Sorry for the late arrival of today’s Money Morning.

The market action has been nothing short of amazing.

We don’t normally like to flood these notes with pictures of charts.  But it’s worth it today to highlight some of the big market moves.

First, the S&P/ASX 200…

The Aussie dollar against the U.S. dollar (the blue square in the lower right corner shows the current level of the Aussie – down six cents in a week!)…

The Aussie dollar against the Swiss Franc…

The U.S. S&P 500 volatility index (VIX)…

And finally, the Aussie dollar gold price…

So much for gold being a bad investment for Aussies!

As we’ve noted, the alarm bells have been ringing for days… months… actually, more than three years.

Last night in Europe and North America – and today here – the mainstream finally took notice.

This morning, stocks have taken one helluva beating.

Of course, that shouldn’t surprise you.  We’ve banged on about it long enough…

Fools making rules

Over at our sibling publication, the Daily Reckoning, value investor, Greg Canavan headlined his article, “When Fools Make the Rules”.  If you don’t subscribe to the Daily Reckoning you can check the article out online… and if you like it you can subscribe to the newsletter – it’s free too!

In a nutshell, Greg says fools are running the market.  And the biggest fool of all is Dr. Ben S. Bernanke.  But Bernanke isn’t alone.

Pretty much anyone who works at a central bank and thinks they can steer a market at will is either a fool or retarded mentally… or both.

There’s an ad running on finance channel, CNBC at the moment.  It’s for a foreign exchange and CFD trading company.

The ad features a guy standing at the front of a room talking about his trading… in the style of someone giving a motivational talk.  He says something along the lines of, “Do I go short the Euro against Aussie?  It depends on what Ben Bernanke had for breakfast…”

The camera scans round and the guy – from memory – is standing in front of a bunch of kids.  In other words, he’s not a hotshot Wall Street trader.  He’s a teacher who trades part time.

Anyway, the point is, even though the ad is trying to show that anyone can trade, the real element of truth is world markets are dependent on what Ben Bernanke had for breakfast… whether he had a good night’s sleep… and so on.

Now and for the past three years, nothing else has mattered.

So, it got us thinking.  How well have the central bankers and politicians done with their stewardship of global markets?  After all, supposedly these guys had to intervene because the free market was doing such a bad job…

Driving the economy into a ditch

Turns out they’ve done a crap job.

Remember, it wasn’t the free market that got the world into the pickle.  It was the government and central bank distortions that caused the mess.

But having fingered the free market as the cause, the central bankers and politicians now claim they’re in control and fixing things.

Only they haven’t fixed anything.  They’re just continuing the same crappy policies that ended with the economic meltdown in 2008.

So almost three years after the 2008 meltdown, markets are heading right back to where they came from.  The Aussie market – get this – is only 31% higher than the March 2009 low.

Or to put it another way, the Aussie market only has to fall 23.6% from today’s level to get back to that low.

What it shows is this: for all the trillions of dollars spent and created by central banks, on an inflation-adjusted basis (real inflation, not the rubbish published by government agencies), the Australian and world economies are no better off today than they were three years ago.

In fact, we’ll argue things are worse.

Individuals were encouraged to increase spending and debts because they were told the government would fix things.  Turns out that was a tissue of lies.

Yet still the mainstream tries to pin the blame on the markets and absolve the bureaucrats.  Our old sparring foe, Peter Switzer wrote this in a note today:

“Right now, so-called bond vigilantes are attacking Italian bonds driving down the prices and pushing up the yields and these guys are like short-sellers who sniff a bear market opportunity and go in for the kill. They need a ‘sheriff’ to come into town and make them pay.

“I asked Dr Shane Oliver from AMP Capital Investors if these financial terrorists needed to be crushed and how could it happen before they precipitate a recession?”

It’s laughable really.  The real “financial terrorists” are the goons the mainstream idolises: the central bankers and government bureaucrats.

They’ve single-handedly delivered more volatility to the market and encouraged (and forced) investors to take bigger risks than necessary.  And now, those investors are paying for it as their retirement wealth takes another hit.

Bear shoots the sheriff

But he’s right about one thing.  Short-sellers do sniff out bear markets, and one of the best in the business, Slipstream Trader, Murray Dawes has cleaned up massively for his traders this week.

In fact this morning he sent the following note to them:

“My target of 4200 has been blasted through by last night’s price action. I think it is time to ring the cash register on all of our short positions here. We may see a sharp sell-off in the morning session on the back of margin calls but my feeling is that a 10% fall in a week is going to see fund managers stepping up to the plate in the afternoon in search of some bargains.”

In this case, when the Sheriff came to town, Murray shot back.  When the smoke cleared, only one man was left standing… and it wasn’t the Sheriff!

Murray’s efforts this week show why it’s important to be an active trader.

Sure the market could rebound back.  But why suffer the stress of waiting.  Surely it’s better to profit from the market moves.  When the market falls you can be genuinely happy it has… because you’ve got plenty of cash to spare.

So we can only hope you’ve taken our advice these past few years.  That you’ve become an active investor.  That you’ve bought gold and silver on the dips.  That you’ve reduced your share portfolio.  And that you’re now holding a big stash of cash in your bank account.

Because, while the market looks awful and losses are being made everywhere, NOW is the perfect time for cashed-up investors to start looking for value.

One key point: it doesn’t mean you buy everything today.  But it does mean you should be ready to buy.  That’s something we’ve worded-up Australian Small-Cap Investigator subscribers to be ready for next week.

Here’s a snippet from the special update we wrote to them earlier today:

“I’ve cleared my diary this weekend.

“Rather than taking the kids to the park or relaxing with a book, I’ll work on the August issue of Australian Small-Cap Investigator.

“Because while this may not be the bottom of the market, it’s a great time to look for cheap beaten-down stocks.  Especially those that could recover if the market rallies.

“As always, there’s no guarantee that will happen.  But when stocks have taken a big hit it’s always a good idea to scout out opportunities.”

To our mind, today’s market has September/October 2008 written all over it.  When other financial advisors panicked, we did the opposite – we started buying… And we’re ready to do so again.

Cheers.

Kris Sayce
Money Morning Australia

Before we get on to today’s Money Morning, don’t forget to check out Slipstream Trader, Murray Dawes’ free market update on YouTube.

He recorded it yesterday morning.

Murray was cock-a-hoop as weeks of groundwork bore fruit. We don’t know about you, but normally when you think of traders, you think of them making quick decisions… buying and selling in seconds.

If that’s the image you have of Murray, well, sorry to disappoint you. Rapid-fire trading isn’t Murray’s bag. We’ve seen how he works. He carefully pours over the charts… weighing up risk and reward.

This orderly approach means sometimes he’ll miss a good trade… but the extra work means he’ll avoid bad trades too… that explains his current record of 17 winners from 19 open positions – not even Murray is perfect <wink>.

Anyway, for a free behind-the-scenes peek at where Murray thinks the market is heading next, click here.

Meanwhile…

“For millennia, people have killed and died in pursuit of gold. In the recent downturn, so many investors have been eager to buy gold that it is sold in vending machines. Governments are as captivated by it as individuals are: for nearly a century, many nations’ central banks have stashed hoards of gold bullion in a vault at the New York Federal Reserve.” – New York Times

Reading that you’d think no-one has ever killed or died for paper money.

That no-one has ever killed or died for a leather briefcase.

And no-one has ever killed or died for a loaf of bread.

And the idea of gold in a vending machine… it’s almost as crazy as thinking you can stick a piece of plastic into a wall and suddenly paper money will appear… like magic!

As if that’s ever gonna happen… sorry? What’s that… ATMs you say.

Funnily enough, at the ‘Great Property Debate’ in Sydney a few weeks back, one of our fellow panellists was amused by the sight he saw at the Burj Tower in Dubai.

“It has gold vending machines in the lobby, ha, ha…”

We smiled.

More value than gold?

But the liberal media and mainstream attitude to gold shouldn’t surprise us. Another line from the New York Times states:

“When asked recently why central banks hold gold rather than, for instance, diamonds, Ben Bernanke said ‘tradition.’ Given the long history of humans considering gold valuable, does it make sense to continue this tradition, or should central banks focus on other assets with more intrinsic value?”

The New York Times doesn’t explain which assets have more intrinsic value than gold. We can only guess.

Perhaps the NYT is thinking of Aussie dollars, Euros, Chinese Yuan…

U.S. Treasury bonds…

Newspapers maybe!

We won’t get into a debate about intrinsic value. Except to say individuals and the market determine value.

Stocks have intrinsic value. So does property. And so does gold.

Guess what: chocolate bars and tinned fruit have intrinsic value too.

But only as long as they’re in demand. If no-one demands gold, property, shares, chocolate bars or tinned fruit their intrinsic value will be low… maybe even zero.

Anyway, News.com.au writes this morning:

“Gold back in favour as investors take cover from volatile markets”

In another sign of the mainstream not quite getting it, half the article is devoted to stories of people selling their gold… d’oh!

But look out, is gold in a bubble? The article says:

“The [Perth] Mint states that every week it has dozens of self-managed superannuation investors pouring up to $10 million into both gold and silver, which has also enjoyed phenomenal price growth.”

(Incidentally, our publishers – Port Phillip Publishing – have been one of those buyers at the Perth Mint… the metal is currently stored at a secure location. More details on why they’ve made this purchase soon…)

$10 million a week is $520 million a year. Or just 10% of what the Australian Securities Exchange (ASX) turns over each day!

Or according to the Australian Bureau of Statistics (ABS), $74.7 billion worth of building approvals went through in the 2010-2011 financial year… that means buyers spend over 100 times more on new housing than on gold and silver.

We’ll admit relative dollar values aren’t always relevant to decide if an asset is over-inflated. But it does tell you gold and silver are still fringe investments.

Fear Index higher but still low

So, is gold over-valued?

We can’t tell you for certain that it isn’t. Its value is determined by what the market is prepared to pay and receive for it.

But we do know that measured by James Turks’ Fear Index, gold is well below the early 1980s peak. Here’s a chart of his index going from 1967 to June 2010:

Source: gold-speculator.com

The small blue square on the right is our calculation of where the Fear Index is today – around 3.3%.

And our guess is the gold price is set to go even higher. Today the Wall Street Journal reports:

“The Federal Reserve should consider a new round of securities purchases to spur the economy if growth and employment keep languishing and inflation recedes, former top Fed officials said in a roundtable with The Wall Street Journal.”

If the Fed pours more fresh cash into the market that can only be good news for the gold price.

The question is how the Fed will stimulate. We doubt it’ll be as brazen as before. The mad men at the Fed are no doubt scheming to find a less obvious way of devaluing the dollar and unleashing more inflation on the world.

So what will they do? Who knows? We’ll have to sleep on it to see what we can come up with.

But predicting the actions of mad men is almost impossible. So even the craziest and dumbest idea we could think of will be a million miles away from the ideas swirling in the heads of Ben Bernanke and his pals.

What we do know is we’ll keep topping up on gold and silver at regular intervals… because we value gold and silver more than paper money.

Cheers.

Kris Sayce
Money morning Australia