Zak Mir on Smart Money vs Dumb Luck

Last week I highlighted that the markets tend to move in the direction of greatest collective financial loss, at least in the near term. Perhaps this concept also related to the moral proverb “the Lord giveth, and the Lord taketh away.” This is especially the case as far as current stock market bête noire Tesco (TSCO) is concerned, where presumably over years and even decades it was the gift that kept on giving to shareholders.

Its market leading position, as well as the familiarity of the company, meant that everyone from Warren Buffett to the novice investor could simply buy shares in the supermarket safe in the knowledge that there would be stock price appreciation and a decent dividend payment to boot. In this way one could say there was a perfect alignment of the smart money and dumb luck.

Of course, all of this changed at the beginning of 2012 with the company’s first profits warning.

Most took this as a sign to buy the bad news on the basis that the group would bounce back – it is a market leader after all! Since then the shares have more than halved and it could be said that rather than being a sure and steady play, Tesco is now in the league of a many a mining stock. That is to say, we have a desperate search for the floor amongst intelligent and not so intelligent traders and investors alike. Indeed, it would appear that the shares have become something of a Pepsi Challenge (or perhaps just a fairground attraction) for those who would like it on their CV that they called the bottom on a high profile meltdown.

Presumably, the best thing is to let Tesco traders do is get on with their arduous task, one that has been so arduous even legend Warren Buffett has lost to the tune of hundreds of millions.

But it has been interesting that just when the image of one of the greats of the financial markets has taken a knock, we find that another has come out of the woodwork to provide a little financial advice: Alan Greenspan.

The former Federal Reserve Chairman oversaw the period from just before the Crash of 1987 to just before the financial crisis in 2006. We can only wonder whether the exit, so soon before the great asset bubble of the 1990s and 2000s burst, was by luck or design. Certainly, you did not have to be Chairman of the Fed to realise in 2006 that things were getting a little frothy.

Judging by Mr Greenspan’s latest comments in the wake of the end of QE, it may be that someone who was generally regarded as something of a miracle worker may have relied on Lady Luck to some extent as well. Nevertheless, his view that QE did not have a net stimulus effect on the economy rather leads us to believe that if he had not retired we would not have had five years plus of a policy from which there is no non turbulent / disastrous exit.

The only exit, if you can call it that is to keep the policy going until inflation rises to hyperinflation. This should lead to gold soaring, but for some strange reason this has not happened yet. In fact, it could be said that the mega rally for gold and mining stocks is rather conspicuous by its absence, not too surprising when we have near zero inflation.

Ironically, against an atmosphere where we have the ECB and Bank of Japan desperate to get back inflation into the system Greenspan has delivered the kind of financial advice he would not have been able to when at the Federal Reserve. He has suggested that gold is a buy. Given that it has already fallen by some $50 since he highlighted the metal, it is probably just as well that he did not give financial advice.

Being long of precious metals / mining stocks has so far been one of the most dumb moves of the 2010s, with the irony that time and again it is the “smart” money which has been backing this part of the market. Obviously, hedge fund legend John Paulson – who won big on the financial crisis happening – has been the major backer and victim to date. His problem – apart from impatience is that while it is highly likely the Fed will not have the guts to raise interest rates for months or even years, the U.S. dollar is soaring on the basis that this will happen. Even if it doesn’t, the U.S. currency remains the strongest play in an “ugly” contest between major currencies. While this is the case both the smart and dumb money will continue to be long and wrong of precious metals.

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