Jeff Berwick: Who really owns your stocks.

For years now I have warned that every paper asset is loaded with corruption, starting with paper money and spreading like cancer from there.  Paper promises are just too easy to game.  Mankind cannot help but do it.  It’s built into our collective DNA.  First the bad people do it.  The better, more principled ones hold back.  But the rapid gains from corruption soon crowd honest players out of the market and, seeing this, normally honest people decide to join the ranks of the corrupt instead of being wiped out.  As the old saying goes, don’t tempt an honest man.

Paper assets are difficult or impossible to monitor which makes the owners of them easy targets.  When you present yourself for such easy fleecing, you will be fleeced.  The housing market showed many instances of this.  It was the most marginal of the big 3 asset classes whose ordering is real estate, stocks and then bonds (both corporate and government).  We are still unwinding all of the corruption in the housing market – everything from liar’s loans and NINJA (No Income No Job or Assets) loans all the way to “robo signing”.  There are still many questions about who really owns what.  We are probably on the backside of that curve but I think it is likely that not all of the corruption has been exposed there yet.  The details will be battled in the courts for years to come.

Looking forward, I believe that the stock market is up on deck.  If the housing market was full of corruption, all markets are.  You rarely see corruption well contained in an economy or a society.  It is like cancer.  If you have a little there is a good chance that you have a lot if you only look for it.  As with cancer, you either go looking for the corruption and kill it off or you ignore it and it kills you off eventually.  Jim Sinclair has been warning about the eventual uncovering of massive fraud in the stock markets.  In his most recent post he cites an article from Jeff Berwick. Yes, they talk about gold stocks but the same is true of all stocks.  In short, he is warning that many more people will be Madoffed.  They have been told they own shares in an account but, via some form or mechanism, they will not have access to the shares when the $hit hits the fan.  I see several ways for this to happen:

• You have shares in an account but the controller of the account does not own the shares.  They have been selling them off quietly in order to avoid going bankrupt in the hopes that times will get better and their trading operations will make money again.  They hope to buy the shares back at that time and quietly put them back into your account with nobody being the wiser.  Either that or the controller never did own the shares and has just been running another version of the Madoff Ponzi. Either way, when people try to cash them out en masse they will not get their money back.
• You have shares in the account and the shares actually exist there but they have legal claims upon them which are senior to your ownership because of the scam of Street Registration.  For example, they have been loaned out to shorts who themselves go bankrupt and cannot return the shares or they have been pledged as collateral in some other trade or business dealing that went south and so “your” shares now belong to someone else.  This is clearly possible based on Jim Sinclair’s explanation of registration of ownership.  In this case, the account controller basically stole your shares right from the start and then gambled with them.  When the gambler finally loses too much it will go bankrupt and you will never get your shares.

All of these risks are piled on top of the normal risk associated with owning stocks.  Unfortunately, these risks are not factored into stock prices because very few know about them or consider them possible.  They believe that their investments are protected by government watchdogs, blah blah blah.  They have given over their responsibility of protecting themselves at all times to a paper tiger regulatory organization.  Very, very foolish.  As Berwick states, the collapse of MF Global is just the beginning.  They were the most marginal player.  They were the Greece of those markets.  The larger players will collapse as well just as France and even Germany are beginning to swirl the toilet bowl.

All of this is completely predictable and was absolutely predicted.  In order to make these predictions for yourself, all you have to do is suspend disbelief regarding the fact that the world economy is one massive debt Ponzi.  Once you recognize and internalize this fact you will see that nothing is impossible and in fact a dramatic collapse of some sort is guaranteed.  The only thing that nobody can predict is the timing.

You can sit and worry about these things all day long or you can do something about it.  If you are still trying to figure out what to do, the answer is to stop investing and to instead begin SAVING.  At the end of the day, gold will be the last man standing in terms of money.  Dollar cost averaging into gold will work as a strategy until there is global thermonuclear war.  I'm not saying that will happen, only that this is what it would take in order for people to stop valuing gold as a store of wealth. 

But isn't gold a risky "investment"?  No, it's not an investment at all.  It's money.  James Pierpont Morgan said "Gold is money and everything else is credit".  Oh sure, the dollar price of gold will show volatility but the value of gold really doesn't change over time.  It's the perceived value of the paper asset known as the dollar that actually changes.  Also, the recent pull back in gold was not unforeseeable.  In fact, I called it pretty exactly in this post.  But even believing that this pullback was going to occur to the degree that I would write publicly about it, I did not sell one oz of gold.  It was a buying opportunity, not a sell signal because I am not trying to day trade gold based on dollar fluctuations but rather to accumulate wealth through the age old process of saving a little bit on a regular basis over a long period of time.