When Fools Make the Rules

-- Perhaps Ben Bernanke was in a neighbourhood bar the other night, getting wasted and telling the patrons just how screwed the US economy really is. His night on the truth serum looks like it leaked back to Wall Street – and it panicked.

-- Asking why the Dow Jones Industrial Index chose to crash by a massive 500+ points last night is a futile question. There are plenty of reasons for it, but they didn’t all of a sudden just become public. When the smell of fear starts to pervade a leveraged, overvalued and corrupt market, the change in sentiment can turn on a dime. And that is what happened.

-- So don’t expect anything in the Aussie market to be spared today. In this environment, fear becomes the dominant emotion. Price prevails over value and the rational voice is carried away by the storm.

-- If you’ve been reading the Daily Reckoning for more than a few days, you’ll know that we’ve been bearish on this market for some time. In our paid subscription service, Sound Money. Sound Investments, we’ve recommended our members hold 60 per cent cash in their portfolios, over 20% gold and silver, with the rest in industrial equities.

-- From that perspective this crash is a good thing, because it provides the opportunity to buy good quality companies cheaply. But market crashes are a very painful experience. You need to wrestle with the emotion that things won’t get better, that the market will keep getting worse.

-- We not sure what the term is – maybe the ‘recency effect’. It’s when you extrapolate very recent events into the future and can’t see another scenario unfolding. Of course, when your wealth is dipping with the market, your rational judgement is clouded. You only see the trees, not the wood…and the trees are crashing down around you.

-- So what do you do?

-- Well, the time to panic is before everyone else does. We’d like to hope we’ve encouraged you to be alert through our daily ramblings. It better prepares you for when the real panic sets in. When you’ve seen something coming – although you never know in what form it will arrive – you’re ready for it. And your rational self takes over.

-- If you do own stocks – and here come the investing chestnuts – know what you own and why you own it. Preferably, you should know the value of your investment, not its price. If you feel comfortable, well, now is the chance to prove you’re a long-term investor.

-- If you’re 100 per cent invested in this market, your pain threshold may be triggered today. When that happens, you need to reassess. Are you getting the right advice? Is the advice right for YOU? Do you know who you are? (As an investor, that is – we don’t want to get too philosophical here.)

-- The good news is the Aussie market is much cheaper than the US market. The US sell-off is occurring from a position of high PE ratios based on record high profit margins. That means the US could have a long way to fall.

-- But the Aussie market has had to compete with cash rates of around 6 per cent. So asset prices have stayed low in order to attract buyers. Further price falls from here will make equity prices attractive relative to cash. That’s especially the case if you choose to ignore 95 per cent of the economists out there and believe that interest rates will fall in Australia later this year or early next.

-- Currency manipulation, just another potent ingredient in this horrible global cocktail of bad policy decisions, is one major reason why the RBA won’t be raising rates anytime soon.

-- This week, the Swiss National Bank cut interest rates in order to weaken its currency. And yesterday, the Bank of Japan sold a torrent of yen – for about the 1,000th time since its economy tanked back in the middle ages – to try and help its exporters.

-- Everyone wants a weak currency. The idiots who ‘run’ these economies haven’t even glanced at a history book to know how that policy turns out. If Glenn Stevens wants to be the lone inflation fighter in the world, he’ll send the dollar soaring and the economy into deep recession.

-- Not that there is anything wrong with recessions. The fact they have been avoided and put off for so long if why we have so many problems now. But when every other central banker has thrown the rule book out the window, does it makes sense for Stevens to keep playing fairly?

-- Perhaps Bernanke will wake with a hangover, take a Berocca and get back to doing what he knows best. The guy is a self-proclaimed Great Depression expert and vanity will not allow him to stand back and do nothing. But anyone who has read his book knows he has virtually nothing to say on the causes of the depression. He only has ideas on what should be done after the bubble bursts.

-- Bernanke’s money printing has failed in the past, so it’s not clear markets will be too enthused about more of the same. Indeed, we put much of the recent sell-off down to the markets’ loss of faith in governments and regulators. It’s just so much more risky to be investing when fools makes the rules. So prices head lower to account for that risk.

-- We’re in a crisis of government. The whole apparatus needs an overhaul and more than anything we need a return to sound money so people can conduct business in a stable environment.

-- That reality is still some time away. In the meantime, don’t look at the market as crashing, look at it as getting cheaper. Because as a value investor, we think this market is beginning to look very cheap.

Regards,

Greg Canavan
Daily Reckoning Australia

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