"A knowledge of the psychology of crowds is to-day the last resource of the statesman who wishes not to govern them - that is becoming a very difficult matter - but at any rate not to be too much governed by them."

As an investor, you don't want to be reactive to the crowd's action, but rather proactive to what the crowds will do. Understanding the psychology of crowds will help you avoid the many emotional knee jerk reactions this market will take.

During the last 3 and a half years, from the time the crisis hit in late summer 2008 until now, it has been the most volatile period for stocks in history. Obviously the initial collapse in 2008, which began due to the sub-prime crisis, among other imbalances, brought on a sell-off comparable only to the market crash of 1929. But beyond the crash of 2008, volatility has remained unprecedentedly elevated.

Is this unprecedented volatility a co-incidence to the fact our society has never been so intertwined with technology and media? Doubtful. When those bad unemployment numbers cross the wire, and within seconds are up on Bloomberg, you, along with hundreds of millions of investors worldwide, are reading them. All you need is a computer (which nearly everyone has) and you are plugged into the global finance markets at a second's notice.

Another technological driver of volatility, and enhancer of the crowd's reactions, is the increased use of high-frequency trading.

Thomson Reuters recently reported that high-frequency trading now accounts for 60 percent of volume, and is spreading overseas and into other markets.

Computers react faster than any human; much faster. The compounding nature of quick access to information and HFT systems compounds the selling and buying and exaggerates market swings. The result of these two factors is an overreacting market and extremely volatile market.

Instant access to information and high frequency trading systems are definite leading factors contributing to today's market volatility, but they aren't the only. Political and economic uncertainty is the spark igniting the volatility. High frequency trading and instant information access, via the internet, fuel the volatility fire.

Uncertainty can wreak havoc in the markets. And it has. It can flip the markets up 3%, take them down 4% and then back up 2% all in the same day. We've all seen it and been living through it week in and week out. Look at this week for example. The markets were either going straight up or straight down. 2-3% daily swings were the norm! A 3% monthly gain used to be impressive.

* No exchange has this extreme volatility hurt more than the TSX Venture. Volatility destroys investors' risk appetite.

The bottom line is that, as investors, our ability to appropriately value equities has become increasingly difficult - especially over the short-term.

Will another round of quantitative easing be implemented? Will the central banks finally do the right thing and let deflation and deleveraging take hold for 5 years? Should you be selling your bonds prior to the impending collapse? Is the EU going to collapse next month or next year? These are all questions and issues adding to the uncertainty and volatility in the markets. This uncertainty continues to hamper investors' ability to make clear decisions.


The Fed's manipulation and constant increase of our money supply is all part of its never ending fight against deflation. This will lead to increased inflation (once money velocity picks up) and most likely a period of hyperinflation. For years and years we have been preaching this and we believe it's in-sight as the EU begins to collapse under its current debt obligations.

Hope your not overreacting to these violent market swings, but aligning your portfolio to benefit from a period of increased inflation and market manipulation from the Federal Reserve. The money supply cannot continue to increase at its current rate without sending the dollar down and most hard assets up. When the crowd accepts this fact (and it soon will) precious metals, commodities and the equities both large and small, which produce these metals, will have their day in the sun.

We are weeks away from an election year kicking off. The Fed knows this and is likely preparing another round of stimulus in one form or another. Europe is being pressured to sweep its debt issues under the rug and let the global economy grow uninterrupted for the time being. The US and China will play along as they have their own short-term agendas at hand. Time will tell how long the ECB can hold out before even more funny money is committed to these faltering nations.

Stay ahead of the crowd, because the inflation trade is coming.

All the best with your investments,