Why Real Investors Love Political Incompetence

The market is extremely volatile. An indicator of market volatility, the Volatility Index [WCB: VIX] crept back above 40 on Wednesday. The VIX is anticipating more market upheaval to come.

Why? The standard response you’ll get is ‘because there’s a lot of uncertainty… about the US… Europe… gold… stocks in general‘. But that’s just a symptom.

It’s the governments and central banks creating this uncertainty. You see, they don’t know they’re largely to blame for the world’s economic ills. Or that their attempts to fix matters only makes them worse.

The market has voted. The best way to move forward from the Euro crisis is for Greece to default. Yet the ruling powers are doing almost everything to avoid this fate.

The Americans, led by Tim Geithner, are upping the political pressure on Europe to create a highly leveraged rescue fund. They want to increase the ‘firepower’ of the €440 billion European Financial Stability Fund (EFSF) by having the European Central Bank (ECB) lend against it.

According to The Age, this could create a bailout fund of up to €2 trillion, with the difference made up of loans from the ECB (which would actually be newly printed money).

The Germans had a ‘print your way to prosperity’ mentality at the end of WWI. It led to hyperinflation.

So while they recognise the need to ‘do something’ to avoid another credit crisis, they are reluctant to put their credit on the line to bail out other Eurozone nations.

As a result, investor confidence is shattered.

This is why you’re seeing so much volatility.

So how do you invest in this mess?

Given this environment, it is prudent to continue to scale into the market selectively.

You’ll continue to see large rallies and sell-offs. So move into the market and buy on the down days – try to resist chasing the market on the way up.

You’ll still be rewarded for investing in good value companies in the current environment. But exactly when you’ll receive those rewards is the question. The skill is trying to find companies which are a good business, but they stock value has been beaten down.

The ongoing market volatility will present buying opportunities.

As always it comes down to patience.

Greg Canavan
for Markets and Money

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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 letters@dailyreckoning.com.au