” and see that the art of warfare, harnessing the motivations of men, and empire management has changed very little over the past two millennia.

During my deployment to Iraq. . . .

My new "little book of big ideas," Weblogs & New Media: Marketing in Crisis is now available on amazon.com for $10.99.

"Charles Hugh Smith's Weblogs & New Media: Marketing in Crisis is one of the most important business analyses I have ever read. It is the first to squarely face converging global crises from a business perspective: peak oil, climate change, resource depletion, and the junction of key social cycles will radically alter the business landscape in coming decades...."

"This guy is THE leading visionary on reality. He routinely discusses things which no one else has talked about, yet, turn out to be quite relevant months later."
--An anonymous comment about CHS posted on another blog.

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