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Markets Being Irrational, So Stay Away From Stocks: Bove

Thursday, 11 Aug 2011 | 11:57 AM ET
Traders work on the floor of the New York Stock Exchange.
Getty Images
Traders work on the floor of the New York Stock Exchange.

Investors are behaving irrationally because they’re being driven by irrational fiscal and monetary policy, banking analyst Dick Bove said.

In a lengthy and detailed broadside on banking regulations, Federal Reserve actions and the peril that awaits, the Rochdale Securities vice president of equity research asserts the US “is as bankrupt as the Europeans” and headed for trouble unless a massive bailout fund is created.

He reiterates a recent call that investors should stay away from stocks until the dust settles.

Instead, though, they have been pushed into making odd decisions that Bove says stem from regulations that have hamstrung banks and monetary policy that could drive the dollar to lose its status as the world’s reserve currency.

“In the past few weeks holders of funds may be judged as acting somewhat irrationally:

When they heard that Treasury securities had been downgraded, they bought Treasury securities. When they decided that bank stocks were bad investments, they sold these stocks and took the money they received and deposited it in the banks,” he wrote in a note to clients.

“They are also buying gold, commodities, and currencies in nations where the financial systems are judged to be stable. There is a frantic need to find a safe haven for funds and traditional pockets are being used.”

The loss of that standing jeopardizes a nation with as much debt—$14.3 trillion and counting—as the US..

“There is no logic in having the world’s reserve currency based upon the financial structure of a nation that is both incapable of controlling the rise in its debt and/or its trade deficit,” he wrote. “A new reserve currency will develop and this will force the United States to pay down its debt at a high cost to its economy.”

The warning comes at a difficult time both for the US and global economy.

Market have swung wildly over the past three weeksor so and particularly this week. Questions abound over the stability of the European banking system and, should contagion spread, its effects on the American financial system.

Bove said his call onJuly 27 discouraging involvement in the stock marketand especially banks has proved prescient, and investors are right to be concerned.

“The financial crisis which became apparent in 2008 has not been resolved as yet,” he said. “The flare up in the United States has been brought under temporary control but the problems in Europe have not.”

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