Volume 12, Number 2, September-October 2008
Understanding Unnatural Divergence in Financial Markets by Michael R. Zaeske —
Events occurring in the stock markets here and elsewhere on September 13th and 16th seem to indicate we are at or nearing some terminal point in this game most people refer to as the ‘free market system’ (and I use the word ‘game’ herein as it is used in the very complex series of studies referred to as ‘Game Theory Analysis.’) Consider that if, in reality, it were truly a free market, there would be no regulation, no oversight, no anything. So it certainly needs to be called instead, maybe, a ‘minimally regulated market system,’ or a ‘derived market system,’ or even (and this is the one right now that I think fits best) a ‘disastrously under-regulated market system.’ But, as it is, we are stuck with what we have at the moment, for the moment. And in truth, it is becoming increasingly apparent to many now that, perhaps, there are some serious problems inherent to the system we have “at the moment.”
Referring back to ‘Game Theory’ once more, what most people did not, or still do not recognize is that, in essence, the free market system such as we have is a zero sum game. There are only winners and losers. Perhaps a word or two describing what game theory is all about would be appropriate. Game theory is a branch of applied mathematics that is used in the social sciences (most notably, in the study of a political economy) and, also, biology, engineering, political science, and even computer science and philosophy. “Game theory attempts to mathematically capture behavior in strategic situations, in which an individual’s success in making choices depends on the choices of others.” (from a Wikipedia article titled “Game Theory”) In a zero sum game, if one investor does well, it must be at the expense of another investor who loses money. The stock market very cleverly disguises itself as being something other than a zero sum game, since in a rising market, there appear to be many “winners.” However, in a falling market, the opposite effect occurs and it seems as though everybody is losing money. The technical reasons for this are easily understood only when one undertakes to learn how markets actually work and the individual is not swayed by emotion or driven by greed.
In a true economy, however, there should always be excess (over what is consumed) created by labor that should be made available for the use of and benefit of those who have both produced and for those who put their valuable things at risk in the form of capital to accomplish these increases in goods and services. But what we have now is financial investments, vehicles, derivatives and endless other electronic and paper stuff that far exceeds the dollar value of real available assets.
So for years and years, our visible economy has been almost pure speculation. Oh, the rules have changed a little from 1929. But the situation now is virtually identical to that in 1928 just prior to the crash. Consider the following: Until just very recently, the top one per cent of individual income earners in this country accounted for making 8% of the total income earned. Presently, the top one per cent now account for just under 20% of the total income earned! The last time this happened was 1928, right before the crash. Am I saying that another crash is imminent. In a word, yes, but this next crash has the potential to make the ‘29 crash look like it was a Sunday picnic!
Returning once again to the facts of the situation at present, you need to understand that somewhere along the way somebody or some group of somebodies got the bright idea of introducing the concept of ‘leverage’ into this free market system in order to “increase wealth.” And, leverage, coupled with the concept of compound interest using a fractional reserve banking system (which is in and of itself a leveraged system, also) set the stage for exactly where we are at now. You see, leverage is a two way street and many investors are suddenly coming to realize this is so. And even more will realize this in the near to immediate future, I predict.
On the very day I decided to write this brief article, these were among the leads in articles by AP, and on the front pages of USA Today (bold emphasis mine):
‘Asian stock markets plummeted Tuesday as the collapse of Lehman Brothers and takeover of Merrill Lynch spurred fears of an imminent global financial crisis.’ by-line - Tomoko A. Hosaka, Associated Press Writer - 9/16/2008.
Only because of ‘. . . emergency moves by the
‘... some investors are coming to the conclusion
that the entire system is at risk.’ by line - Matt Krantz
and Adam Shell,
Well, I don’t know for sure if this is the ‘Big One,’ the ultimate crash. In fact, I would suspect not only because the insane leadership (and potential leadership offered up thus far by the two leading presidential candidates) directing the affairs of this country is prepared to start dumping one hundred dollar bills out of helicopters to keep the system afloat, if necessary. (This suggestion of helicopters dropping money out of the sky is not mine; it had its origins several years back and is attributable to Mr. Ben Bernanke, currently the Chairman of the Board of Governors of the Federal Reserve Bank.) And, if this were to be accomplished, whether in the ridiculous form just stated, or by simply “printing more and more money,” it will mean hyperinflation much like what happened in Weimer Germany in 1923, but this time, it will happen world-wide. That is how I think the ‘Big One’ will ultimately manifest itself.
But, what is this ‘Unnatural Divergence in Financial Markets’ all about. Well, about thirty-five years ago, I realized (but was never taught), after completing my first graduate level course in economics, that this system of economics that we have, which I have just recently learned is called a ‘political system of economy,’ can not be sustained on an indefinite basis. To put it quite simply, I realized some thirty years back that a system of debt money, such as we have, would ultimately reach a point where the interest on the debt could barely be paid by a working class such as myself, and therein, ultimately, it would be realized that this was, indeed, the case, and that the nation and its populace were hopelessly bankrupt (and the leadership corrupt, as well!), and, finally, the system would collapse. I called this future event ‘The Great Equalizer’ because I recognized that it would topple not only the poor and middle classes, who would lose everything, but also, the upper class, and perhaps even affect the super-rich. It would ‘equalize’ everybody, so to speak, financially and economically. Thus my term, “The Great Equalizer.”
I believe we are either at, or very near, that point
today, even as I write this article on
As a side note, which does not seem to interest many, I did learn about ten years ago, that there is another gentleman of note, a very distinguished economist, who thought much like I did. Indeed, he was way ahead of me in figuring this whole thing out. His name is Lyndon LaRouche and he has written extensively on the subject. And for those interested in what he has to say and his solution to the problem, I suggest you look him up on the internet and study fast. The problem is - it may now be too late. No, not too late to implement his solutions, but, rather, too late, for ordinary Americans accustomed to learning about economics and politics from sixty second “sound bite” commercials, to fully grasp what Lyndon LaRouche is all about. Most Americans simply do not think they have sufficient time to consider what this most learned individual has had to offer, and act appropriately, before the whole shebang goes ka-boom. As LaRouche has often stated, most Americans are acting these days as if they were clinically insane.
But back to ‘Unnatural Divergence in Financial Markets.’ And this is me, Mike Zaeske, talking here, not LaRouche. Some thirty-five years ago, when I first started figuring this stuff out, I began asking myself just what might be an indicator that the Big One, ‘The Great Equalizer’ might be at hand? And one night, I woke up and I knew. Yes, if prices for things in markets that were normally expected to essentially mirror each other suddenly were to start moving in opposite directions, I reasoned, this would be very unnatural if it continued for a period of time, and would probably be indicative that a major disruption was imminent. I figured it would be just like with an earthquake. Quite frequently, seismic activity is picked up by seismographs well in advance of a quake. Similarly, I reasoned, unnatural divergences in markets would be an indicator of a major break in what was occurring in the markets. You see, I had learned very early on, from one of my high school chemistry teachers, this old adage: ‘As goes sulphur, so goes the market.’ In other words, the price of the raw material, the chemical sulphur, worldwide, always moved in tandem with most all other chemicals. And, this, in turn, moves with most all chemical manufacturing, and, that, in turn, with most other industrial undertakings, etc., etc.
Now, wouldn’t you expect the price of the basic raw material, crude oil, to move in tandem with the price of the finished products? Of course. Usually. Under ordinary circumstances.
But, these are not ordinary circumstances. And, guess
what? Ask yourself, at the end of 2007, what was the price of crude oil?
Answer: $95.98 a barrel. And yesterday, what was the price of crude? Answer:
$95.71 a barrel (source: graph in USA Today p. 2-B,
[As we are going to press on
Is this not an unnatural divergence in financial markets? I would think so.
Similarly, the price of gold, recently, has fallen significantly. Most investors, sensing the insecurity of the markets in general, would be expecting the price to rise. In normal times, this probably would be the case. Do you want to do an interesting experiment? Look for the price of gold (quoted daily in most major newspapers) and then go out and try and buy some at that price or even close thereto. You will discover, it almost impossible. Why? Because the market for gold, the pretty yellowish metal most are so familiar with, is largely no longer open to people like me and you. Am I suggesting one can not, then, purchase the metal, gold? Not at all. What I am stating is that most gold merchants who deal in sales in the hundreds of low thousands of dollars charge 10% to 30% more than the published price. There are a few who will try to sell in small quantities with as little as a 4% markup, but these days, most of them have very little gold for sale at all.
The fact that the price of the basic commodity gold is
dropping in this tumultuous market place is but another example of an
unnatural divergence in the financial markets. When one would expect the
price of a commodity to be rising, and, instead, it is dropping
significantly, that is unnatural. Why do I believe this is all happening?
Answer: So that very, very wealthy individuals and their families can cash in
twice. First, they know that what might happen in the
Consider this: In Russia, several years back, it was made possible that each and every citizen was able to obtain at least one newly struck gold coin. This was done under the Putin regime in order to give the Russian populace a “head start” should something like my “Great Equalizer” occur.
But there is more.
Now remember, earlier in this article, I suggested an experiment wherein one should attempt to purchase some gold. That was only half of the experiment. If you really want to understand how this all works, then one must also try and sell a small quantity of gold and see what the price for that sort of potential transaction turns out to be. Once this is tried, if it is tried, one should quickly realize that the sale and purchase of gold has developed into a one way street! You will have to sell your gold for less than the published prices. In other words, if you have cash, buy a few ounces of gold, then sell it for cash the same day, you may well have 20% less cash than you started out with. But you will have figured out another aspect of how unnatural divergence in markets occurs in the times immediately preceding great and tumultuous crashes (and I am not referring here to something like the “Great Crash of ‘29” - rather, I am referring to something like the end of the Lombard Banking System in the middle of the 1400’s when the entire planet was plunged into a Dark Age and millions and millions of people perished as a result.)
Once again, it appears appropriate to expand a little what
I was just discussing concerning how gold prices are established. There are
at least two recognized ways in which the price of gold is determined. One of
these ways is called “the London Morning Fix.” Every business day in
Now recognize, all I have dealt with here is the price of gold bullion and gold bars (which only governments and very, very wealthy individuals get involved with) and this gold is .9999 pure in all cases. So in reality, the novice buyer in the gold market trying to purchase just a small amount of gold, will frequently find himself paying anywhere from 10% to 30% above the so-called spot price in order to attain physical delivery of a specified quantity of gold.
The unnatural divergence of gas prices and gold prices discussed in this article are just two of many other financial discrepancies going on now. These are unusual times.
Does all that I have written mean the end is really close? I don’t know. Do I, personally, think our collective financial demise is imminent?
Yes, I do. &
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