Financial Markets Are Rigged & The Whole Economy Is Fake

May 18, 2018

Financial Markets Are Rigged & The Whole Economy Is Fake

  • Low interest rates have created a unique situation.
  • Economies are fake because you don’t know what’s real value or smoke.
  • What you should do might surprise you as to play along isn’t such a bad idea.


Something that’s easy to forget is that the current financial environment is rigged and not many discuss this because it’s done in a legal way.

In today’s article, I want to quickly explain what has been going on in the financial environment over the last decade and how natural market forces are distorted in order to increase asset prices and enable the economy we live in to continue as it has for at least a while longer.

I’ll conclude with what to do in relation to what’s going on in order to improve our financial wellbeing for the long term.

The Trigger For Market Rigging

The trigger for market rigging isn’t the 2009 great recession, it’s simply debt and lots of it. Total public debt as a percentage of GDP increased from levels around 30% in the 1970s to the current 103%.

Figure 1: U.S. public debt to GDP. Source: FRED.

The situation in Europe isn’t much different as the debt to GDP ratio is at 86%.

Figure 2: Euro zone debt to GDP. Source: Trading Economics.

These large debt increases have been normal throughout human history and are a normal sign of the long term debt cycle. You have short term recessions that usually happen every 5 to 10 years and you have long term issues that happen every 75 years on average where the last time humanity was in such a crisis was the Great Depression of the 1930s.

As the debt burden is high and governments want to avoid a great depression scenario at all costs, after the great recession in 2009, their goal was to input as much money as necessary into the economy and lower interest rates to allow for more borrowing and stimulate the economy. The idea was that higher asset prices would spillover to more spending, higher wages, and eventually inflation which would allow for easier debt refinancing. Central banks have purchased a huge quantity of financial assets on markets and increase their balance sheets by an average of 5 times over 10 years.

Figure 3: FED, ECB, and BOJ balance sheets. Source: FRED.

As central banks mostly buy bonds—with the exception of the BOJ which also buys ETFs—a big demand for bonds has lowered interest rates and also made stocks more attractive to investors as a dividend of 2% looks much better than a 10 year note with 0.48% yield like is now the case for Germany.

Figure 4: 10-year German Treasury yield. Source: FRED.

So, when bond yields fall from 4.2%, as was the case just 10 years ago, to 0.48%, all those who have high debt burdens are happy while those who have been diligently saving are screwed and tempted to invest in stocks and real estate chasing any kind of yield. This pushes such markets higher and politicians and monetary policy leaders expect such a situation to improve the health of the economy as people spend more.

Financial markets are legally rigged and that’s something we all should keep in mind as you can’t fight the FED.

Now, things have been improving as the FED has started increasing interest rates, but the ECB and BOJ are still pumping money into the system which consequently spills over and we still have high asset values, plus employment is improving which increases demand for assets.

Figure 5: S&P 500. Source: FRED.

The monetary market rigging mission was a success as asset values increased, real estate values also increased and are mostly above 2007 levels which allows for more debt, better collateral, and everybody is happy.

Now, where does the rigging part come in?

Well, a country can now borrow at 0.48% interest rate while companies can borrow at 1% or 2%, and junk companies can borrow at 5% or 6%. This distorts normal market forces and increases competition which keeps inflation low and reinforces the cycle of how good low interest rates are. However, keeping interest rates artificially low because nobody with a sane mind would lend money to somebody else at a rate that’s below zero for 10 years. So, we live in a rigged economy and all that is going on around us is fake thanks to the immense liquidity that has been produced.

What To Do

As long as we, people of the world, have faith in our currencies, things will remain as they are. However, if in the next recession we lose faith in our currencies and business conditions get tough, the only things that will provide value are real assets that are actually there and that you can touch. Those who have land will benefit, gold, real estate, some commodities, producing assets not under debt burdens, and all those assets that have been adding value for a few thousand years now.

Another thing to do is to play the government’s game where a loan can be taken and invested in a real asset that is going to keep its value no matter what while the loan might be easily repaid in the next round of monetary easing. When somebody is giving you money practically for free, why not take it? Interest rates in the U.S. have gone up a bit, but the situation in Europe is one to still take advantage of.

As for stocks, be well diversified and try not to follow the crowd by investing in whatever, no matter the book value. I think that a good portfolio can be created with the same upside potential, but with a much better price to tangible book ratio.