Uncommon Sense

February 25, 2021

The China Hustle

If you needed more ammunition to support the belief that the stock markets need to be shut down, do watch the documentary “The China Hustle” on various streaming services.

What this hustle comes down to is some “investors” saw that China recovered from the 2008 Great Recession very quickly and investing in Chinese companies might be a way to offset losses from the stock market crash. The only problem was most Chinese companies were not traded on American stock markets. So, a workaround was devised. They arranged for small Chinese companies to be merged with now defunct U.S. companies that had one crucial characteristic: they were already approved for trading of “their” stock on the U.S. exchanges.

So as to not spoil the documentary, let it be pointed out that lying to foreigners is not a crime in China. The upshot is that hundreds of billions of dollars were extracted from “investors” which then flowed into China through fraudulent descriptions of these “companies.” And, apparently, none of the usual “checks and balances and regulations” apply.

And it is still going on, because those who are making money off of the process don’t want “the problem” to be solved.

The stock market has no real purpose other than to be a giant casino where people gamble their money. That there are “losers” in the game is acknowledged, but only the winners are celebrated and because the “house” skims its fees off of the top, there is no impetus to close the casino.

This is a well-made documentary and well worth watching. If you wonder whether our democracy is strong enough to withstand all forces, you need to think again. If we fall, it will because of greed being our most serious failing.

 

14 Comments »

  1. Have you read “Reminiscences of a Stock Operator” from 1923? Interesting read, very fascinating.

    Since you have posted on this subject more than once, I’d be interested in your thoughts on what in principle is different in terms of market dynamics in the contemporary environment vs back then…

    Liked by 1 person

    Comment by Matt Barsotti — February 25, 2021 @ 11:26 am | Reply

    • In the twenties the hot term was “speculation.” That referred only to the secondary market. The same problem still exists today because we did little to discourage rampant speculation. The Glass-Steagall Act was helpful, so we of course did away with it at the behest of the “Masters of the Universe,” aka Big Political Donors.” Something as simple as a transaction task would diminish the volume of speculations greatly but we can’t even manage that. Since the losers in the markets are not pushing for such changes, it is the winners that are controlling the regulatory urges. And the biggest winners are those extracting fees from investors (brokers, bankers, fund managers, etc.). Great deals of money are spent in this casino, but nothing useful comes from that activity. It should be abolished and, if not that, it should be regulated down to a very small volume.

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      Comment by Steve Ruis — February 25, 2021 @ 11:33 am | Reply

      • Are there any template economies you could compare this model to? That is, is anyone doing this? America is pretty myopic about a lot of things, and I’ll admit that I’m not very familiar with other models besides ours.

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        Comment by Matt Barsotti — February 25, 2021 @ 11:35 am | Reply

        • Part of the problem is American bullying since the end of WW2. We go around the world and bully other countries into emulating us. They are expected to implement “market reforms” and “governmental reforms” and “currency reforms” as a condition of receiving American aid. We have co-opted the World Bank and other “lending institutions” to do this. Poor Sweden was bullied into copying our education reforms (basically “privatizing efforts in reform clothing”) to the severe detriment to their entire education system. They have stellar examples of education systems around them, including Finland, which copied the old Swedish model on its way to education excellence and others, but they ended up copying the US model. Why? Because there was money to be made in the process, money that could be used to bribe politicians, etc. to enact the “reforms.” So called “third world” countries are regularly bullied into such changes, complicated by corruption already existing in their own systems.

          The system closest to ours that has dodged many of the bullets we have taken here, is Canada, although there are still ongoing efforts to undermine their native systems in favor of Americanized ones. When the whole world shuddered under the blows of the 2008 Great Recession, Canada barely felt the effects. Why? Because their banking and real estate systems didn’t allow the abuses ours were encouraging. Canada has universal health care, excellent health care, that has been vilified by the US plutocrats because well, it works far better than ours, but it is not a for profit system. Canada’s system is compared to the healthcare rich people in this country receive and it is found wanting. Well, duh, but those comparisons never involve cost benefit analyses. The rich people in Canada can buy extra insurance, but ordinary people like their coverage quite nicely, that you. In this country, the rich people have excellent health care facilities available, but the poor and middle class do not.

          As you can tell, I am a social democrat (all lowercase) in that I prefer a socially responsible system based on a democratic model. How well that is to be pulled off depends upon the people involved. For instance. as an example, Switzerland is a Capitalist country (with a capital C), yet if you are a Swiss citizen in a foreign country and are robbed, or mugged, and are stripped of all you own, you can appear at the Swiss embassy and either provide your passport (or provide information that they can use to confirm you are a Swiss citizen) and they will put you on an airplane and get you home. When you do get home, you are expected to pay back the government, but they will set up a payment plan. This is a country in which the government (aka the people) makes sure we take care of one another. We could do the same.

          On Thu, Feb 25, 2021 at 11:35 AM Class Warfare Blog wrote:

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          Comment by Steve Ruis — February 25, 2021 @ 12:37 pm | Reply

          • Well, I agree with much of what you said. Lending practices, margin requirements, leverage, etc. All pose asymmetric risks to market participants.

            But on the stock market, I’m trying to put my finger on the actual problem. For the sake of argument, let’s assume that leveraged buying was eliminated. In other words, drop the lending aspect of it. At that point, you would have a big boxing ring filled with players all trying to outsmart one another. It may well be gambling, but does that matter? There are middlemen who take their percentage.

            Entrepreneurship could be considered very illiquid gambling. And many businesses don’t “produce” much if anything. Accountants and lawyers and other officials are the middlemen taking a percentage there. Having two businesses myself, I’m all too familiar with the costs of doing business, so to speak.

            If rich people want to swap dollars trying to prove they are smarter than each other, that in principle doesn’t seem to be a real problem. It is a problem, however, if Joe Somebody is forced to keep his retirement provisions in the market. That I would like to see eliminated, personally. But that isn’t really the same thing as saying the market itself is bad.

            And overall, what happens to the notion of commerce if publicly traded companies are outright banned? That would be the practical outcome if the stock market were eliminated. Ordinary people couldn’t own Google or whatever any more. Only venture capitalists could own businesses… so big dollars or no dollars.

            Anyway, those are a few thoughts, which is why I was asking about other national models where maybe there was something similar. Something where I could catch a glimpse of an alternative…

            Liked by 1 person

            Comment by Matt Barsotti — February 25, 2021 @ 1:25 pm | Reply

            • Re “If rich people want to swap dollars trying to prove they are smarter than each other, that in principle doesn’t seem to be a real problem.” Well, if you were talking about an actual casino, I would have no problem with it either. But these rich people distort the tax laws and much more to “win” in these markets. There used to be an unwritten aspect of US tax law that money earned by the seat of one’s brow was to be taxed less than money earned through “rents.” That was true for a while … until the amounts of money available to be “earned” through speculation in these markets grew out of proportion. And the distortions are great and mall. Do you remember the term “unearned income”? It has essentially disappeared from our language because the plutocrats didn’t like the implications. So, the effects are small, as to terms in use, and huge as to capital gains tax reductions (now taxed less than ordinary income . . . why is that?).

              Think about what you are saying when you say that only venture capital would own businesses. How would that be different from privately owned businesses? Think about when Apple Computer “went public.” They sold shares for a few dollars and got money they needed to expand greatly. Those shares have paid dividends . . . and dividends . . . and up the yin-yang. If those had been loans, they would have paid them off many fold, and yet they are still paying. How is that superior to a bank loan? Japan had a system dominated by banks and very little in the way of stocks and bonds involved. Their system crumbled from corruption. There is no fool proof system. But the secondary stock markets have been shown to be a drain on the economy, which means that the American people are subsidizing this playground for the rich. The rich then take their gains and distort our government. You know that rich people are attended to by politicians and poor people not at all. It is as if the system were designed to end up at a plutocracy.

              Liked by 1 person

              Comment by Steve Ruis — February 26, 2021 @ 7:54 am | Reply

              • I think we agree on the tax question. Though it does get tricky when we try to distilled what “earned” needs to mean. I’m thinking here of the looming need for UBI, or ownership of a business.

                On the second paragraph, let me explain why I’m looking for the key criterion, as a functional principle.

                I’m a small business owner. I have a decent stake in small business engineering firm where I work. Practically speaking, I get income two ways… I get income from my wages, as a worker — that is, “earned” by the sweat of my brow, so to speak. But I also get income from profits because I’m an owner. For all intents and purposes, this is similar to a stock dividend — profits being distributed to owners. If we can double the size of our company, or triple, or whatever, the revenue and profit will continue to go up. But only people who work for our company can have a percentage of ownership, and anyone who leaves gets cashed out.

                My sister is not a small business owner. What if she wants to gain profit dividends by owning some blue chip company stock? If public trading of companies goes away, then only folks who had the good fortune to wind up with a ground-floor opportunity can participate. Wouldn’t people like me have an unfair opportunity advantage? Wouldn’t big investors have even more?

                I’m looking for a kind of general criterion for what is inherently bad about publicly traded company stock… A sort of principle that says small companies are good, but public trade of them is bad.

                Again, I remain in favor of the reforms you’ve talked about — taxes, banking, retirement, etc.

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                Comment by Matt Barsotti — February 26, 2021 @ 8:17 am | Reply

                • Re “My sister is not a small business owner. What if she wants to gain profit dividends by owning some blue chip company stock?” The owning of such stocks is not the question or the problem. The problem is if such stocks are sold freely on a secondary market and those markets are subject to manipulation, then all Hell breaks loose.

                  Let’s say that a “market reform” is that if you buy a stock you must hold it for a minimum amount of time, say two years (I am not recommending this idea as it just came to me). There certainly would be no more day traders or microsecond traders or much of any speculation involving quick turnarounds.

                  It is generally agreed that people do not invest in stocks for dividend income. If that were the case, people would want trading sites with oodles of information to dick around with to make “buying and selling” decisions. The real money is made in buying and selling (buy low, sell high).

                  Back when people weren’t allowed to participate in those markets (yes, I am that old) I remember certificates of deposit that paid quite nice interest rates (I had several that paid in the 6-8% range). So, there are ways to leverage one’s savings other than the stock markets. But why are the markets so popular? Basically because of the rate of return. Savings accounts right now have near zero interest rates. If the stock market weren’t sucking all of the air out of the room, maybe lending would increase and interest rates with them.

                  I am bouncing all over the place here, but your business (I am in one, too) was created by you. You put your ideas, and I suspect immense amounts of energy and no little of your own funds (I know I have) into it succeeding, so I think you should receive a reward from those efforts (probably vastly underpaid for or not paid for at all at the beginning). If you wanted to go public yourself, your sister should have an opportunity to buy into your ideas, too. I see nothing wrong with that. It is the rampant fraud and speculation I see as the great problems with what happens secondarily to that initial offering of stock.

                  On Fri, Feb 26, 2021 at 8:17 AM Class Warfare Blog wrote:

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                  Comment by Steve Ruis — February 26, 2021 @ 8:55 am | Reply

                  • OK, so rate of turnaround on a trade is a criterion. Mutual funds typically have those… ETFs are designed for people who want to be all “trade-y” with the same concept of baskets.

                    By secondary market – are you talking about the exchanges (NYSE, etc), or something else? That is, are you saying that buy/sell would have to happen only between individuals and the parent company?

                    Like

                    Comment by Matt Barsotti — February 26, 2021 @ 9:13 am | Reply

                    • Sorry this took so long. The secondary market is the buying and selling of stocks already issued. What we learned in school about how selling stock can create funding to create or expand a business only applies to the first sale. Any subsequent sp[eculative changing of hands on those certificates benefits the company not at all (except as the influence the value of the shares kept in company).

                      I once did a rather crude calculation as to how much Apple Corp has paid in dividends against the stock it has issued and if a bank had given them a loan, it would have been paid off ten times over decades ago.

                      On Fri, Feb 26, 2021 at 9:13 AM Class Warfare Blog wrote:

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                      Comment by Steve Ruis — March 23, 2021 @ 1:21 pm

  2. For four bloody years that idiot Trump screamed about the stock market, and I didn’t hear one public person scream back “The stock market IS NOT the economy!”

    Missed opportunity to open this much needed conversation.

    Liked by 1 person

    Comment by john zande — February 25, 2021 @ 12:56 pm | Reply

    • We have been screaming that for years (probably Trump Fatigue kept us from continuing to below)!

      I have gone so far as to suggest other and better indicators of the health of the economy. The Fat Cats don’t care. They even killed a bill that would have had us adopt the Canadian system of economic indicators to replace ours because, well, theirs are better.

      On Thu, Feb 25, 2021 at 12:56 PM Class Warfare Blog wrote:

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      Liked by 1 person

      Comment by Steve Ruis — February 25, 2021 @ 1:03 pm | Reply

  3. I spent way, way too long in accounting and economics classes in college and later in life when I went back for computer science and electronics and ended up having to take two more years of accounting for. (Why did I have to take accounting when I was majoring in computers and electronics? Good question. They couldn’t answer it either. For “reasons”, probably to suck more money out of the students). Anyway, after all that, I pretty much agree, the stock market and the commodities markets as they exist today are pretty much a scam.

    Here’s the thing a lot of people don’t get. All that money in the stock market? It doesn’t actually exist. I am serious here. All that money is actually what I suppose you could call “potential money”. It has no basis in reality. Musk doesn’t have x number of billion dollars. He has a *potential* value of X billion dollars which could vanish into thin air under the right conditions. That money doesn’t exist until one actually cashes out, i.e. sells the stock. Until then the money is sort of in limbo.

    I suppose you could call it quantum economics. It both exists and doesn’t exist at the same time.

    Liked by 1 person

    Comment by grouchyfarmer — February 25, 2021 @ 10:35 pm | Reply


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