Without thinking, investors are following the path of least resistance, which is to return to the past and jump right back into paper assets such as stocks and bonds. This is clear when examining each bear market rally. Investors recently have gone back into tech stocks, especially Internet shares where manifestations of a manic bubble are apparent. They are helped in part by a giant spin machine that recycles every piece of bad news on the economy, corporate earnings and geopolitics in a favorable light. Authorities are trying to keep the sheep corralled on one side of the road and prevent them from seeing the greener pastures that lie yonder.
The movement in the markets right now is pure feelings and emotion. Investors are reacting to contagion, the idea that there will finally be a second-half recovery. The crowd in this case also includes Wall Street and fund managers who are falling prey to their own suggestions and hopes. The danger of the herd moving en masse is that it becomes susceptible to suggestion–which the authorities are only too happy to provide–and the Pollyanna belief in an eventual recovery. Moving en masse, the vast herd of investors are responding to their favorite cue: rising asset prices. The financial authorities are helping by providing the stimulus that comes from direct intervention and constant credit.
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