Half of the big people say it will crash soon while the other half says it will continue to escalate. Last week Clif High suggested in this month major events will occur in which people will see large bankruptcies that will indicate that the market is worthless. He also indicates that the market will be propped up higher and higher over a long term. How can any of this make any sense? Let me give it a try.
Bernie Madoff ran a Ponzi Scheme for possibly up to 40 years. When he was finally arrested he had stolen around $66 Billion through fraud. See the Netflix Documentary Madoff – The Monster Of Wall Street.
Maddox's Accounting Systems:
He had a “Pristine Accounting office”, per the FBI, on the 19th floor. The last 15 years he had a second overcrowded accounting department on the 17th floor that most employees were not familiar with. That is where the books were cooked “to be able to fool any SEC audit”.
To me it appeared to be using old mainframe computers and dot matrix printers to act as a print shop. I laid in bed early one morning trying to see how Bernie did it. He used old technology to print boxes of green-bar paper to print fraudulent records of buy/sell transactions, invoices from traders, with all of these transactions post-dated from the actual market prices the day before.
Then he have to include real activity as well as made up activity for the Ponzi scheme together. He would then have to print checks proving those transactions. This would require a teller’s check posting machine on the 17 floor to verify the bank cleared those checks for an auditor to see. Of course he would also have to print his own bank statements as well. In the meantime, the 19th floor kept the real books based on information they were fed from the 17 Floor, without suspecting fraud.
But the main reason Madoff got by with it so long is he had two businesses running together. One was a true Hedge Fund and the other was an investment advisory service. The latter did not have to register with the Security Exchange Commission so they never audited him. It’s a wonder how that 17th floor personnel didn't go mad in doing what they were doing for so long!
Exit Bernie Madoff:
Bernie Madoff was convicted and jailed in 2009. When he later died in prison I feel the desire to have to work as hard a Madoff did in falsifying fraudulent records died in most of humanity as well. It was just too much work.
Exit MERS: The Mortgage Electronic Register System was created in 1995 by bankers to hold all original Mortgages and Mortgage Notes in various locations in the U. S. They were recorded on spreadsheets. As mortgages were collected in batches of a thousand and resold on the bond market and then resold again, this made the paperwork easier. The first version of MERS went bankrupt and as such all of the original documents needed up in landfills. There was then no record of how many times your mortgage was sold, or how many persons think they hold your true mortgage. If a person was to be repossessed they could find an attorney with enough guts to have the plaintiff produce the original Mortgage and Mortgage Note, as required by law. I personally know of several persons who have not made mortgage payments in 20 years and cannot be foreclosed on.
MERS turned out to be a hidden scam to defraud others. I believe the system is dead but still clouding mortgages today. It was an electronic system to defraud.
Enter The New Derivatives:
What Madoff did was amazingly impossible to do over a long period of time. Then we entered the world of derivatives.
There is a scene in the movie The Big Short in which derivatives were explained. The scene takes place at a Craps table in Vegas. A hot shooter just won the last seven rolls. He is going for roll #8. There is a crowd around him. One woman bets $1,0000 with a man in the crowd that the shooter wins his bet. Immediately another lady bets another man $5,000 that the first lady wins her bet.
It was explained that the first lady created a “Derivative” in that she was not active in the game or had money on the table, but she was betting on the outcome of the main bet. The second lady then purchased a “Derivative of a Derivative”, or “Derivative squared”. If the shooter only had a $500 bet down, the Derivatives around his action could be in the $100,000 area, who knows because there is no official tally on Derivatives? They are usually officially “off books”.
History of Holding a Stock Certificate:
Until 30 years ago, persons purchasing stocks held the certificates in hand until they were traded.
Then suddenly Mutual Fund companies announced it was too much paperwork and they would hold all stocks in their company name. Now an investor gave money to the fund and got a monthly statement about the horses he bet on, but the customer actually had no stock in his name.
If the Mutual Fund went bankrupt and closed fund investors are more likely unsecured investors. This is similar to bank depositors learning they are in that same situation.
Enter Cede and Company:
In 1996 Cede and Company was a special bank created to transfer stock certificates. See Link
Most stocks are now registered in Cede & Co. which is almost like passing a check with no Payee on it. To me, Cede and Co. is a street name. Now if your Mutual Fund goes bankrupt, you can’t sue Cede and Company because you have no standing with them; they don’t know you.
Bring It on Home Jim:
Desperate people do desperate things. So do desperate banks, hedge funds and Mutual Funds holding all those pensions. Somewhere along the line they themselves will keep the funds rendered and cover themselves with derivatives. So now the Mutual Fund Investor is buying a Derivative on stock market action but have no stock. The Mutual Fund may not have all the stocks expected to be in inventory but have derivatives themselves to cover them if necessary.
Black Swan Event:
I expect two major companies, like Anheuser-Busch, to file bankruptcy. You can’t sell the stock because the Mutual Fund does not have enough cash to pay you out for the stock you don’t own. And even if they did hold the stock it’s worthless or tied up in the bankruptcy. Worse yet, the mutual Fund is forced into bankruptcy because they can't collect on the derivatives they own and there goes all the records and dreams of you holding your dear stock.
The Federal Reserve will continue to prop up the market with Fiat Dollars but more and more people will wake up to all the Ponzi mechanisms in play against them. They will not rejoice when the market hits $100,000 because there will never be any buyers of stocks that no longer exist. I suspect most investors will realize this by mid - October.