Tuesday, May 5, 2009

Why All Paper Will Burn (In plain English)

Zero Hedge has been doing a great job exposing the story of the six-month-old Supplemental Liquidity Provider program (SLP) in which Goldman Sachs has taken control of the New York Stock Exchange.

In the comments below the latest article on this subject, Jus7tme asked a good question:
ZeroHedge/TylerDurden, Can you distill the significance of all this a little more? What exactly is it that GS gets to do that the rest of us don't, and how are they using it to screw us? I'm going to re-read the old article now, but I'm having trouble reading all the between-the-lines stuff.

This question made me start to think about answers. The answers are not as obvious as they might seem. So first, let us deconstruct the market process.

Imagine a live auction.

It really doesn't matter what is being sold. What is important is the transparency of the process. First of all, you can clearly view the product being sold. In the video above, the product is the house in the background. Secondly, you can observe the bids and you can see who you are bidding against. You can also see how many people want to buy the product, which gives you a gauge of how far and fast the price might rise. In this primitive market process, basically everything is transparent.

Now, imagine that you can no longer see the product. Instead, if you want to participate in this auction (which is completely voluntary), you must rely on the description of the product that is put out by the auctioneer.

Now, imagine that you can no longer see the other bidders. They are hidden in something like a voting booth. You really have no idea who is bidding or how many people are interested in the product.

Now, imagine that you can no longer see the auctioneer either. In fact, imagine that the auctioneer is part of a company, which puts out the product being sold, and that this same company also hides people in some of the "voting booth" tents.

At this point, let us take our imaginary auction to the computer screen, since pretty much all of our real-world senses are gone. So now, imagine something along the lines of a quick Ebay auction. Only we know that the person running the auction is the person selling the product, and we trust his description of the product (at least we must if we have voluntarily agreed to participate), but we also know that he is bidding against us among the other bidders.

Now lets throw in a twist. Let's say that the price in this bidding process now has the ability to fall as well as rise. In the above video, once the bids started coming, the price could only move in one direction, up. Once it stopped moving up, the auction was over. But in our new iteration let's assume a new method for the price to fall. Let's say that this auctioneer created a second product, which is essentially the antithesis of the first. And as people bid on this second product, its price goes up but the price of the first product goes down.

Now lets say that there is a large, but finite quantity of these two products. So we are no longer bidding on one house, but we are bidding to buy one of many identical houses. But since they are so big, let's just say we are bidding on one sheet of paper that says we own something. That will keep it simple.

Now it is getting quite complex, so let's get rid of the paper. After all, paper just kills trees. So now we will be bidding on what used to be this paper saying we are the owner of something, but instead of killing trees, this auctioneer is just going to put a little digital computer mark by our "auction number" on the screen. If we win the auction, we get the mark.

But you know, this has really morphed from the video above. In the video, if we won the auction, we had a nice house to go play in. Now we just have a mark. So let's imagine that the whole motivation of the game has changed. Now, as soon as we win our auction, we can resubmit our little mark to be sold to someone else. And if they pay more than us, then we make some money. But don't forget, we are also playing this game against the guy who is creating and selling the product, because some of those other "auction numbers" on the screen represent him buying his own product... from himself! And why would he do that? Well, he would do that to make the price go in one direction or another.

Oh, and he also has that opposite product. Let's call it a "short ETF". This "short ETF" is essentially a way to put downward pressure on the bidding process which was an impossible task in the house auction above.

Now here is where it starts getting a little crazy. You know I said that these "products" are in a "limited quantity". Well, let's now imagine that the auctioneer, or any one of the other secret players, can sell either one of these products even if they didn't buy it first. In other words, "supply" can be added to the market process with the click of a mouse. And this "supply" can be either the main product, created by the auctioneer, or it can be the inverse product, also created by the auctioneer.

Well, up until now, we were relying on supply and demand fundamentals combined with price movements we watched and analyzed in order to squeeze a little bit of profit out of this game. But it is getting very difficult to do now.

So now let's say that we just say "sorry, we no longer want to play this game." Remember, it is a voluntary process.

But wait. Not so fast. Imagine now that your retirement pension fund has been "playing" this game. And not only that, but someone else is managing it. So you take a close look and you realize that your pension fund has fallen in value about 40%. What the heck? "This auction process is so rigged", you say to yourself. But then on a closer look, you realize that at least it has been going up a little over the past two months. What do you do?

Now, imagine that you find out that the game has actually been changed for the last few months. Now, the auctioneer himself is buying and selling more of his own product than everyone else combined. This gives him total control of the price. So you think, "well, he must want my pension fund to go up in value". But how can this be? He is obviously in this game to make a profit for himself. And as you know, this is a zero-sum game. So something must be going on.

Perhaps this crazy auctioneer stole so much money from all the players that he now has to give some back or else his game will come to an end. Or, perhaps he has some special deal going with those players that are managing your pension fund. At this point, it is really hard to tell what is going on, but it can't be very good for your pension money in the long run. You know this auctioneer is not Santa Claus. Or is he?

What if... this auctioneer can not only create more of these products, but he can ALSO create more MONEY? What if he is pumping some of this new money into your pension fund to keep you from withdrawing your wealth?

Boy, this gets complicated. What do you do? I suppose you could just sit back and take the free money. But how big is this game? You have no idea. And if he is creating money just like he creates product, doesn't that very "money" become as suspect as the product? Eventually it must. And if he is NOT creating this money, then something else sinister must be going on. Either way, I think you have a problem.

At this point you start to wonder, "what has become of our market system? And what is becoming of "money" itself?" At this point you start to long for the markets of old. Where real goods were exchanged for real money, and an entrepreneurial spirit like yourself could make a real profit with a little hard work and a little knowledge.

I think what has happened is that our market system and our monetary system have grown so complex over the last hundred years that only the very operators of the system can now profit from the system. And on the rare occasion when it appears that someone OTHER than the operators are profiting, what is actually happening is only "appeasement" in order to keep the system going. The very operators are giving a little bit back, knowing full well that whenever they decide the other participants have been calmed, they can reverse operations and start taking again.

When the Fed prints money and gives it to the US government, the government spends it and real, physical capital, real physical things and human effort are diverted from "we the people" to "they the government". This happens in the here and now. It is happening right now!

And when the Fed prints money and gives it to our "auctioneer", real market-driving power is diverted from "we the people" to "they the operators of the system". Perhaps some of that is given back to us to keep us sedate. But is that enough? I think not.

Here is the problem. More and more people and nations are aware of what is going on. It is not always talked about openly, because that is not the best way to prepare yourself to abandon "this system". The best way to profit from the GLOBAL ABANDONMENT OF THIS SYSTEM is to prepare in secret. To get your affairs in order while "they" think they have sedated the masses.

This system can only continue for as long as a simple majority of people believe in it. And here is a list of the "groups" that are preparing for ABANDONMENT. China, Russia, South America, Middle East, Southeast Asia, perhaps 30% of Europe, and perhaps 1% of the rest. So let's check the numbers.

Total World Population 6,707,000,000
Africa 973,000,000
Asia 4,054,000,000
Europe 732,000,000
Latin America 577,000,000
Northern America 337,000,000
Oceania 34,000,000

To be fair, let's put in the US$ camp, Northern America, Europe, Oceania and half of Africa. That works out to 1,589,500,000 people.

The rest of the planet, Asia, Latin America and half of Africa works out to 5,117,500,000 people.

So by my calculations, that is roughly 25% of the world in the dollar camp. And 75% of the world preparing to ABANDON the dollar.

I am sure you are aware that the 25% in the dollar camp holds most of the world's "dollar denominated paper wealth". However, that other 75% actually holds more REAL wealth in the form of commodities, minerals, land, oil and gold, both in and out of the ground, which is suppressed in (relative) value by the dollar system.

So if the ABANDONMENT of this system happens, what do you think will happen to the balance of wealth in the world? What will be the outcome? And how can you prepare for this? I think the answer is clear.

Avoid the rigged auction and all the fraudulent paper. Soon it is going to burn in a massive fire. Very soon.


Anonymous said...

SLP : merry-go-round !

FOFOA : Your conclusion is simply to the point.
The global $-opposition is growing and will break the weakening $-cartel. The paper fire will start when the main $-loyalists abandon the merry-go-round.
Simply because the $-system is suffocating under its own debt dynamics.

This SLP liquidity-prothese is only buying some more time. The goldaction of today was the umpthied example.


Anonymous said...

" Burning heat in the kitchen "

Insiders Selling At A Furious Pace
Joe Weisenthal|May. 5, 2009, 11:19 AM|20
PrintTags: Investing, Stock Market
Last week there was a report that corporate insiders were selling at a faster rate that at any time since October, 2007 -- right near the top of the market.

Well, the market's only raged higher since then and insider selling is only getting more intsense.

>>> What if,...global stockmarkets and debt papers deflate (crash) another few Trillions !?
What if,...the flight in the dollar goes with $-devaluation !?

Where are the "insiders" hiding their tangible wealth ?

There is no genuine free market anymore and therefore there cannot exist a genuine "bottom" in this market. There's only free-fall left...and dead cat bounces amidst flying pigs with lipstick.

Dave said...

Brilliant analysis! I think you really hit the nail on the head. There is no free market in anything anymore. Every “market” is totally rigged and controlled by the insiders, who are the only ones who can actually make a profit. As you noted, they occasionally throw a few bones to the marks to keep them in the game.

Dave - Erstwhile Urban Wanderer

maximus said...

Thank you for the great explanation, I think it will help many people and have featured it on my blog tonight....


Best to all


J said...

"So if the ABANDONMENT of this system happens, what do you think will happen to the balance of wealth in the world? What will be the outcome? And how can you prepare for this? I think the answer is clear."

This is why I'm moving to SE Asia in about 8 weeks. I dont want to be stuck on a sinking ship I'd rather be in a position to ride the wave

Good read man

FOFOA said...

"You take the blue pill, the story ends, you wake up in your bed and believe whatever you want to believe.

You take the red pill, you stay in Wonderland, and I show you how deep the rabbit hole goes."

Morpheus in The Matrix

Link 1 - Jesse's Café Américain

Link 2 - Steven Yates, Ph.D.

"...I think virtually the whole economy is malinvestment. During its 94 years of existence, the Fed has injected so many dollars that hardly anything is where it should be, doing what it ought to, at the correct prices..."
- www.chaostan.com Sept. 2008

"...the malinvestment caused by the fiat dollar is so pervasive that I doubt any business or individual in the US is where they should be, doing what they ought to, at the correct wage or price. We don't know what will happen, but the many national examples of fiat-caused malinvestment give us some clues. Looking at 2,500 years of economic history, I cannot see how this calamity won't lead to riots..."
- www.chaostan.com April 1, 2009

FOFOA said...

"Am I trying to scare you? Probably. I care about you and want you to take whatever precautions are necessary to stay safe and enjoy peace of mind.

"In 2,500 years of economic history, whenever a society has entered the kind of turmoil that seems headed our way, some people have been destroyed, while others have come out on the other side hearty, content and wealthy.

"Please, do what's necessary to be in that second group. There's a better world coming, after this chaos, and I want you to be there to enjoy it with me."

- Richard Maybury May 2009

FOFOA said...

The Absurdity of Gold?

"Over almost three decades, policymakers became ever more confident they had found, in inflation targeting, the holy grail of fiat (or man-made) money...

Finally, economists in the “Austrian” tradition argue that the mistake was to set interest rates below the “natural rate”. This, argued Friedrich Hayek, also happened in the 1920s. The result is misallocation of resources. It also generates explosive growth of unsound credit...

Whichever critique one accepts, it seems clear, in retrospect, that monetary policy was too loose. As a result, we now face two challenges: clearing up the mess and designing a new approach to monetary policy.

On the former, we have three alternatives: liquidation; inflation; or growth...

This unforeseen crisis is surely a disaster for monetary policy. Most of us – I was one – thought we had at last found the holy grail. Now we know it was a mirage. This may be the last chance for fiat money. If it is not made to work better than it has done, who knows what our children might decide? Perhaps, in despair, they will even embrace what I still consider to be the absurdity of gold."

- FT.com Martin Wolf 5/5/09

Gold = absurdity
Paper = holy grail
To whom? I suppose to he who prints. And to he who operates the system.

Makes you wonder who the Martin Wolf is writing for.

Inflation Targeting on Wikipedia

Anonymous said...


The CB gold-action of the past 15 years is in fact the (evolving) new gold-trade that is the start of gold-rehabilitation as the global value standard.

The reason why this gold-trade remains at absurd low price-levels is that the $-regime doesn't want gold's importance to overshadow the dollar's importance.

For the time being, we MUST realize that a huge gold-change has taken place : CB Gold reserves started moving (trading) at the euro's birth ...after laying idle for 2 decades in the sterility of deep vaults !

>>> The former absurdity of gold is already evolving towards holy grail ! In order to have freegold (free floating goldprices),...CB-goldmetal must be "traded"...as to price freely (properly) the stored wealth reserve.

It is the $-paper-gold pricing that is making gold absurd (marginalizing gold).

The dollar is definitely losing global importance at gold's advantage. The biggest $-reserve holder/accumulator (China) recently told us so :)))

Anonymous said...

The "gradual" decline of the dollar's importance :


Anonymous said...

James Turk :

“…the US government intervenes in the gold market to make the dollar look worthy of being the world’s reserve currency when of course it is not equal to the demands of that esteemed role. The US government does this by trying to keep the gold price low, but this aim is an impossible task… So recognizing the futility of capping the gold price, they instead compromise by letting the gold price rise somewhat, say, 15% per annum. In fact, against the dollar, gold is actually up 16.3% p.a. on average for the last eight years. In battlefield terms, the US government is conducting a managed retreat for fiat currency in an attempt to control gold’s advance.” James Turk

Anonymous said...

Philip Klapwijk :

Philip Klapwijk, chairman of GFMS, the precious metal consultancy, believes it is “extremely unlikely” that central banks will return to the market on a large scale. He predicts that in coming years central banks may shift between small net sales and net purchases.

****- A new era in the gold market has begun -****.

Shanti said...


Thx for the green shoots !

Seems times are ripening, to meet a new GMS.


Nice read on the self protection


Anonymous said...

Excellent. Written to be understood.

FOFA it sounds like Economic Sublimation.

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