Wednesday, 29 September 2021 — Gold Coast, Australia

By Vern Gowdie Editor, The Rum Rebellion

[7 min read]

• Tulips
• Ponzi
• Madoff
• Bitcoin

Pssst…wanna buy a rare tulip bulb?

A couple of weeks ago, they were selling for 10 guilders, now it’s going for over 100.

May I ask what makes it so rare?

To which we are told, ‘They just are.’

Not being all that familiar with the exotic flower market, you think aloud, ‘Can’t you just propagate more of the bulbs, and they won’t be so rare or valuable?’.

The temerity to even entertain this thought bubble, earns you the rebuke of ‘Obviously, if you have to ask that question, you simply do not get it.’

And so, with facts abandoned and belief established, the scheme gains the mob’s legitimacy…temporarily.

The trick to a good con is in having a somewhat plausible story and then blinding people to reality.

What’s the easiest way to obscure a person’s vision? With dollar signs. Lots of dollar signs.

When the perceived road to riches is found, objectivity is lost.

Doubts and doubters are not entertained.

They are howled down by the self-assured insiders…the ones who (apparently) get IT…whatever the ‘IT’ is.

Ponzi

In 1920, Charles Ponzi achieved lasting notoriety with his international postal reply coupon arbitrage ‘opportunity’.

Ponzi convinced people he was buying postage coupons abroad at a discount and selling them at face value in the US. Tremendous profits were to be had. A half-truth was all Ponzi needed to germinate the seed of his scheme.

Throw in the promise of a 50% return in a matter of weeks and money poured in.

A journalist named Richard Grozier sensed all was not right.

In theory, you could make a profit from the arbitrage opportunity. But nothing like the alleged ‘profits’ Ponzi was delivering to investors.

Why?

Well, how could Ponzi claim to be trading US$10–15 million in coupons when there are only a few hundred thousand dollars worth in circulation?

The numbers did not add up.

The rest, as they say, is history…and so was Charles Ponzi.

Madoff

Bernie Madoff knew all about the subtle art of seduction.

He cultivated an image of sophistication, respectability, and exclusivity.

Year after year, Madoff’s fictional proprietary trading system — the ‘split-strike conversion strategy’ — delivered investors consistent above-average returns…with no volatility.

Bernie knew the lure of superior past performance would entrap the unsuspecting, gullible, and greedy into his web of deception.

Bernie’s scheme appealed to the heart…not the head.

But not everyone fell for Bernie’s scam.

Harry Markopolos — a quantitative financial specialist — sensed one and one was not making two.

As reported by The Guardian in March 2010 (emphasis added):

‘In a newly published book, No One Would Listen, Markopolos describes agonising over how Madoff could produce 1% to 2% returns every month, in positive territory 96% of the time, producing a 45-degree curve of profit — with no volatility. For months, he tried to reverse-engineer Madoff's stated strategy of using a basket of S&P 500 shares hedged against risk using options on Chicago's derivatives exchange.

‘After analysing Madoff’s vague, broad-brush statements to clients, Markopolos concluded that it was impossible — not only was it mathematically inconceivable to smooth out all the ups and downs in the S&P index's performance, Madoff would need to use more options than existed on the entire Chicago Board Options Exchange, where nobody owned up to seeing any volume from Madoff's firm at all.’

Harry thought he had an open-and-shut case against Madoff.

In 2001, Harry presented his findings to the US Securities and Exchange Commission (SEC). The result? He was ignored.

Not to be deterred, in 2005 he gave the SEC a weighty report titled ‘The World’s Largest Hedge Fund is a Fraud’. The result? He was ignored.

The maths didn’t lie. But as often happens when things are going well, the truth becomes a casualty. People prefer the lie.

Which brings us to a scam that is magnitudes bigger than tulips, Ponzi, and Madoff. A scam that, in due course, will go down as the most infamous in history.

Bitcoin

In August 2008, absent any fanfare, the domain name bitcoin.org was registered. On 3 January 2009, the anonymous Satoshi Nakamoto launched the Bitcoin network.

Blockchain technology promised to create a peer-to-peer network to generate ‘a system for electronic transactions without relying on trust.’

The ideal of decentralised finance (DeFi) took hold. It’s highly likely the original adopters believed fervently in the ideal.

But as Albert Einstein famously said:

‘In theory there is no difference between theory and practice. In practice there is.’

In practice (and I might say also in theory) the ideal is flawed.

Firstly, contrary to what Nakamoto thought, the Bitcoin system relies solely on trust…a trust Bitcoin [BTC] can retain value and relevance.

Secondly, the whole notion of DeFi is a furphy. Control of the crypto network rests in the hands of a powerful few.

DeFi is nothing more than a clone of the centralised financial system.

The crypto faithful have this rebel-with-a-cause mindset.

However, I strongly suspect the only cause they’ll have is one where they lament their folly.

The present-day equivalents of Richard Grozier and Harry Markopolos have been sounding the warnings on Tether [USDT] (the bitcoin price manipulator), but no one is really listening.

The US Journal of Finance published an excellent 52-page research paper titled ‘Is Bitcoin Really Untethered?’.

The findings? The maths simply does not add up. Tether appears to manipulate the price of bitcoin…so much for decentralised finance.

And there was this press release by the New York Attorney General on 23 February publicly declaring Tether is a scheme that lies (emphasis added):

‘“Bitfinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines,” said Attorney General James.

‘Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie...’

Does any of this matter to the faithful?

Not a jot. Read the commentaries and these findings are dismissed with ‘they would say that wouldn’t they’ or ‘they just don’t get it’.

Oh, how I wish these free-thinking rebels would come up with new excuses…we’ve heard the same lame reasoning with tulips, Ponzi, Madoff, and countless other scams.

Does it ever cross the minds of the cult members that the reason some really intelligent people — like John Paulson, Jeremy Grantham, Michael Burry, John Hussman, Charlie Munger — ‘don’t get it’ is because there’s actually nothing to get?

Is it possible those who’ve successfully navigated the highs and lows of all types of investments and investment conditions can spot a fraud a mile off?

I think so.

The fact is, believers want to believe…irrespective of what evidence is provided to the contrary.

Even after Ponzi admitted to and was convicted of fraud, there were still some investors who held onto their certificates. Believing their ‘investment’ would one day come good.

Bitcoin produces nothing. It has no assets, income, customers, cash flow, or dividends. Bitcoin’s value is derived solely from manipulated speculation.

In a nutshell, bitcoin — like tulips, international postage stamp arbitrage, and a split-strike conversion strategy — has value while people believe it to be so.

The maths does not lie…bitcoin is basically worthless.

Next week, I’ll show you why those who think cryptos are a way of staying outside the grasp of authorities are sadly mistaken.

Until then.

Regards,

Vern Gowdie,
Editor, The Rum Rebellion

Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory— investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come. 

By Bill Bonner Editor, The Rum Rebellion

Politics is war. War is politics.

Everything is a battle. Good versus evil. Black versus white. Democrat versus Republican. Force someone else to do something he doesn’t want to do. Or try to stop him from forcing you. The only goal is to win.

If life were that simple, perhaps even Washington Post reporters and members of Congress could understand it.

But it is not.

Blame game

We’ve spoken about the fact that the fight between Republicans and Democrats is a distraction. A fake out. A sideshow designed to keep Americans entertained by trivialities and diverted by non-sequiturs, while the real show — ripping off the public — goes unremarked.

We take up the theme again today…

If there is a flood in New Orleans, it’s because Republicans have blocked desperately-needed climate change mitigation measures. Fires in California? Ditto.

And were our proud warriors stabbed in the back in Afghanistan? Were our jobs stolen by the Chinese? Are we now facing an economic and fiscal cataclysm?

Hey, that must be the fault of the Democrats, no?

According to the popular narrative, everything is either the Democrats’ fault…or the Republicans’ fault — depending on which team you’re rooting for.

Red versus blue

Even the death toll from COVID-19?

Yes…at first, it looked like the Democrats had brought it on themselves, like the Genoese traders, who brought the Plague to Europe. Hardest hit were the ‘blue’ states, such as New York and California.

Here’s a Law & Liberty report from April 2020:

‘When controlling for the differences in population across states, the number of deaths from coronavirus is over three times higher in states with Democratic governors than in states with Republican governors. As of Sunday, April 26, states with Republican governors have experienced 57.53 coronavirus deaths per million of population, states with Democratic governors have 179.74 deaths per million of population. Even excluding the state of New York as an extreme outlier, states with Democratic governors have 138.58 deaths per million from coronavirus, still over twice as many coronavirus deaths per million as deaths in states with Republican governors.’

Republicans sneered at their masked-up cousins in the blue states.

But the virus didn’t stop at the New York state line. It soon made its way to the red states.

Then it was widely reported that the Republicans were the ones who deserved to die.

Some commentators even went as far as to say that Republican governors of Texas and Florida were ‘killing’ their citizens by failing to enforce Dr Fauci’s latest recommendations. Here’s The National Memo of 11 July 2021:

‘The childish narcissism and prideful ignorance of the American right — as personified in its idol, former President Donald Trump — have transformed “conservatism” into a public health menace. Republicans in office and their media echoes are the principal obstacles to vaccinating enough Americans to achieve herd immunity from COVID-19, which would be awful even if their gullible audiences were the only potential victims.’

No party affiliation

Well, guess what? COVID-19 doesn’t really seem to care who you vote for. Look at the deaths per state. The results are all over the place.

Mississippi (Rep) and New Jersey (Dem), for example, have very little in common…except that they have the highest death rates in the country — over 300 per 100,000 of the population.

Likewise, Vermont (Dem), Hawaii (Dem), and Alaska (Rep) are hardly ideological soulmates…but they have needed the fewest caskets — below 100 per 100,000 of the population.

Texas — scarlet in colour — has a lower death toll than Massachusetts (Dem) or New York (Dem), despite Governor Abbott’s attempts at mass murder. Florida (Rep), too.

What probably happens is the obvious thing.

You can slow the movement of a virus by closing borders, social distancing, masking, etc — especially if you are relatively isolated, geographically, such as places like Hawaii and Alaska.

But then your population is virgin territory for the disease. Sooner or later, you have to open up…and in comes the lusty bug.

Lesson in consequences

The most remarkably revealing opinion appeared this week in Salon:

‘To be blunt, white privilege has long shielded many conservatives from the concept of facing consequences for their actions. We see this in a lot of obnoxious right-wing behavior lately, from tantrums over COVID-19 mitigation measures in public places to the attempted insurrection on January 6. Who can forget how many of the arrested Trump supporters expressed genuine shock that they might actually face a legal consequence for participating in a violent effort to overthrow democracy? This lack of familiarity with consequences is likely why there are so many holdouts, even in the face of vaccine mandates.’

The Salon piece goes on to say that it’s not enough to watch the anti-vaxxers ‘pay with their lives’…not while the rest of us ‘are suffering because of Trumpist hubris.’

And there’s no point in scaring them with the threat of death. Why? Because they’re not going to die! Here’s the quote:

‘The problem with highlighting COVID-19 deaths to scare the Trumpers straight, however, is that they can always tell themselves that they’re not going to be the ones who die since 98.4% of people in the U.S. do survive.’

That’s right, they’re not going to die because the disease is only dangerous to a few people. According to figures in New York Magazine, an 85-year-old is 10,000 times more likely to die from COVID-19 than a 10-year-old.

We know who needs protection. We know too, that natural ‘herd immunity’ is much more effective than vaccine immunity. And we believe that a person who has submitted to the jab has little to fear from those who have not.

So…why the vaccine mandates? Salon explains it in their headine: ‘Trump fans are overdue for a lesson in consequences’.

Get it? The argument is no longer about how to keep people safe. It’s just politics.

It’s time to teach the bastards a lesson!

Regards,

Bill Bonner,
For The Rum Rebellion