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25. 01. 12. - 15:45

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25. 01. 12. - 15:45

Clem Chambers - does a free market actually exist or is the world economy rigged?

As S&P downgrade Austrian Debt – to AA+ – and the IMF expect Europe to enter recession the role of the free markets have come into question. Here, Clem Chambers, CEO of stocks and shares information site ADVFN.com and author of ‘101 Ways to Pick Stock Market Winners’ asks whether a free market actually exists or if the world economy is rigged?

With the IMF predicting a Europe-centred recession, the long slow road to global recovery continues. Following a sweeping round of EU downgrades by Standard and Poor’s, that saw Austria lowered to AA+, the Institute for Economic Research has argued that it will take a further two years for the Austrian economy to grow by 2 per cent.

The research cited that exports will be crucial to a recovery. The question facing the Austrian economy is how to do this as Europe heading back into recession, with the UK announcing negative growth figures. The road to Europe-wide recovery continues, but it is not all doom and gloom.

The market looks out a year ahead. As such, the recent rally in the market is actually predicting a recovery in 2013 while the market slump last summer and the growth figures suggest a rocky 2012. Anyone brave enough to have bought equities in the pit of Euro crisis anxiety is looking pretty clever.

The markets of Europe and the US have been rallying hard since the Euro summit. It was agreed that most of the EU countries would tie themselves tighter together for the sake of their common currency. Pundits don’t seem to think the problem is sorted, but the market seems to think it has.

‘Watch the market not the news’ has been the model that has worked for me the best in the last six months.

This means paying attention to the market price swings ahead of the news we get. Waiting to hear what is going to happen in the Euro crisis and then decide how to trade is pointless – the market has already learnt about this ahead of time and has moved accordingly.

In effect, there is an enormous amount of insider trading going on in the current climate. This is awful, but hardly surprising, when you consider just how many people are involved in the process of unscrambling the world economy.

The theory says that this can happen magically without leaky politicians, bureaucrats or bankers letting the facts slip out before anyone in the mainstream gets it. However, it’s a huge stretch to believe this, when it is so much more likely that a small percentage of the people involved are blabbing to "friends and family".

This is yet another reason why it is dangerous to speculate rather than invest.
An investor takes a long term view of the basics and puts his money to work. The speculator, on the other hand, tries to spot the short term twists and turns of the market. Any speculator standing on the outside of affairs like the euro-crisis is effectively trading against people with a much clearer picture of what is going to happen - as such the chances of winning are low.

What should an investor be doing right now?

The answer is to examine the basics. What are the key elements that make up the investing environment?

Firstly, this is not a free market situation anymore. We are operating in a rigged market. That sounds bad, but it’s not as bad as you think. The market is being pushed around by a kind of pressure that verges on it being rigged, because the folks driving markets for better or worse are politicians.

If free markets had operated since 2008, we would be in a very different place than we are right now, again for better or worse. Likewise the Euro crisis which is shaking the global economy is purely a political dynamic as so will be its resolution, for good or ill.

The markets aren’t setting prices unfettered; the market is being twisted and warped by the application of untold billions of dollars and Euros of state created funds.

Governments are trying to beat the market by smoothing it out with oceans of cash, hoping for a recovery - if you tried to do that as an individual you’d be arrested.

Before the implosion of the credit crunch, the markets were driven by economics but now they are driven by politics.

The medium term future of equities, bonds and commodities will be settled by political decisions not directly by everyday normal supply and demand. This is what I mean by rigged. For now markets are not free because the FED, ECB, the IMF, the Bank of England etc. are all working flat out to force prices to be right for what they think the economy needs.

That puts us all in a tricky spot. Markets are generally really good at setting prices for things like currency and commodities, while governments are famous for getting it wrong.

What if the same people that mismanaged our economies into the rupture of 2008 remain as clumsy now as they were then? It doesn’t exactly augur well.

That aside, the key question is, are we going to recover now or are we in a long term decline.

Statistically, or rather using past performance to predict the future, something that amounts to violating the first principles of investing, 2012 should be a strong year. Certainly the stock markets have started well and from my vantage point at ADVFN, global private investors are looking at stocks a lot closer than last year. It looks positive.
If the markets are right, then the economy of 2013 should show solid recovery and 2012 markets should show a recovery as next year's good news becomes more likely.

There will of course be an almost incalculable number of factors to consider but the chances are that 2012 will be the beginning of the end for the slump created by the crash of 2008.

It is clear that recovery sits in the hands of the political classes and that is the key risk factor. The political class have been responsible for more catastrophes than nature could whip up in a thousand years, so it is no time to be complacent. 2012 will be a cliff hanger.

You will know if disaster has struck, because the market will collapse a couple of days ahead of the news.

~Clem Chambers is CEO of stocks and shares information site ADVFN.com. Visit www.advfn.com for free, real-time share prices. Follow Clem on Twitter @ClemChambers

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