Stock Market Hindsight Versus Market Foresight

Occasionally we receive comments along the lines of ‘you try to push the market lower’ or ‘talk the market down’. Some mistake our realism for grumpiness. Or assume we just don’t like it when the stock market goes up.

While flattering, we must admit we have no control over the stock market whatsoever. It doesn’t matter which way we push or pull. The stock market couldn’t give a hoot about our opinions.

For the past few weeks we’ve been telling our readers at Sound Money. Sound Investments that this current rally is a bear market rally. It will end in tears. And for the past few weeks the stock market has disagreed.

It thinks Ben Bernanke and Mario Draghi have it sussed. That they can just feed liquidity into the market by taking bad assets off the banks and giving them chips – oops, we mean cash – to play with in return. And then the banks can give that cash to insolvent governments so they can try to reverse decades of systemic welfarism WITHOUT fracturing their societies.

At least that’s the plan in Europe. The US keeps borrowing hand over fist for we don’t know what. There’s no spending reform going on there. And anyway, isn’t the US economy recovering? Why does it need the US government to run a budget deficit of US$1.1 trillion in 2012 (around 7.5 per cent of GDP) if things are looking brighter?

That’s because they’re not. Bear market rallies are tailor-made to make you think things are getting better when they’re not. Actually, they’re designed to make you stop thinking, full stop. After worrying for months about Europe and Greece and the slowdown in China, a rising stock market makes you think all is well. You don’t examine the reasons behind the rally – you just accept them.

We discussed this issue in yesterday’s Sound Money. Sound Investments report. We also discussed the crucial difference between hindsight and foresight. To preserve your wealth in this post-bubble world, the use of foresight is crucial. Hindsight will provide an explanation, but it will be a costly one.

Everyone understood the reasons for the GFC in hindsight. But very few had the foresight to see it coming. We’re not saying we know what’s ahead. What we do know is that this rally is based on nothing more than the hopes and dreams of central bankers. The stock market is living the dream at the moment. The question is – for how long?

What about Australia’s role in this global drama? Glenn Stevens at the Reserve Bank of Australia thought the price of credit was just about right this week. He thinks the European and US economies have improved and China’s slowdown is going according to (central) plan.

That’s a conventional opinion and it’s based on hindsight. For an unconventional opinion, with liberal use of foresight, have a read of Satyajit Das’s recent article: Vulnerable to External Influences – The Economic State of Australia (Part I)

For the record, Das was one of the few experts in the world who foresaw the credit crisis well before it happened. He’s speaking at our upcoming conference in March. Das requested extra time for his presentation and question-and-answer session so he could deliver something really worthwhile for attendees.

To benefit from Das’s foresight – and much, much more – sign up for the show here. And read on below to find out why Australia remains vulnerable to events in Europe…

Greg Canavan
for Markets and Money

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, Markets and Money is published in 7 countries with a worldwide readership of almost 1 million people.

Leave a Reply

Be the First to Comment!

Notify of
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to