Most of us are aware of the irrational behaviour of the stock market.
However, recently that has reached an insane limit, completely defying any logic.
Central banks throughout the globe have been providing liquidity (funds) into the economy in order to revive and stimulate business. These funds have sloshed into the financial markets, entailing distortions there as well as in the real estate sector, to an almost unmanageable extent.
There is a strange inconsistency in the gold market where physical demand is up 53 per cent recently. Despite this, the paper market quotation for gold and gold mining shares has fallen precipitously. Too, U.S. holdings of foreign gold reserves have disappeared. Perhaps the rumours of government manipulation explain these anomalies.
Most investors nowadays are adjusting to the idea that the Federal Reserve will start to “taper” the infusion of funds. That, coupled with concerns that Chinese growth is slowing down, should be instilling fears among investors, but so far that has not been the case.
Yet, financial markets have developed unique rationalizations. If central bank stimulus ends, that theoretically implies that business conditions are improving. Further stimulus will diminish, and that justified bullish sentiments.
Still, if the injection of funds into the financial markets continues because business is not improving very much, that is bullish for markets. In either case, good news is good news and bad news is good news for markets. How absurd!
Investors should have enough common sense to reject that “thinking,” that good news is beneficial for financial markets and bad news likewise is positive for bond and stock markets.
To reinforce the paradox, investors have assumed an overweight position in equities. They seem to infer that eventually business conditions will improve sufficiently to justify above-average prices for stocks.
The latest data from Eurozone reveals that conditions there are stabilizing, but the Chinese economy is a cause for concern. On the television program 60 Minutes, it showed mile after mile of empty shopping malls and apartment houses, suggesting a great deal of trouble ahead in the world’s second largest economy.
That and our prevailing sluggish economic growth are not good backdrops for rising financial markets.
Clearly, sobering thoughts for investors remain a prudent course of action.