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. & Download Full Issue in PDF: September-October 2008
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