Tuesday, May 12, 2020

Guest Post: @pdxsag on the Chinese Pump and Dump

[Our correspondent @pdxsag shares his latest thoughts on the sucker's rally.]
I had an epiphany of sorts last week which I would like to offer as a challenge to the CBS readership to adjudicate. I contend that the market recovery from the March lows, though universally ascribed to the Federal Reserve, is 180 degrees wrong. In fact, the incredible – literally, incredible – market recovery is another fraudulent “pump” operation by China. My contention rides upon two rails.

The first rail, and this was the epiphany last week, is that the countless pump and dump frauds that so frequently have Chinese involvement in one fashion or another are not individual, idiosyncratic operations of isolated crooks doing the same basic con over and over again because it works so reliably. Rather, they are a systemic operation carried out by, and with command and control coming from, the very top of the CCP hierarchy. (H/T @deepthroatipo for planting that seed)

Bear with me while I draw an analogy. I believe we in the West generally see Chinese pump and dump frauds like 19th century snake-oil salesmen... every few months there is another one in town. That misconception is the biggest fraud of them all. It is the fraud all the others rely upon. The correct comparison is to the Sicilian mafioso. There are multiple frauds from the mundane: trucking, garbage removal, street toughs collecting insurance; to the usual suspects in vice: gambling, prostitution, drugs; to the elaborate: securities frauds, bucket shops, tax and embezzlement schemes, but they all have their command and control in common -- a single, patriarchal family.

In this regard, the February-March market crash and March-April rebound is just the latest and most grand in a long series of successful financial market pump and dump schemes. Each scheme is run with the rigor of a science experiment, the results are used to refine their technique for more powerful successive operations.

The following sequence is not meant to imply that there is a single linear progression at work, but one can see how in the fullness of time the stakes of each progressive pump and dump has gotten broader in economic scope and larger in financial magnitude. We have gone from solar power and green energy to internet marketing and real estate to a series of increasingly gigantic, headline-grabbing, pure security-market pump and dumps: Bitcoin (2017), Momo-growth stocks (2018), Covid sell-off (2020).

(A point of clarification is probably in order here. The “pump” phase of the Covid sell-off began when the Fed signaled they would stop raising rates in January 2019. It climaxed with the Repo operations in Q4 2019. The “dump” phase commenced with Covid appearing in Italy. We are now in a new pump and dump cycle. The “pump” phase began with the Fed Reserve blowing out their balance sheet in March. However, again this is the critical distinction, the Fed is not driving these pumps. CCP is behind them, but in such a way as to obfuscate their actions and lull market participants, including, from appearances, no less than the Fed and White House themselves, into thinking the Fed is the one in control!)

I further submit that the “tell” on this latest cycle – indulge me in a little cheekiness – to which I will refer to as the Pandem-onium pump and dump is that the least credit-worthy, most reliant upon capital market emotions and psychology are the ones rocketing up the highest. Apparently we are to believe investors were not chagrined by the four 4 weeks between February and March options expiration, rather they were emboldened!

Obviously, Tesla is the poster-boy, but some of the biggest percentage gainers are wholly unprofitable companies trading at nose-bleed ratios going into an economic contraction with unemployment rates handily exceeding that of the Great Depression. Companies like Chipotle Mexican Grill (up 2.3x since lows), Carvana (4.3x), Wayfair (up 9x!), Shopify (2.5x), Beyond Meat (3x), and Netflix (1.5x). Further, it seems the more suspicious the companies c-suite and the closer their affiliations to the CCP are, the bigger the equity’s market-rebound.

There's also been a reliable joke – except it's not a joke – that declaring bankruptcy is the surest way to ignite a rally in a stock price. Whiting Petroleum - which is in bankruptcy - is the most notorious example in the last few weeks. It traded from the $0.30's, then rocketed to briefly over $2.00 in the course of 3 days, before settling into and remaining in the low $1.00's. Not coincidentally, this was one of the most popular stocks on Robin Hood for its meteoric rise. If this is not a textbook penny stock pump and dump, I'm not sure what is.

Finally, by way of counter-example I will point out the one market segment that has largely been passed-over from the equity market pump are the ocean oil tankers. In a soaring market, the one segment that cannot get a bid are oil tankers. There are a lot of reasons one could use to explain why, but there are a lot of reasons to explain why the aforementioned bad jokes should not get a bid, and yet they do. However, there is one thing that makes oil tankers unique: it draws close to the same set of people that notice market frauds in and around Tesla, and they noticed Covid when it was still just a thing in Hubei province where the official story didn’t add up. In short, the sheepdogs among us that pay attention to details and are the first to sound the alarm when an incipient fraud is attracting attention are the same people long the tanker trade.

If you wanted to wage a psychological and financial war on the "sheepdogs", going after their long trade after subjecting them to wave upon wave of short squeezes in all the glaring market frauds would be an obvious thing to do. Further, if a foreign entity had the power to orchestrate short squeezes in $100B market cap companies, insuring some sub-$1B micro-cap tanker stocks could not get any traction despite a string of record quarterly earnings would be ‘small ball.’ That is, small from a financial stand-point, but the psychological effect on the one enemy that is able to see through the lies and innuendo, and sound the alarm on your malfeasance would be priceless.

As they say, in times of war once is a coincidence, twice is enemy action. The relentless short-squeezes could be a coincidence, but the beat-down in tanker stocks smacks of enemy action.

A foreign government waging a covert financial war on Western economies generally and the US economy in particular may be necessary for a succession of pump and dumps; however, it is not sufficient. It takes a failed state on the part of the target nation.

This leads to the second rail of support which is that China is able to wage their covert economic war through a combination of compromised individuals and “useful idiots” both in industry and the regulatory state.

Using Tesla as the poster-boy, we have seen regulators (SEC, NHTSA, EPA, DoJ) and states (California and New York) fail to do anything to rein in a fraud on par with Enron, Madoff, and Theranos, for brazen obviousness to anyone that takes a moment to look closely into the details. Many in the $TSLAQ community have rationalized and lamented that Elon Musk's protection must be coming from President Trump himself. I submit that just as the Fed is not the driving force behind the market exuberance, the White House is not the driving force behind Elon Musk's teflon skin. The Chinese are his protector.

With security breaches tracking back to North Korea and China almost routine news events, we, the American public, are led to believe nothing has ever come of them. The CCP gathers all this sensitive information, but as yet has never seen fit to use it – nor would they ever – so we, the American public, can confidently re-elect the politicians we have, who will then re-appoint the regulators we have. At least, that is what we are led to believe. Anything else would be a conspiracy theory.

But there needs to be an account for why the state fails to muster a defense for itself. I readily agree it is tin-foil hat territory that every head of every governmental agency from the DoJ down to the Alameda County Department of Health is compromised by the CCP. For that I will refer to a comment I made on CBS 2018 book review compendium. In essence the grand unified conspiracy is that while it is all grifters at the top, there is not a central committee picking and choosing the grifts this week or this year. Rather, there is a fierce Darwinian marketplace of grifts. The only unwritten rule of grifting is you never question the other guy's grift. Ironically, it was spelled out for us in the movie about a counter-cultural attack at the very modernism destroying us today: Fight Club.

“The first rule of Fight Club is you never talk about Fight Club.” That is the oath and omerta of the ruling class today. The first rule of Grift Club is you never talk about Grift Club. If you are the head of the SEC and see an obvious grifter like Musk getting one by the EPA and the DEA and the FBI and the State of New York, etc. you do not call any of those guys and ask what the deal is. Instead, you infer the only conclusion that is allowed to be drawn: he's in The Club. If he wasn’t shutdown by NY State when he swindled a billion from them, and if he wasn’t taken down by any of the regulatory agencies in California after swindling a billion from them, ditto NHTSA, ditto SEC, ditto DoD, ditto DoJ, say what you will about career bureaucrats, but when it comes to fierce Darwinian Marketplaces, their careerism knows no rivals. They know which way the wind is blowing.

What this means to a covert bad actor is they do not have to compromise every node of authority. Nor do they need to compromise the very top node in the tree. The nodes communicate with each other far less than anyone appreciates. Compromising a small number of nodes followed by strategically making a grand display of beating them will send the message to the rest of the Graph that you are a Made Man. Played right, an obviously brazen fraud that doesn’t raise immediate rebuke, can act like a display of fitness in nature where garish coloring counter-intuitively wards off predators.

For the purposes of the CCP, if they can make the most glaringly obvious market frauds run up in price in the midsts of the market rebound -- a rebound ostensibly instigated by the Federal Reserve and cheered-on by the President -- what regulator is going to be brazen enough to call foul on them? If the highest-fliers are brought down, would that not mean the mid-fliers are overpriced too? If the mid-fliers are overpriced, perhaps people start thinking the whole market is at risk and they should just exit in it entirety. Psychology is a very fragile thing, especially when the real economy is all but shut down on any measurement you care to look at: employment, fuel consumption, hospitality and service, healthcare (ex-covid), industrial production.

So what does this mean for our financial markets?

If your investment thesis relies on the Federal Reserve’s “put,” ask yourself what happens to your portfolio if real driver in the market today is the CCP’s positive-feedback gamma algo that cut its teeth in the wild, wild west of Bitcoin and crypto currencies trading with the ultimate goal of attacking Western economies in a covert 21st century Cold War.


High Plateau Drifter said...

I am always amazed that consumers are unable to disentangle status value from the physical utility value of the status symbols that they buy. A classic example is the Tesla autos that I see in the north suburbs of Austin Texas.

It makes one wonder whether the status value of their automotive purchase is critical to their self image or to their social and financial image. But when all is said and done, the automotive status symbol is a depreciating asset the value of which melts with age and increasing upkeep, but is very visible, unlike an investment of securities which cannot be mentioned until the young lady begins to talk of investments and thus obliquely enquires as to the magnitude of such holdings.

Anonymous said...

Very interesting.

but Trump is not stupid, if what you says is true, our military/NSA know all about it.

Now, I would not buy stocks Trump tweets about, i.e. AT&T, but when I see Druckenmiller on TV today talking his book, "Amazon good, rest of market bad" and let's be honest, he is way over hyped now days and made his money in an analog trading word, I take that as a contrarian indictor.

Another six week and up we go, to finish the year at new highs.

What say you?

Stagflationary Mark said...

In this regard, the February-March market crash and March-April rebound is just the latest and most grand in a long series of successful financial market pump and dump schemes. Each scheme is run with the rigor of a science experiment, the results are used to refine their technique for more powerful successive operations.

Speaking of pump and dump schemes, I’ve been watching Planet Fitness stock in fascination. What a wild ride that’s been for overly optimistic gym investors over the past month.