Controlled Illusion


When in the annals of finance we see people trying to usurp historically held ‘facts’, we should pay attention to see if something has indeed changed.  New knowledge is almost always good, though blindly seeking it without logical thought commonly leads to the misleading sentiment of investors (whose quote is attributed to the paragon of finance, Sir John Templeton, who said); “The four most expensive words in the English language are ‘this time it’s different”.

Alas, far more times than not, the answer is the truth has been obfuscated, not changed.  Let’s take what’s happening at the current time in China.

No one really disputes that the world’s largest controlled economy is China (Russia, by comparison, is 14% of China’s market capitalization[i]).  Recently there have been events going on in China that, if they were successful, would dispute the ‘fact’ that stock markets are independently derived and not controlled.  It would be ‘different this time’.  For in China, the central government is intervening in 3-4 key areas to keep the market propped up, and by propped up we mean helping to support stock prices.  If that market can be manipulated, then any market can be manipulated, and it’s just a matter of having the power and resources to do it.

First, some facts.  The Chinese government is bending rules that most economies would find against the rule of law.  Start-up companies seeking money (called IPO’s, Initial Public Offerings, which is the same thing we call them in this country) have been BARRED from going public until things settle down.  Share prices are being supported by a change in margin availability, where the Chinese government has ORDERED brokerage firms (which they control) to issue loans to mom & pop consumers who want to buy stock.  Executives and officials at large government controlled companies have been TOLD to purchase stock in their own companies to keep share prices up.  And, last but not least, the government has HALTED trading in some company stocks when their share prices were falling too far.  You would have to concur that those are might steps in the sphere of market manipulation.

So how’s that working for ya?  “Stocks are down 29% from their peak in June, and investors have continued to sell shares despite the strongest efforts by Beijing to prop up prices.  The current bear market – defined as a fall of 20% or more from a peak – is the 27th that investors have suffered in the past 25 years.  It is the 21st worst in terms of losses.”[ii]

Therefore, the next time someone says to you “the markets are rigged” in order to scare you, a healthy dose of skepticism is in order.  Markets of the size we’re talking about are never ‘rigged’.  They might display emotion (greed, fear) and move up and down on the pittances of rumor, but they are not rigged.  This reality is not merely mental convenience for you, as you both would need and want your investment assets to be based on facts and not manipulated markets.  Thus, let me conclude with a quote from another acclaimed investment expert who taught Warren Buffet his stuff (Benjamin Graham);

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”


[i] 2014 World Bank API (via Wikipedia online)

[ii] “In China Market’s Plummet, Is Déjà vu” (Chao Deng, Wall Street Journal, B Section, Saturday, August 1, 2015)