Analyst: Wall Street Is Rigged and Here Is the Proof

Analyst: Wall Street Is Rigged and Here Is the Proof
Photo CC BY-NC-ND 2.0, courtesy of International Monetary Fund

From Birch Gold Group

It’s fairly easy to make the case that a market correction is on the horizon.

In fact, the Data Driven Investor crunched the numbers and claims a colossal 70% market correction is possible.

Since Wall Street doesn’t like it when rates go up, that certainly seems possible, especially when it looks like there’s “a 65% probability of 5 rate hikes in 2022.”

You can see the target rate probabilities for yourself on Charlie Bilello’s Sunday chart, sourced from the Fed’s December meeting.

Well, Wall Street and the stock market have never liked rising interest rates. And that’s not the only thing that hasn’t changed…

Michael Lewis: Wall Street “worse than it was back then”

In a recent interview on CNBC, the famous author of The Big Short, Liar’s Poker, and Flash Boys explained how today’s Wall Street operates compared to 30 years ago, when he wrote his first scathing exposé:

I think deep down, the financial behavior, I think it’s worse. I think it’s worse in part because they’ve gotten really good at presenting a polite face to the world.

The pernicious stuff that goes on in the financial markets now — the structure of the stock market that I wrote about in Flash Boys — is in some ways just worse than it was back then. And it’s bigger.

It’s been incredible to me in the wake of Brad Katsuyama’s excellent explanation of how the stock market actually works in “Flash Boys” that we still have such things as payment for order flow, that we still have these bizarre incentives, bad incentives baked into the stock market.

Payment for order flow is when a broker sells customer transaction information (usually to high-frequency trading funds or HFTs) before the order executes. That way, the HFT can buy and deliver stocks to the customer, with a “convenience fee” markup. This is famously the way Robinhood makes most of its revenue. (While the legendary folk hero Robin Hood robbed from the rich to give to the less fortunate, day-trading app Robinhood seems determined to do the opposite.)

Now, some of these “bizarre incentives” that Lewis refers to were supposed to be regulated out of the stock market by the Dodd-Frank Act of 2010. That legislation was created to put an end to the Wall Street tricks that caused the 2008 financial crisis.

It didn’t exactly do that, only producing a limited limited audit of the Federal Reserve. We learned that the Fed “committed over 16 trillion dollars to foreign central banks and politically influential private companies.” You didn’t know the Fed was supposed to do that, did you? Which part of the Fed’s mandate of “stable prices and full employment” does bailing out foreign banks and private companies fulfill? (Just imagine the shady dealings a full audit could have unearthed!)

We don’t have to look very far for another example of the “bad incentives” that Michael Lewis mentioned. Take a gander at Matt Taibbi’s report on the Libor Price Fixing Scandal:

at least three – and perhaps as many as 16 – of the name-brand too-big-to-fail banks have been manipulating global interest rates, in the process messing around with the prices of upward of $500 trillion (that’s trillion, with a “t”) worth of financial instruments. When that sprawling con burst into public view last year, it was easily the biggest financial scandal in history – MIT professor Andrew Lo even said it “dwarfs by orders of magnitude any financial scam in the history of markets.” [emphasis added]

The same article revealed that a class-action lawsuit against these banks was dismissed by a federal judge on the basis of the following rather absurd argument:

If cities and towns and other investors lost money because of Libor manipulation, that was their own fault for ever thinking the banks were competing in the first place.

Hear that? If Wall Street scams you out of money, it’s your fault for trusting them in the first place!

Taibbi goes on to label the conspiring bankers “gangsters” who “learned from the Mafia.” This seems like a fitting description. After all, they cooperated to manipulate interest rates to fix prices that effectively robbed uncounted millions of people, “a huge class of victims that could include everyone from state pensioners to big cities to wealthy investors in structured notes would have no idea they were being robbed.”

Today, those “bizarre incentives” haven’t gone away… And Federal Reserve bankers are involved again.

Insider trading laws are for little people

In 2021, two Federal Reserve executives resigned after unethical trading practices were revealed in yet another Fed scandal. A third, Vice Chair Richard Clarida, resigned in January for similar unethical trading practices.

Here’s what happened in February 2020, just before the markets crashed in March of the same year:

Clarida amended his financial disclosures in late December to show that he had sold and then repurchased shares in the stock fund within a matter of days. Previously, Clarida had reported only the purchases, which came a day before Chair Jerome Powell said the Fed was prepared to support markets and the economy. The Fed had characterized the purchase as a simple portfolio rebalancing — an explanation that was undercut by the revelation of the initial sale. [emphasis added]

But we’re just getting warmed up! Looks like even Chairman Powell himself was up to no good in December 2019, and even tried to hide his malfeasance.

It’s been called a Fed Scandal Bigger Than Watergate:

Fed Chair Powell — who is supposed to serve in the public interest and avoid even the appearance of conflicts — traded millions in personal stocks and bonds while obstructing required public disclosures about those trades for years. Yet, the information that has slipped out is damning. It shows Powell made trades *DURING* the restricted blackout period for pivotal Federal Open Market Committee (FOMC) meetings. [emphasis added]

Aside from the fact that Powell presided over the same trading scandal we pointed to above, which resulted in three resignations, Powell’s Powell’s alleged misconduct didn’t end there:

Indeed, Powell sold between $1-5 million in stock in October 2020 just prior to a significant market downturn.

And even Dave Kranzler didn’t hold back, leveling a serious accusation of insider trading at Jerome Powell:

Keep in mind that Powell directed the massive bailout of Wall Street banks. He knew ahead of time that the trillions printed and transferred to the financial system would send stocks and bonds of all “flavors” soaring. He directly benefited from that by implementing trades that took advantage of his inside knowledge during periods of time when it was unequivocally illegal for him to trade in his personal brokerage account.

So maybe Michael Lewis was right, and bad incentives are in fact “baked in” to Wall Street, even today.

The only thing for you to consider next is whether you want to keep playing their game…

Don’t double down on Wall Street (do this instead)

When you know the game is rigged, you don’t double down, cross your fingers and hope to get lucky. That’s just a recipe for losing faster.

You pick up your chips and walk out of the casino.

Now is the time to consider taking your business elsewhere.

Consider diversifying some of your paper assets for real money “they” can’t hijack with their shenanigans. Physical gold and silver are unhackable, uninflatable and still there when the lights go out.

Since we started this story with Michael Lewis, we’ll end with another Lewis must-read: Boomerang. This is an excerpt from an interview with hedge fund manager Kyle Bass (who made a couple of billion dollars predicting the 2008 financial crisis).

Now he’s betting all of his money that sovereign debt will be the next big thing to take down the world.

He even told his mom: “You need physical gold.” He explained that when the next crisis struck, the gold futures market was likely to seize up, as there were more outstanding futures contracts than available gold. People who thought they owned gold would find they owned pieces of paper instead.

Now is a good time to learn how gold performs over time and consider the benefits of diversifying your savings with real assets neither the Fed nor Wall Street can manipulate.

2022, Featured, federal reserve, stock market, wall street