Saturday, January 29, 2011

The Pump and Dump

Where money is concerned, men are widely irrational. They fear to lose it, and they fear to gain it, they fear to have less than the man next to them, and they fear to have more -- lest they become a victim of theft or fraud. Ironically, it is these irrational fears and hungers that make markets so very easy to manipulate and which account for most of the losses people suffer in business. Blinded by fear or irrational greed, people make mistakes and get duped. Whether it is the con man who claims to have an inside scoop or the Nigerian prince on the Internet, scammers count on your desire for the unearned and your fear of loss. They know how to manipulate you.

Manipulation is practically the only game on Wall Street these days. As the 60s generation comes to uncontested power and the last vestiges of the 50s wane, a rash of irresponsibility and fraud has enveloped our financial world. As the generation of Father Knows Best rides off into the sunset, the generation of Woodstock smashes and grabs for immediate gratification without consideration of the future.

Easy money is the name of the game, and this mentality extends to the very top of our economic and political power structure.

I believe we are witnessing the biggest heist in human history. When we read stories of Quantitative Easing, inflationary and deflationary fears, bank bailouts, deficits, fiscal reform, World Bank, IMF, G20, Keyesianism, commodities pricing, etc we throw up our hands in confusion and bewilderment-- too intimidated by the arcane complexities of credit default swaps and derivative markets to form certain opinions or make decisions about the future. What the hell is going on? We can sense it's phony and someone somewhere is pulling the strings, but we have no legend for the map, no key to make sense of it, no Rosetta stone to translate the business page into plain english.

Unless we know where to look.

As I've written earlier in this blog, I have been trying to understand the financial collapse and the subsequent actions of the government. I fear a dollar collapse in the future. But I too have had trouble understanding exactly what our officials are up to until recently-- now I have a theory as to what's going on.

There are very few ways, really, to manipulate a market. You can buy low and then drive a financial instrument up in price, or take a short position on something and drive it down. That's really it. All profits are made on the differences in value you can predict or generate. In the small-cap penny stocks, manipulators have been at it for decades-- spreading rumors to drive a stock up, and then unloading it to the investors that buy on the rumor. The smart money is in the know, gets out early, and pockets profits. The dumb money comes in last, and is left holding the bag.

Understanding this dynamic, the dynamic of penny stock manipulation, is the Rosetta stone to understanding the magnificent heist going on at the national level.

Our Fed policy is indistinguishable from a pump and dump scheme.


Let's first look at how a pump works.

IMAGINARY COMPANY: EXCELSIOR OIL (EXCO)


#1) THE COMPANY
Let's say you want to rip people off with a pump and dump scheme. You first need a company. Not to say that you need actual production-- all you really need is a name, an address, and proper paperwork (preferably spread across several jurisdictions just in case-- Las Vegas and Delaware are popular.) For the purposes of this discussion, let's say you create the imaginary company of Excelsior Oil. You might give your company some assets, maybe legitimately purchase a few oil leases. Maybe you get the rights to some experimental drilling equipment. Or maybe it's all a fiction and the company headquarters is your Mom's basement. Doesn't matter, as long as people believe in it.

#2) THE STOCK
SEC regulations are very lax. You can get your "company" publicly traded with no trouble. You may have reporting requirements etc, but these can be evaded or you can meet the basic requirements with bookkeeping tricks etc. No one really bothers to check financials anymore. Let's say you get 100million common shares issued publicly-- to be traded as EXCO on the largely unregulated Pink Sheet market. BUT-- at the same time you also issue your officers another stock EXCR which are "restricted" shares convertible at their discretion. You have to report these, but very few people in the general public will know what's up and what to look for-- even if they pull copies of your SEC filings. These EXCR shares are key.

#3) THE IPO
So you offer your shares on the market, and let's say you sell them at .01 apiece. If you sell all 100 million shares of EXCO, you've immediately made a capitalization of $1 million dollars for your troubles (usually it's far less, but I'm using round numbers). What happens then? Well, ordinarily you would be expected to start showing profits, production, earnings etc but remember you're not really going to drill those wells -- you're a stock manipulator not a real company. Remember EXCR? You convert those shares and create another 100million common stock EXCO, releasing those secretly to your insiders. Maybe the public holders see a sudden dip, maybe not.

#4) THE PUMP
Now it's time to make money. You take your 1 million and go to a shady market maker-- they certainly exist-- and arrange for him to pump the stock. Such firms are expert price manipulators. They can drive the stock price up by colluding with others-- trading the stock back and forth to drive it higher, releasing newsletters full of exclamation points and breathless adjectives to their subscribers ("Hot new penny stock" "Fast Cash" "Don't miss out!"), releasing bogus trumped-up "news" about your eminent directors and imminent partnerships or some any-second-now breakthrough in crude production-- maybe a combo of all of these.

The shares go shooting up.

#5) THE DUMP
As new investors buy the stock, your insiders are unloading their secret shares. Maybe they sell at thirty cents, maybe forty, maybe a dollar a share-- it all depends on how good your pumper is and how much you could pay him. Your initial investors make a profit too so they don't complain unless they hold the shares too long. Because eventually your insiders have made their money. And they tell the market maker there is no need to support the price any longer. The shares crash, the people who held too long or bought at the top are wiped out. There's no one buying, volume dries up, and they are stuck with worthless shares in a worthless company which they can't pass on to anyone else.

They're called the bagholders.



Now what would those 5 steps look like at a national level?



IMAGINARY NATION: THE UNITED STATES OF AMERICA



#1) THE COMPANY
You can think of the United States as the company. It has limited production, runs entirely in the red, and has been running as a bankrupt for decades. People believe it to be strong and sound, though, which is crucial. It is unimportant for the purposes of the pump whether we're talking an economic powerhouse or a two-man operation in a basement. As long as people believe it to be a real economic entity, the stage is set.

#2) THE STOCK
What is the stock on a national level? In the US, our stock is the dollar. The Federal Reserve is printing the common stock of the United States in enormous quantities. They can do this on their own authority-- there is no SEC for them. Where is all this money going?

#3) THE IPO
Like the EXCR registered shares in the Pump above, the Fed is giving millions of shares-- largely in secret and without public accounting-- to insiders, friends, and co-conspirators. All of these dollars, though, are not allowed into the system. You can think of them sitting in Scrooge McDuck-style money bins at Goldman or JP Morgan. The banks are not loaning because to do so would increase the velocity of the money. In the pump scheme, the secret converted shares could not be immediately sold without crashing the "real" common stock market. Similarly, allowing all the secret dollars into the system would cause huge inflation and devalue everyone's holdings. So the insiders either sit on them or, more likely, they put them where they know they will be valuable-- in gold or silver.

#4) THE PUMP
But some of the new dollars do find their way into the equities markets, and the Fed's constant buying of treasuries does support the bond markets and allow for endless stimulus spending. So the economy starts to be pumped up by all this bogus money indirectly. As the market rises, you hear new voices chiming in from media outlets (Bloomberg, etc, controlled by insiders) saying the economy is getting better. Or you have a push to declare "recovery summer" on the political front. But the US is not gaining productivity. If people spent 10% more on milk than last year, you can't consider that a real increase of value if what's driven it is a 10% increase in the price thanks to inflation. The numbers will go up as prices go up, just as stocks will rise as more fake money flows into the system. It is in the insiders' and the politicians' interest to trick you into thinking you have a robust economy. It's like a trainer pumping adrenaline in the heart of a racehorse. They're not doing it for the sake of the horse, but because they have very large and precarious bets on the race.

#5) THE DUMP
Okay, there's several things to keep in mind. What is happening in the rest of the world? Because the dollar is the global reserve currency, central banks worldwide hold large positions. Think of them as fund managers holding shares of EXCO. They start realizing that they are holding shares in a pump and dump. It is in their interest to unload them. As the dollar inflates, we start to see inflationary price increases around the globe-- Egypt is rioting because of food costs. Tunisia falls. China is experiencing inflation. Everybody is. Eventually they have to dump the dollar for their own survival. And a global dump of the dollar is the crash at the end of this particular pump and dump scheme. We know that it's coming eventually. The housing bubble made it a mathematical certainty. No austerity measures can reverse this 14 trillion in debt. America will lose its credit rating and its global reserve status. Count on it.

And they are counting on you to be the bagholder.


2008: HATCHING THE SCHEME?
I believe that in 2008 when firms began falling the powers that be saw that there was no avoiding a dollar collapse. Instead, they began a pump and dump scheme to enrich the banks and the insiders. They pumped trillions more into the already inflated money supply and gave it to their friends. These banks never released the cash into circulation to create jobs. Instead, they began buying commodities. Now, with exuberance coming back to the stock market, the large banks will start to unwind their stock positions as best as they can as small-fry investors, speculators, grandmas and whiz kids start gaining confidence in stocks again. When the dollar collapse comes, it will cream the financial markets. The average American will be the bagholder. Classic pump and dump.

The insiders will have used printed dollars to buy commodities and inflation-protected assets. The politicians will have a crisis upon which they can capitalize and push more global governance and controls upon us. America will lose its standard of living, while the lot of other nations will be largely improved-- a redistributive result that is much desired in many circles. A new global reserve currency will come into effect-- either the Yuan, the Euro, or a new reserve fashioned from the IMF's SDR basket will be the new standard. Perhaps this will be called the Bancor after John Maynard Keynes' 1944 design.

As the dollar collapses globally, we will see massive hyperinflation. Banks that are unconnected to the administration will fail. The FDIC will be on the hook for deposits, requiring more money printing to cover the obligations. Failed banks will be seized by the FDIC, recapitalized by the treasury, and cronies of the administration from Goldman or Chase will be placed in charge (already happening). Food shortages will be commonplace. The responsible American with savings will be wiped out. The irresponsible will see the real value of their debts dwindle. We will be unable to maintain our empire, and the dollar will revert to a mere national currency-- no longer a global powerhouse.

People will rush to safe havens. Gold will soar, and the insiders will be further enriched.


This is, I fear, what we're dealing with. That's why they aren't making serious cuts-- they are stepping on the accelerator. A dollar collapse is coming, and they are counting on you to be the bagholder.

I hope this post helps you protect yourself, or at least gives you food for thought about the nature of the social system under which we are living.



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3 comments:

  1. Rich, you are absolutely correct. I've heard five years or less as a real end for the dollar. I've been banging my head against the wall trying to explain this Ponzi scheme to my family. I have gold, silver and food stored,...hard assets. Everything else is fluff. The dollar meant something when it was backed by gold. Instead we get a promissary note on the good faith and credit of an Out of Control Spendthrift Uncle Sam.

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  2. I don't mind this but the use of the term "fake money," can get confusing and have your point missed entirely.

    I wonder what the new global reserve currency might be. There is that pesky whitepaper on the Amero which cashes in all the events a US dollar collapse would cause if you can find it (it isn't that hard to find). Basically half the whitepaper talks about the hardships caused by floating exchange rates in North America.

    There is the other bag-holder as well, which cannot be demphasized. China don't just hold US reserves. Chinese businessmen have US dollar business and generally they will suffer with the average American. This could mean a hell of a lot for global tensions. It could also be why a US dollar collapse never happens - though at the moment it seems Washington isn't afraid of anything (even when its bigger than us).

    Less value in the US dollar means less incentive to produce in China. Peter Schiff thinks China will just go produce for itself. I don't think Chinese are allowed to do that. When a country like China has idle production - their Government will quickly sweep it up and blow us decadent capitalists right off the map, especially since they've already cried foul and the robbery keeps going.

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