Thursday, December 28, 2017

Bubble Deniers

Bubbles occur when the perceived value of some commodity far exceeds its real value.   In order to do this, some folks have to keep the perceived value in the public eye, and tamp down any mention of real value.   Social media is the perfect platform for bubbles.

In the world of investment scams there are what I call bubble deniers.  These folks, and the arguments they make, fall into a number of categories, and basically their goal is to groom and program people to buy into investment scams by de-legitimizing any opposing viewpoints.  Their tactics and types are many, and include one or more of the following techniques to shout down opposition to pyramid schemes, bubble Investments, Ponzi schemes and the like.

One way to tell if something is a bubble or a scam, is if you see these sort of techniques being played out either online or in-person.

The bubble denier proper, denies that bubbles even exist.  I ran into this recently when we were discussing the tulip bubble. I received an email from a bubble denier claiming the bubbles never existed in fact the Tulip bubble in Holland 1600s never even happened.   That's good news to all the people who lost their life savings on tulip bulbs - maybe their descendants will get their money back.

The so-called logic behind this argument was that inflated prices for commodities or stocks or whatever or merely "market evaluations" of those items.  This is sort of a non sequitur.  It doesn't address the fact that the price of these items skyrocket in a short period of time and then crash just as quickly.  If these are truly realistic market valuations of these commodities or stocks, why do they rise and fall so quickly?  And the answer is of course that they are not realistic evaluations but inflated or hyped evaluations - they are skewed perceptions of value, and it is all-too-easy to skew people's perceptions through persuasion.

And that is how con artists make money out of these scams, whether it is hyping gold or hyping penny stocks or whatever.  The idea is to change the perception of the value of an item and get people to pay a lot of money for it, before you pull out the rug from under them.

UPDATE:  Another way to "validate" inflated prices is to engage in sham transactions.  Beanie Babies are listed on eBay for thousands of dollars, even as the company making them warns that even the most "valuable" one is worth maybe $20 on a good day. These listings (which never result in a sale) are used by con artists to ensnare the unsuspecting into buying their worthless junk for hundreds if not thousands of dollars.  Or, it is like mortgage fraud, where straw-buyer sales of homes drove up prices - and the fraudsters take the cash profits, leaving banks (and you and me) holding the bag.

Another technique is the credentialist argument.  They will quote or cite some so-called expert in the field, saying that the value of the commodity or stock or whatever has nowhere to go but up.  This was common during the gold bubble (which I can think we can now say has burst) where "experts" predicted that gold would hit $5000 an ounce, "soon" - without any reasons being given.  Of course, the credentials of these people is usually somewhat sketchy.  Often, the only real credential they have is proclaiming themselves to be expert on the field whether it is gold or Bitcoin or some heavily hyped penny stock.

The victims or potential victims of these scams are then told, "Look, Mr. Credential says this is a great deal, and the naysayers, what credentials do they have?  They don't know what the hell they're talking about!"

And people will believe these sort of arguments, and even repeat them among each other.  That's the beauty of all of these scams and hypes is that not only will people believe what you or your audience shills or trolls say, but the victims will actually repeat these things themselves - what the Soviets used to call "useful idiots."  It is like going to a timeshare seminar.  After sitting in the audience for three hours, hearing what a great deal timeshares are, you may find that you yourself fall for this rhetoric and actually repeat it to others. Why not invest in your vacation?  Why not, indeed.

(Shills bear mentioning, and the term is from the auction world.   A shill is a "plant" in the audience who places fake bids on auction items, in order to gin up the price.   If an item is getting no bids, the shill will bid on it to make it look like people want the item.  Or if a buyer is serious about buying it, the shill will counter-bid, trying to get the buyer to raise his bid (a tricky bit of business, as if the shill over-bids, the real buyer may back out).   Sometimes, a real shill isn't needed - the auctioneer merely points in a vague direction and calls out a phony bid he claims to have seen.   Since he is usually pointing at the chandelier, these are called "chandelier bids".  As you can see, the auction world is another example of how perceived value trumps real value.)


The good news is, whenever you see these sort of arguments in play, you can be sure you have stumbled upon a scam, con, or bubble.   Legitimate investments don't need to skew your perceptions to get you to invest. 

The third subset of this group or type of argument is the phony mathematician. This is the guy who cranks numbers to show that whatever the investment is, it is a good deal. Of course, the numbers are either fake or skewed or the math is wholly wrong.  But few people challenge it, as few people really have a visceral understanding of math.  For example, in one gold group I recently visited, a fellow opines that gold is still a good investment for anyone who bought it in the past, except perhaps for the three or four years when it peaked in 1981.  Other than that, he argues, it has "held its value" with regard to inflation and therefore would have been a good investment for anyone.  As he put it, "Any investment in anything that's gone up in value has to be good investment right?"

Of course, there a lot of errors in his mathematics.  To begin with, besides the bubble of 1981 there have been other bubbles such as in 1974 as well as the recent bubble in 2011 where the price peaked at $1,800 an ounce before falling back to $1,200 today.  Not only that, by selectively choosing start and end dates, they're showing it to be a "good investment" when in fact it really wasn't.  Even if you bought gold after the bubble burst in 1981, you would have seen absolutely no appreciation in it for almost 15 years.  Factoring in inflation, that's losing money.  Thus, it was really a bad investment for more than merely a time period of a few years during the bubbles but also during the long stretches where it just simply fail to appreciate in value.

But his argument carried the day, of course, with others "piling on" (some shills, some useful idiots) echoing the sentiment and not bringing up any sticky details that might derail the group-think.

The reality is, the only really good time to buy gold is right before it shoots up in value in a bubble, and that's really hard to predict.  Even harder to predict as when the bubble will burst and then sell out in time.  In fact, bubbles are really shitty investments to begin with, and there really is no way to properly time that the buying and selling of bubble items. The best thing you can do is just stay away from these things.  And specious mathematics doesn't change this analysis.

Yet another tactic used to preserve the group-think is the personal attack which may be combined with baiting - along with a combination of the previous techniques.  I noted before in another posting how a fellow in another blog tried to debunk some sort of scam.  Like clockwork, he was baited by people perpetrating the scam - posting messages on his blog which were incendiary.  When the blogger responded, the troll played the classic game, "Well, I can see my comments have clearly upset you!  Why don't you calm down and we can talk about this rationally?"   In other words, the guy's a weirdo, so whatever he says can be discounted.   And that's how the bubble promoters work, on their sites.

If someone questions the legitimacy of whatever it is they are doing, and the above tactics don't work to convince the plebes to keep the faith, you just attack the attacker.   "Don't listen to him - he's nuts!  Everyone who knows anything knows that gold/bitcoin/pennystocks/real estate/timeshares/whatever is the greatest thing since sliced bread!   He's probably just miffed he missed out on such a good deal!

Arguing with these folks or trying to point out the flaws in their logic is fruitless - regardless of whether it is a paid troll selling the commodity in question, or just the useful idiot at work who bought into it, and is now proselytizing on his own.  The best thing you can do for yourself, is not try to "save others" but just walk away.

The good news is, whenever you see these sort of arguments in play, you can be sure you have stumbled upon a scam, con, or bubble.   Legitimate investments don't need to skew your perceptions to get you to invest. 

* * * 

UPDATE:  With regard to Bitcoin, South Korea said today that they will close cryptocurrency exchanges unless they can be made accountable (i.e., - provide the government with the names of who is buying and selling the currency and how much).   Like clockwork, a cryptocurrency "expert" (self-appointed, natch!) tried to spin this as South Korea being "jealous" of "so many people making so much money in cryptocurrencies!"   Uh, right, that could happen.

The reality is, of course, that their neighbor, North Korea, is skirting sanctions, engaging in arms and drug trading, spreading ransomware, and doing all sorts of nefarious and illegal things using Bitcoin as a medium of exchange.   Shutting down Bitcoin is their way of striking back at a rogue state.

We are moving to a cashless society where physical money is disappearing quickly.   This is good news for governments and tax authorities, as it is harder to conceal money electronically.  Even Swiss bank accounts and offshore Cayman Islands banks have been pierced by governments.   If they are taking down the Swiss, do you think they will let Bitcoin get a pass?   I think not.  South Korea and China are already cracking down - the rest of the world will follow suit.

And then what do you have?  A "currency" that costs more to use, takes longer to use, and is just as traceable as a credit card transaction.   Hmmmm.... that value does that have?

UPDATE:  A reader sends me a link to a blog entry where the blogger engages in the old "the tulip bubble never happened, thus Bitcoin is not a bubble" bit.   But that is not the blog entry I was thinking about - but rather one from several years back at the height of the gold bubble, when someone made the same argument - the tulip bubble never happened, thus gold is not a bubble.   Since gold crashed from a high of nearly $1800 to $1200 and has stayed there, I think we can call that a bubble now.

Another person argued we should "go back to the gold standard, when the economy was stable!"  He uses credentialism ("respected Wall Street Publisher") and the ersatz mathematics to make his "point".  But as I noted in my blog entry, there are maybe - just maybe - one or two bubbles that burst when we were on the gold standard.

No bubbles?   You don't have to go back to the 1600's to find examples of bubbles.   We had one just a few years ago in gold, a few years before that in houses, and before that in tech stocks, and so on.   And in each case, the techniques recited in this blog entry were used to shout down the naysayers.

This alone, is proof of a bubble - when people say, "It's not a bubble!"

And MLM isn't a pyramid scheme, either!  Ha!