To live and die in the age of market fundamentalism

Future generations will view our current system of exponential debt and deliberate market manipulation as farcical in hindsight. Mainstream economics has abandoned any semblance of rational thought, and instead embraced what is best labelled as market fundamentalism. The core tenet of market fundamentalism is that markets are efficient no matter what, even if they are deliberately ramped by forcefed debt-driven inflows. Since markets are unmanipulable, we should deliberately ramp them as high as possible. The promise offered by the gospel of the bubbleheads is alluring; if everyone puts all their money in the stock market index and leaves it there, over thirty years the money will grow thirtyfold. According to the bubbleheads, this thirtyfold increase in wealth will come without effort, with the long time frame eliminating risk too. Individuals, pension schemes and governments all enthusiastically converted to market fundamentalism based on this promise.

But if everyone puts their money in the stock market, expecting to cash out thirtyfold down the track, where exactly will those gargantuan amounts of money come from? The market fundamentalists never say, as there is no rational response to this question, instead referring to "faith" and "belief". At best, the bubbleheads invoke the coming of magic robots, technology that will somehow increase productivity and median incomes at some ill-defined point in the future. To support their absolutely nonsensical assertions, market fundamentalists point to the observed thirtyfold increase in markets over the previous several decades.

However, there was a very simple reason for the previous thirtyfold increase in markets, one that is taboo to mention for market fundamentalists, namely an exponential increase in debt forcefed into markets. In a debt based monetary system, the money created by increased debt will inevitably find its way into financial assets. After all, where else would newly created money end up? New transmission sources for debt-fuelled ramping of markets have emerged - margin lending for individuals, stock buybacks for companies, and quantitative easing for governments. As debt has increased, so has the market cap and power of financial institutions, with banks and big corporations tied ever closer to government, in what is effectively a fascist system. One of the main drivers of forcefed inflows to markets over the last several decades, that is seldom recognized even by the rational, is the creation of a private sector pension system.

Fittingly, one of the first places such a system was implemented was Pinochet's Chile, at the behest of Milton Friedman. By law, a portion of employee pay is forcefed to financial intermediaries, with a large proportion then put into stock markets. This has several effects. It provides an immediate massive boon to financial intermediaries, causing resources to be diverted from actual enterprise into the financial sector. The emergence of powerful financial intermediaries increases income inequality, creating a boy's club that set each other's wages, as assets are controlled by these intermediaries. Furthermore, the stream of forcefed market inflows provides a boon for those already owning financial assets - the first entrants to the pyramid scheme - as the inflows temporarily ramp prices. So everyone's happy! Except when it eventually comes time to cash out the promised thirtyfold reward, at which point the outflows cause the markets to tank. But by that point Friedman is long gone, jetted off after taking a healthy fee. And of course, the inevitable crash is blamed on the market gods by the bubbleheads. The solution? More debt and an even higher proportion of incomes fed to financial intermediaries, of course.

The core assumptions of market fundamentalism are completely ridiculous when clearly stated, which is why bubbleheads so often resort to obfuscation and jargon. Expressed in plain English instead of Latin, their creed is laughable. For example, according to market fundamentalism, the size of a given market has no impact on its expected return. So if you ramp a $1 trillion market to $2 trillion, using mandated pension inflows or other government intervention, this will magically make the companies comprising said market twice as profitable, with twice as high cashflows and dividends. Why on earth would that be the case? Because markets. According to the fundamentalists, the structure of the market has no impact on its efficiency either. So if you have a handful of financial intermediaries setting prices, with these institutions incentivized to keep prices up, prices will still be magically efficient and not manipulated. Because markets. Neither does the composition of the market matter. If the index gets filled with China Waste Corporation and Panorama Synergy fraud schemes and turned into a wretched hive of scum and villainy, this will have absolutely no negative effect on expected returns according to market fundamentalists. Because markets. The most ludicrous tenet of all, however, is that debt levels do not directly ramp markets. So if you double the world's money supply, and markets correspondingly double, this means you are truly twice as wealthy.

Human history is the tale of how 1% control and leach off 99%, and through the millennia, only the titles of the 1% controllers change. The witch doctors, high priests, fund managers and banksters have one thing in common, namely no objective empirically provable skill. As a statement of fact, psychics cannot empirically prove their purported powers. In exactly the same way, scientific studies show that fund managers cannot predict the future and achieve risk-adjusted market beating returns after fees, cannot invest any better than a random chimpanzee. This is not a "belief", it is a simple statement of fact. Yet to this day, the sheeple 99% persist - grotesquely - in yielding to a 1% that is provably lying. Perhaps this is in their nature, to be endlessly shorn and slaughtered through the ages. And what of those unfortunate few that understand the prevailing scam of their time? In Teotihuacan before the fall, in the last days of Rome, or during the current global debt ponzi. Cursed with helpless prescience, spat upon by gods and mortals alike, you are raped and driven insane.

The China Waste Corporation fraud scheme

Investorlink Group is an Australian criminal organization specializing in intermediating international securities fraud and market manipulation, as described previously in this blog post. The company mainly helps with the listing and deliberate ramping of Chinese fraud schemes on the Australian stock exchange. Such fraud schemes need no actual assets or operations before revaluation by the criminal cartel into ASX-entities valued at billions of dollars. Investorlink recently helped launch yet another revaluation fraud on the ASX, by backdoor-listing and ramping China Waste Corporation (CWC.AX).

China Waste Corporation purportedly is an environmentally friendly waste management company, through its interest in Cayman based shell company Harvest Champion and its subsidiary China Urban Mining Holdings Limited. But as the prospectus for the backdoor-listing admitted, none of these companies actually have any operational history whatsoever, merely "planning" and "aiming" to conduct business. According to the prospectus, the only asset held by these companies was purportedly $3m cash, to be acquired by issuing 628m shares of CWC in the listing.

A small investment cartel now controls almost all CWC shares and manipulates its share price. According to disclosure documents, the top twenty shareholders hold more than 97% of shares. Immediately after listing, the "market" cap of CWC was set at $230m by the criminal cartel controlling its share price. According to the ASIC, this was not market manipulation at all, but rather a magical market mystery. According to ASIC, the overnight transmogrification of $3m cash into a $230m asset was just a wonderful occurrence, a miraculous event that needs not be investigated by the regulator. More recently, this blatant fraud scheme has been ramped to a "market" cap exceeding $300m, and ASIC still does nothing about it.

There are several uses for inflated ASX shares. The criminals freely admit one purpose of these ridiculous listings is to gain "credibility". But is "credibility" something that ASIC should be willing to sell? Furthermore, manipulated shares can be used as collateral for borrowing, or used by criminal fund managers to misstate fund performance and fraudulently extract performance fees. Deliberately inflated smallcap shares can also be used to defraud the significant investor visa program, whereby corrupt Chinese officials and other criminals can buy permanent residency in Australia. Recent changes to this program have been designed to provide a boon to organized crime syndicates such as Investorlink.

Migme and the Foxconn revaluation fraud

Most new listings on the Australian market are now revaluation frauds rather than genuine enterprises, and are listed for the sole purpose of creating a manipulable "market" price. Investment cartels commonly hold 90% or more of outstanding shares of such schemes and control their price. After ramping the share price, the inflated asset can be used to pad the books of investment cartel members, used to raise debt, or packaged into financial products and offloaded on granny investors.

There is zero justification in economic theory for the assumption that an asset controlled by an investment cartel will trade at a "market" price. Efficient market theory explicitly assumes many buyers and sellers, none of which individually can move prices. But if 90% of the shares of an asset are held by a small group that is incentivized to keep prices up, then the asset will not trade at a market price, but rather at a systematically inflated cartel price. You may call this The Benway Theorem. Efficient market theory deals with the Platonic ideal of a market, a perfect imaginary market, whereas The Benway Theorem deals with markets as they actually are. An increasing number of stocks are held by small investment groups, this is simply an indisputable statement of fact. Efficient market theory does not take into account the rise of financial intermediaries or their incentives, nor does it even consider the control of information by said intermediaries, instead it just assumes an infinite number of perfectly informed traders.

The most egregious example of revaluation fraud was Fifth Element Resources (FTH.AX), previously described in this blog post. FTH recently announced its "voluntary" delisting from ASX, having taken the scam too far even by Australian standards. With all outstanding shares held by 13 entities, ramping the worthless company to a $155m "market" cap just made this fraud a little too obvious even for complicit moron regulators. But FTH almost made it into the All Ordinaries index. As a service to future criminals, ASX has explicitly spelt out the requirements of revaluation frauds. In the announcement, it was revealed that ASX had required FTH to create a spread of 300 small investors holding at least $2,000 worth of shares, but FTH was unable to raise even this $600,000 in dumb money. Criminals should take note of this and plan their future listed securities fraud accordingly.

The business of listing and market manipulation is now more profitable than any actual operations, with even the most catastrophically loss-making enterprise still having utility as a listed securities fraud. The latest and most laughable trend is the listing of companies that are either bankrupt or teetering on the edge of bankruptcy. Migme Limited (MIG.AX) is a newly backdoor-listed fraud scheme on the ASX, dual-listed on the Frankfurt exchange for good measure. Migme was created by agglomerating a dog's breakfast of worthless and consistently loss-making internet companies, some of which already had gone out of business. Migme purportedly is a social media platform, with aspects of multi-level marketing, diversifying into e-commerce with forays into online gambling, recently adding a music service. Migme does a lot of things except make money. Even its core operations has plunging revenues and widening losses, as detailed in its annual report. Between 2013 and 2014, revenue fell from $2.9m to $1.9m, while losses widened from $4.3m to a staggering $28.3m. But operational performance is irrelevant to Migme's utility as a securities fraud.

In a few months after listing in its current form on the ASX, Migme's share price was ramped to $1.06 by the investment cartel controlling its price. According to ASIC, this was not a ramp but rather a magical market mystery, an enigmatic but wonderful occurrence for which an explanation just cannot be found. The ramp brought this joke of a company to a $200m "market" cap, and Migme was included in the All Ordinaries index as a top 500 Australian company. Ladies and gentlemen, this is your Australian stock market, this is where your money goes if your pension fund buys the index. Migme.

The investment cartel controlling Migme has some interesting members. FIH Mobile Limited (PINX:FXCNY), formerly known as Foxconn International Holdings Limited and part of the Foxconn group, holds 20% of Migme shares. Foxconn is predominantly known for working conditions so horrendous it drives its workers to suicide. What is less known is that the Foxconn group cooks its books, using a bewildering array of crossholdings and related party transactions. The Migme ramp allows Cayman-incorporated FIH Mobile to pad its books by making reference to the "market" value of its holding, a level 1 input in terms of IFRS 13. According to Note 19 on page 75 of the FIH Mobile annual report, the "fair value" of its listed investments in associates was US$44m as at 31 December 2014, exceeding the carrying book value by US$9m. However, the vast majority of this US$44m is Migme shares, and in the absence of the ramp, FIH may have been forced to impair the carrying value of its associates.

RBA and the trillion dollar question

Having helped create a truly grotesque debt-driven asset bubble, the proceeds of which have already been spent, the RBA bubbleheads and their media cheerleaders are getting visibly nervous. The banksters now hope for a "soft landing" for property and bank stocks. This betrays a fundamental lack of understanding of the basic mechanics of a bubble. Simply put, the current price of property is based on what is perceived as guaranteed future capital gains, and were the expectation of said capital gains to disappear, prices would collapse.

Expected future price rises are the only reason buyers are willing to pay current prices, in the very definition of a bubble. Since the current price of property is dependent on continuing unsustainable price rises, a soft landing is impossible. Bubbles can only ramp up or collapse, it is in their very nature. This is easy enough for a child to understand, but for those whose living depend on not understanding, naturally this is all incomprehensible.

The talking beards of the media sometimes advocate increasing the supply of "housing" as a solution. But it is not demand for "housing" that drives the bubble, it is demand for capital gains, demand for admission to the state sponsored pyramid scheme, to get rich without effort or risk. Say the government sold a product with a guaranteed 10% return, and people could borrow at 5% to "invest" in said product. The demand for this product would be infinite, people would rationally borrow as much as possible to "invest", to the point of collapsing the economy.

The key question for determining the size of the Australian property bubble is simple. Beyond all the verbiage, beyond the smoke screens and deflections, there is a key metric that is never ever discussed. This is the question the dourfaced bubblehead at the RBA should be forced to answer:

What long-term future growth rate is priced into current property prices?

The size of the bubble is directly determined by how much this expected future rate of growth in prices exceeds the future rate of growth in net rental incomes. The banksters would of course never give a straight answer to this simple question, it would be unthinkable even to pose it.

Revaluation fraud using sham internal transactions

If fraud is tolerated, it will inevitably spread across an economic system, crowding out actual enterprise until there is none left. This is the true systemic cost of allowing fraud to fester, and comes in addition to direct costs in terms of money lost and lives destroyed. In Australia, circular investment and revaluation scams have been allowed to gradually take over the entire economy. The only viable form of business in Australia now involves fraud, as only fraud schemes can promise sufficient returns. Pie cannot be sold profitably in Australia, only pie in the sky need apply.

One form of revaluation fraud uses sham internal transactions between related parties to enable revaluation of an underlying asset. The upwardly revalued asset is then used to raise money from investors or lenders. This form of fraud has spread literally everywhere in Australia, from almond farms to restaurants to funds management. All that is required is an asset, the value of which is derived from a payment stream, and two related parties controlled by the criminals.

Let's say a criminal cartel has attained control over defunct almond farmland, which is valued with reference to how much it can be rented out for. The cartel creates two entities, A and B, with A paying B for the privilege of using the farmland, and with B owning the farmland in question. Since both A and B are part of the cartel, the cartel is essentially paying itself. Crucially, the more the cartel pays itself in sham transactions, the higher it can revalue the farmland asset. The fraudulently revalued asset is then used to perform capital raisings or for borrowing, with the proceeds used for even further fraud and to pay off the criminal cartel operators.

Of course, wealth can't really be created by paying yourself. If that were the case, you could become rich by sitting at home sipping Brawndo, paying yourself a million dollars for every batin'. But in the idiocracy of Australia, such farcical fraud schemes are hailed as the height of innovation. No journalist or analyst dare call it for what it is, namely fraud. In the example above, the longevity and success of the almond farm fraud is completely independent of actual operational performance, and instead solely relies on the cartel's ability to raise neverending funds from victims based on fraudulent performance metrics. In reality, it is but a poorly disguised Ponzi scheme.

The Blue Sky Alternative Investment fraud is organized in exactly this way, with the Blue Sky "fund manager" getting inflated payment streams from various "alternative funds" under its control, and then "investing" in these funds circularly. The Rural Funds Group is another recently listed fraud scheme using this method, deriving almost all its "income" by paying itself, as shown in its fraudulent financial statements. Another perhaps more bizarre example of this scam involved a presenter of the Australian cooking show MasterChef.

In August 2014, an article in The Age newspaper about the struggling MasterChef restaurateur revealed what was euphemistically labelled an "unconventional property-based business model". According to the article, the restaurateur and his business partners acquired the properties which their restaurants occupied. The group then charged "its own restaurants high rents, which increased the value of the buildings and subsequently allowed the company to secure more debt." Sound familiar?

Property valuation and the bubble economy

The story of how the global debt ponzi started is surprisingly simple. In western democracies, a majority realized that, in addition to voting themselves into the treasury's coffers, they could vote themselves into their children's pockets too. This was done by deliberately inflating the price of property using debt, with one generation hijacking housing and ransoming it back to the next. Property is a significant determinant of a nation's wealth, its price movements considerably impact consumption, it underpins pensions and retirement plans. Most significantly, property underpins the banks and other financials, so inflating property prices artificially boosts stock prices too. The property bubble thus created a thousand further bubbles, metastasizing and eventually coming to threaten the entire real economy.

The price of property is always claimed to be set by a "market". In reality, a nation's property prices can be deliberately moved by changing tax laws, by restricting land and infrastructure supply, by repressing interest rates and changing lending rules. In reality, there are plentiful ways to manipulate property prices, that have nothing to do with "markets" or supply and demand for a place to live. In Australia, a prime example is the tax deductibility of losses incurred on so-called investment properties, in effect a government subsidy to property speculation. These are deliberate policies to ramp property prices, put into effect by political majority, creating a bubble economy that gradually has come to engulf other actually productive areas of society. As financials make up an increasing proportion of the economy, with more people and time spent, this constitutes an enormous drag on the actually productive.

The valuation of property is also surprisingly simple, and as always comes down to cashflows. Since the long term cashflows of property are much more stable than those of shares, calculating the fair value of property is in fact easier than valuing most shares. In the long term, average net rental cashflows follows average income closely, and in the very long term both are expected to converge with inflation. Just as the value of a stock is the sum of all future dividends discounted at an appropriate risk-adjusted rate, so the value of property is the sum of all future net rental cashflows discounted appropriately. Property value is thus equal to starting net rental cashflow, divided by the discount rate less the expected growth rate in net rental cashflows.

The rent that is or could be charged on a property, less all expenses and maintenance, is what determines value. Increases in the fair value of property can only be driven by a matching expected increase in net rental cashflows, any increase in price beyond that is a burgeoning bubble. Assume a model where the average property price at Year 0 is $100,000 and the net rental cashflow is 8,000, with both prices and net rental cashflows increasing by 3% annually. Over 30 years, price increases to $242K and net rental cashflow increases to $19K, with net rental yields constant at 8%.

In this model economy at equilibrium, long term property price growth equals long term net rental cashflow increase. (The model assumes constant increases each year purely for presentational ease, the conclusions are independent of this assumption. Also, note that a long term model of property prices need not include variations to the central bank interest rate, since in the long term the sum of central bank rate movements is zero.) But 3% capital gains are no fun and generate no bankster bonuses, no boom times or popping champagne corks, just boring sustainable growth. Assume instead that a political majority aided by banksters, a stealing generation if you will, decide to implement policies to deliberately inflate the price of property at a 7% growth rate. This growth is of course financed by debt, aka money created out of thin air.

In this scenario, net rental cashflows and the fair value of property remains the same, but property prices rise to $761K in Year 30, sending net rental yield down to 2.6%. Anyone buying property in Year 30 is paying $242K for the actual property, and a further $518K for a ticket to the state sponsored pyramid scheme that has been created. In Year 30, two thirds of property prices constitute a down payment to the government sponsored pyramid scheme. The only reason anyone is willing to pay $761K in Year 30, after years of unsustainable increases in price, is the expectation of further increases. In time and with enough "benevolent" intervention, future expected price increases become priced into the market, and the bubble fuels itself.

This is most clear in Australia, with more than 50% of house purchases going to property "investors" (actually leveraged speculators on the government sponsored pyramid scheme). The majority of these property "investors" incur running losses on their "investment", and are thus without question making the purchase based on expected future capital gains. This is an acknowledged fact. Meanwhile the presstitutes and analysts tie themselves into knots trying to explain why this is not at all a textbook bubble, when an asset is bought solely on the expectation of further rises. The latest explanation is the most humourous: it is not a bubble because Australia has many "coastal cities". Such a non sequitur could only pass as intelligent comment in an idiocracy, it proves not only the idiocy of the commenter but also the stupidity of the society that promotes said commenter to a position of power.

But how can bubble economists admit that lowering rates and changing tax laws boost asset prices, yet simultaneously claim prices are set by an efficient market? This is solved by circular thinking and the so-called wealth effect. Bubble economists believe that if we ramp up asset prices by lowering rates, the higher prices will inexorably lead to higher economic activity (the wealth effect), with the fair value of this increased economic activity perfectly matching and justifying the increased asset price. So if we ramp shares/property, this increases future cashflows for shares/property, so that the initial ramp was just a fair value movement by an efficient market. The initial manipulation of the market was therefore not manipulation. Because of efficient markets and the wealth effect, markets are essentially non-manipulable, therefore we should manipulate them as high as possible (this power should of course be yielded to only the most prudent and benevolent central bank bubbleheads). This is not meant as parody, this is what bubble economists actually profess to believe. If their premise were correct, i.e. if markets with absolute certainty always were and always will be perfectly efficient, their logic would be flawless. If you knew a car's speed gauge was perfectly correlated with vehicle speed, and could not for any reason ever be incorrect, it would make sense to try and move the car by pushing on the speed gauge with your finger.

Both political parties, all "respected" economists and every mainstream economic journalist fully support the bubble economy that western democracies have descended into. To challenge the bubble paradigm is to invite ridicule and revulsion. In Australian media it is forbidden to say that we have a bubble, likewise the bubblehead of the Reserve Bank and other banksters would never admit there is a bubble, regardless how grotesquely prices become detached from reality and cashflows. (At most they are permitted to say there is maybe a risk of future overheating.) Realistically, 2007 was the point of no return, the time when the west could have abandoned the bubble economy and dismantled the expanding beast of finance and debt-fuelled asset bubbles, but instead decided to inflate an even bigger bubble to cover up the losses that would have been necessary to face, if true price discovery had prevailed. The bubble has gone so far now that no politician could ever propose dismantling it. The campaign slogan "I'll crash house prices! (But it's necessary for our future)" is not likely to be popular.