Gold News

Hapless Money Chasing Misleading Stock Prices

The bull is in full flow...

THE FESTERING sore that is the global monetary system is getting worse, writes Greg Canavan for the Daily Reckoning Australia.

Not that you'd know by looking at stock prices. If you take a credulous look at recent activity, you'd think that the state of the world is actually improving. But it's a long time since prices last imparted any real knowledge of what a business may be 'worth'. These days, stock prices simply tell you the direction and force of tidal capital flows.

Unfortunately, there is no longer a market 'moon' exerting a natural regulatory force on these flows.

Be skeptical of stock prices...they're not telling you what you think they are.

Speaking of stock prices, you know sentiment is pretty good when you see bold and confident headlines such as, 'Shares: What to Buy in a Correction'. We noticed it in the Weekend Financial Review, but didn't bother to find out which shares to buy.

We'd be more interested in an article that read, 'Shares: What to Dump as This Rally Gets Out of Hand'. But we're not going to see anything of the sort. The bull has worked up some momentum these past few months. A vertiginous price drop of 120 points in a day isn't some sort of sign of the fragility and speculative nature of the stock market. It's not a warning shot for people to pull their heads in. No, it's a correction to buy!

And the bulls are probably right, in the short term at least. Momentum works when everyone believes in it. Put another way, when capital flows in a certain direction (towards stocks) it doesn't reverse easily.

But it's worth thinking about who caused the panicked dump of stock last week and why. Well, we know the Fed caused it in their attempts at monetary vigilance. Why? They're concerned that financial markets divorced from economic reality long ago and that things could really get out of hand again.

It's also worth asking whether the erroneous price signals resulting from the speculation, which in turn results from the Fed's green light, are once again sucking the retail investor back into the stock market just as the pros (the speculative hedge funds) eye an exit.

We had a chat with a mate last week. He's a financial adviser with a big four bank. He told us a story about a potential client who had money to invest in the stock market 'because it was going up' and was looking to double it in a few years. But he still wanted safety, of course, the banks, yield etc.

He also told us how borrowing to buy property in a self-managed super fund is all the rage too. Hmmm...dumb money is not the right term. This market will catch out much smart money too. We'll call it 'hapless money'.

Time to Buy Gold?...

Greg Canavan is editorial director of Fat Tail Investment Research and has been a regular guest on CNBC, ABC and BoardRoomRadio, as well as a contributor to publications as diverse as and the Sydney Morning Herald.

See the full archive of Greg Canavan.

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