- Money Morning Australia

The Point of Maximum Pessimism

Written on 02 September 2011 by Kris Sayce

Phew! What an exhausting month.

On the last day of July, the S&P/ASX 200 index closed at 4,424 points.

On 9 August the index reached an intra-day low of 3,765 points.

At the close of trade on Wednesday the index closed at 4,296.

As you can see on the logarithmic chart below, the stock market action this month has been the most volatile this year:

stock market chart
Source: CMC Markets Stockbroking


In fact, for a similar sized percentage move you have to go back to April last year. Funnily enough, that too marked the approximate end of a period of U.S. Federal Reserve money-printing.

And now the market is waiting for the next central bank move.

Not surprisingly, the market has gone all topsy-turvy.

What’s good is bad, and bad is good

Economic news that’s normally seen as positive is now seen as negative. Why? Because the market fears it may stop the Fed from printing money.

Not only that, but bad economic news is cheered… because it increases the chances of money-printing… and that’s seen as a good sign for the markets and the economy.

For example, this from Bloomberg News:

The dollar rallied, Treasuries rose and U.S. stocks swung between gains and losses, as the manufacturing report bolstered optimism in the economy while dimming prospects for more monetary stimulus from the Federal Reserve.

It’s crazy. Positive news should be positive for stocks. But these days, that ain’t always the case.

The only explanation we can come up with is this…

A genuinely self-sufficient market will take months and possibly years to recover and grow. But – and here’s the key – it will be sustainable growth.

By contrast, a central-bank-induced “recovery” will hit the markets right now, like a big shot of coffee. But – and here’s another key – it’s not sustainable. Just as the effects of previous stimulus soon wear off, so will this one.

And traders who have gotten into the market on the basis of more stimulus know this. That’s why they’re getting out on any signs of positive economic news.

However, they needn’t be so nervous. Because we’ve got some news for them…

Fed meddling is certain

Action by the U.S. Federal Reserve is almost guaranteed. Meddling is what these guys live for. But we understand traders’ nervousness. When they’re punting with huge leveraged bets the last thing they want is to be in the market while other traders are selling out.

That’s what’s making the market hyper-volatile.

And if you’re in any doubt about the impact of stimulus on the real economy, it’s worth noting the following quote from the Financial Times. Because not everyone is happy about the outlook for the economy:

In many countries, the surveys of purchasing managers produced the lowest readings of manufacturing activity, orders and jobs since mid-2009, when the world economy was crawling out of recession.

To us, the situation is clear: for as long as policymakers continue to meddle and try to boost the economy, the longer the economy will stay depressed.

Yes, it may help the stock market in the short term by artificially inflating prices. But long term, it will do no more than disappoint investors.

And eventually investors will get so used to the post-stimulus disappointment they’ll forget to get excited about the stimulus beforehand. That’s when you’ll know the market is at the depths of the depression.

And that’s when the market will be at a genuine bargain price. Famous investor John Templeton only bought stocks when the market reached “the point of maximum pessimism”.

In 1939 it reached that point. He bought stocks. He made a fortune. But not straight away. It took time. Central bankers aren’t interested in taking time. They’re trying to bag a quick fix.

And that’s what’s creating the volatility and distortions in the market.

So right now, some individual stocks are at “maximum pessimism” prices and are worth buying. But the market as a whole isn’t.

That will only come when investors are no longer fooled by the magic charms of central bankers.

Until then, the action you’re seeing now is nothing more than a trading market. That’s great for traders. And great for punters. But it’s not so good for the conservative investor who’s just trying to save for retirement.

And by our estimates, it seems the market is set to stay this way for a while yet.


Publisher’s note: Something else that’s “great for traders”: Murray Dawes’ latest market update video, posted on YouTube on Wednesday. If you haven’t watched it yet, go here now. It’s rare that an experienced trader will give his insight away for free. So while he’s happy to do it, you should lap it up! For Murray’s latest overview of the market… and an idea of where he thinks it could be headed next… click here.


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21 Comments For This Post

  1. Bobby Says:

    US is suing the banks for bad mortgages.


    This shall be “good” for the markets tonight.

  2. Peter Fraser Says:

    Thanks Bobby, I guess they will sue for the $30B lost by Fannie and Freddie, and then they will settle out of court for half that. The banks should be easily able to afford that, and if not the public will have to bail them out again.

    If it wasn’t so tragic it would be funny.

  3. Drood Says:

    If we,re all here to make money, why should banks be villified for doing it well?

  4. PT Says:

    They weren’t making money Drood. They were going broke, begging the American government to be bailed out, and then kept on paying out bonuses and acting as if nothing was wrong.

    Try “The Big Short In The Doomsday Machine” by Michael Lewis. I also recommend his book, “Liar’s Poker”, which will explain how it all started.

  5. PT Says:

    The reason the mess ain’t going away is because those who created it are still in power, and haven’t changed their ways. (Or have they? I could be at the point where I’m getting out of date here but I doubt it. Anyone know any better? … )

  6. Peter Fraser Says:

    Drood there is absolutely nothing wrong with a bank making money, in fact it is desirable, but when it was done with dishonesty and sold off to unsuspecting investors, that becomes a diffferent matter.

  7. The Wolf Says:

    PF… how is that fence ?

    “but when it was done with dishonesty and sold off to unsuspecting investors, that becomes a diffferent matter.”

    It isn’t a different matter… it is fraudulent…and they should be prosecuted, fined, directors and managers jailed, and certainly not bailed out by the taxpayer to do it all again ;-)

  8. Peter Fraser Says:

    Wolf – yes I agree, I’m disappointed that people are not in jail over what has happenend in the past. I believe a couple of people have been charged in the US, but surely there are hundreds who were complicit and knew the full extent of the damage they were causing.

    Fence – I’m lost on that question. I painted my front fence/wall recently – looks great, but I don’t remember having an international forum discuss it. Cheers.

  9. Drood Says:

    Why is what you lot do more ethical than the banks?
    Ok so its done with dishonesty , but so is investing in stocks that cause pollution , made in sweatshops, kill a few iraqi,s for.
    Pretty easy to say other business,s ,countries shouldn,t do things then invest in those things.
    PF…How many unaffordable mortgages did you help people obtain?

  10. Roger Guillemet Says:

    It was reported this week that 25 of Americas top 100 companies payed their CEOs more than they paid in income tax. Not fraudulent, but not right either.
    Given Telstras increases in pay to its directors of 50% plus whilst it sheds profits shows its not just a US problem and Bluescope lays of mass employees and increases directors income whilst seeking a bail out from the taxpayer.
    It seems there are no Ethics in the business world just out and out Greed. All in the name of increasing share holders profits of course.

  11. Peter Fraser Says:

    drood – I was referring to US lending. It’s a little hard to blame every small cog in the machinery, some aren’t trained to see any further than their desk,and nor are they encouraged to, but overseeing the whole operation there would have been people who knew that it would blow up eventually. Even if we generously allow for some initial naivety, there would have been warning signs when borrowers kept coming back to refinance essentially to get their debts up to date. When the volume of that business gets to certain levels you know that you have a problem. The experienced heads of lending would have been able to see that, and they knew that house prices wouldn’t keep rising strongly forever, history always repeats itself.

    There was a precedent for this in the “savings and loan scandal” in earlier decades, which was much smaller, but many went to jail, and many copped fines.

    As for me, funny but I’ve only had one client complain. That was after I had hauled his @rse out of a major financial hole, negotiated a number of his large debts down for him, and then helped him through a sale which left him with a fair bit of money left over – all at no charge. He called me some time later after he had spent almost all of the money wanting another house and a new truck. When I said that I didn’t want to be involved he got really angry and threatened to come and get me. I said “well you know where I am and you know how to find me” – he never showed up.

    Lending is one of those strange occupations, when it is done well it provides business with much needed capital to expand and grow stronger, or it provides a roof over a families head, but when it goes wrong it really does become a problem. There are many tell tale signs to look for, but never any absolute guarantees. Being right about 99% or 98% of the time is as good as it gets. Over a long period of time a 100% rate is quite impossible to achieve.

    Those 1% or 2% errors don’t have to lead to a tradgedy, they can be handled well if all parties act sensibly. I had to sell a largish family business up years ago when I worked for a bank,not a pleasant thing to do. When it was over all the partners came in to thank me which wasn’t what I was expecting. It let them move on with their lives and it released them from a gradually failing business – they all knew it was failing, but they didn’t know how to take the first step. They were skilled men and all had good well paid jobs within a few weeks. I did think that they would all want to shoot me, but they were actually grateful.

    So drood, you point your little finger at all those who post here, and the authors of the articles that we all like to pull apart, but exactly what is your claim to sainthood? If you constantly adopt a “holier than thou attitude” you may be asked to justify it one day…

    Or do you spend your days righting wrongs, rescuing fair maidens, and leaping tall buildings with a single bound.

    Are you sure your superhero cape still fits you?

  12. Drood Says:

    PF…Fair comment , I m definitely no saint , i do try and buy ethically wherever i can and i send a lot of money to the various relief agencies. I also get out and protest when appropriate, have worked overseas on various projects. and spend some time writing to ministers, governments , companies etc. In other words t least i get off my backside and try.
    I cannot abide the culture here of its not my fault, its the unemployed bludgers garbage. I wonder how many of them work for themselves.
    They completely fail to understand reality and the consequences of their actions. Read Shae Smiths article today , she is in reality ( if you follow the train to the end ) advocating support for a company that wants to make somebody,s life completely miserable in order to make a few dollars.
    Why can,t Lynascorp refine REM in their own back yard. Because people here don,t want that in their own backyard ,they just want the benefits.The argument that its cheaper overseas also means they are exporting jobs. How does that benefit Australia.
    Whose the idiots at the moment re tariffs, Australia or China. If anyone in business had any foresight they would have seen what China was up to years ago and reacted. How on earth do they ever expect to compete with China if they don,t impose their own tariffs , the Chinese are just laughing at us. They will soon rule the markets completely without firing a shot.
    I keep recommending the Zeitgeist project, as it is promotes a genuinely different system based on a resource economy run on scientific principles. You come up with an idea to make peoples lives better, easier and you will get the resources to do it.
    Whats more innovative , everyone using the same smartphone or everyone gets to eat.
    With the zeitgeist model everyone can have both. They don,t pretend to have all the answers yet but at least they are trying.
    Everyone here thinks that this is impossible, yet i am willing to bet they know nothing about it and are too lazy to find out.
    As for yourself, I understand you have to make a living and i also think you are a reasonable man who is able to think things through but don,t kid yourself plenty of those mortgages you have sold will be to people who couldn,t really afford them.
    Right now i build power lines for the government ( and yes they are hopeless at it here and yes i have worked for private companies and yes i have run my own business) ) so that the folks here can get online and whine about things they mostly know f-all about ( ie how their power even gets there and that they pay part of their taxes so that i can go out in the next cyclone and keep it on ) and yes i am fully aware that i am part of the problem.
    The difference between me and most people here is that i care about my fellow human beings not just myself.

  13. Drood Says:

    Ignorance by the way is not an excuse.

  14. Bobby Says:

    Outside any of the above discussions. I am a migrant but came here to stay.


    This is at a time when local jobs are under threat and predicted to be lost. What is this government doing?

  15. TRB Says:

    Poor Drood wants to save the world with good intentions but all it does is make matters worst.
    Drood all these donations you give just keep the status quo the money is used to buy guns and billion dollar swiss bank account for corrupt violent leaders.
    Little bit gets to the poor something like over 40% goes in administation costs new houses,expensive cars and $100,000 Salary to do nothing but play the bleeding heart to the suckers.
    Drood please read this frank book

    POOR STORY by Giles Bolton.

    An insider uncovers how globalisation and good intentions have failed the world’s poor.
    Drood you want innovation it’s starts with destroying the status quo next time you see a homeless man in the street give him a $100 dollars aleast you know 100% of your money is going to that poor soul not some corrupt greedy charity organistion that takes 40% commission.
    Yes Drood I still stand by my comment about shortsellers being innovated and cleaning the system out to create a innovate honest society.
    Nobody else is going to do it , forget you gutless APRA and AISC.
    Rule of law is most fundamental thing in society and shortsellers are the last good guys to keep the bastards honest.
    Good short sellers spend thousands of hours checking weak balance sheets and talking to people it’s hard work Drood.
    You try trading for a living you must have good control over your emotions, you can lose everything
    I dare you to try it for a living and then make your self righteous comments.
    I can tell you a productive job is easy of done it, trading and controlling your irrational emotions is a lot harder.

  16. Drood Says:

    TRB………..You need to get out a bit more mate, try going to school or something.

  17. TRB Says:

    Drood anybody that challenges your bleeding heart needs to go to school.
    Let me tell you something Drood been around a long time come from the school of hard knocks you have no idea of the real world.
    Read the book POOR STORY and educated yourself and don’t be so naive.
    Toughen up princess!

  18. Drood Says:

    TRB , I dont need to read your book, i,ve been to see these places and i have worked for one of the agencies.
    Yours is just another negative argument. Do nothing.

  19. TRB Says:

    Drood I can speak from experience I can tell you alot of money is wasted on corruption and expensive salaries,expensive cars and houses.
    You are problem Drood do nothing and enjoyed ripping the poor off.
    If you had a conscience speak out, say alot of this bleeding heart stuff is a ripped off.
    I give my charity money to a homeless persons in the street 100% goes to that poor soul.
    Just force cash into homeless peoples hands and walk away, they don’t even know me and see me for just a few seconds.

    My own small protest against large corrupt administation costs!

    60% is not lost in administrations costs to your greedy agencies.
    Again you made false assessment of my trading values.
    Please Drood read POOR STORY by Giles Bolton.

  20. Drood Says:

    TRB…What is your experience?

  21. TRB Says:

    What is my experience Drood.
    Sad stories of real old people suffering mental illness and homeless.
    All they need is few seconds of somebody saying hello and giving them some cash.
    They don’t need massive administration infrastructure and some inexperience young overpaid case managers telling them what to do.
    As a trader I will not invest in a company that spends over 40% on administration costs and same with any charity.
    I think most traders would think the same way.


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