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  • Jim Costa

Jim’s Daily Rant. What Clif High May Have Been Implying About The Stock Market and Mutual Funds.

This past week Clif made time predictions for September. He spoke about major companies being forced into bankruptcy. During the process, stockholders may not be able to sell those stocks. Clif implies this will spook the stock market in general when investors smell fraud throughout the market. Investors have good reason to fear fraud in the system.

Let’s go back in time to 2009 when Bernie Madoff was arrested for fraud and embezzlement in his Mutual Fund Company. Before he was arrested people were throwing their money at him because he was providing higher returns than all other mutual funds. Another fund manager looked for the method of his investments so he too could raise his firm’s return rates.

He searched the buying history of Madoff’s company on Wall Street. He was shocked that the company was not buying any stocks at all. The manager tried to tell SEC what Madoff was doing but they turned deaf ears to his calls. Madoff was running a true Ponzie scheme after a while. At first he was buying stocks and putting them in the name of his company. Then after hitting financial hard times, he stopped buying stocks at all. He was just sending a monthly statement to the fund investors saying they have such and such stocks for the customer. But in the end that was a lie.

Thirty years ago when you purchased stocks you were mailed a stock certificate for safekeeping. Then the brokers said it was a hassle to do it in the mail so they took the hassle out of it. Thus the setup for some or all fraud. Think of this as derivatives of derivatives or derivatives squared.

Now back to today’s world. If you sold your stocks from your mutual fund you get a check from the mutual fund. If they had stock for you in their holdings they would just sell your stocks to another customer, just that simple. But now suppose Coca Cola files bankruptcy and 90% of that mutual funds investors hold Coca Cola. If it is impossible to sell Coke, the Mutual fund has to pay off out of funds they may not have. Then they would have to file bankruptcy as well. Note that their customers cannot sell any of their stocks because of the funds bankruptcy because technically the customers never truly owned any. They just lent money to the now bankrupt fund.

It was all or partly a scam. Clif said when two or three large corporations suddenly file bankruptcy the stock market Ponzi scheme will be apparent. I guess that is why for ten years Clif was predicting that the market will continue to set higher and higher records but no one will care anymore. There will never be buyers for stocks because you won’t know if they are legitimate stocks for sale traceable by transferable receipts.

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