Now it begins. A subtle change in mood occurs. As the nervous and the wise detach, the market shifts into reverse.
UNLIKE the certitude that precedes market tops, the sense after the top is unsettled. Investors no longer feel they know the future. They start to doubt the health of the economy, real estate and the stock market, and they feel nervous.
Anxious sellers rush to the market to avoid losing money, and since fewer investors are willing to buy, prices fall. Investors trying to get their money back outnumber the bargain hunters. In turn, falling prices trigger more selling.
In only a few days, the mood has become uneasy and tense. Before the top, the collective mind held thoughts of enrichment, luxury, and abandon. Investors expected great things. Lenders saw no problems, and neither did borrowers. No one wanted to sell.
In the new order, anxiety and doubt seep through the tissue. Although fundamentals remain positive, at least on the surface, something is different. Worry birds fly overhead. What is wrong with the stock market? Are banks in trouble? No one wants to buy.
Chin up, boys and girls
To head off a downward spiral of pessimism and cutbacks, policymakers respond with positive thinking. They recite familiar bullish arguments. Heads nod. To reinforce the residual confidence, they cite data gathered during the boom. Esteemed figureheads assure us that everything’s going to be fine.
“This trouble we’re seeing, it’s manageable. It’s a minor correction, a healthy pause in a long upward sweep. Don’t panic.”
As the downmove continues, some investors have their doubts. Those prices aren’t falling by themselves. Others wonder if history will repeat, bringing a bear market to the people. Defensively, Wall Street and central bankers deny these parallels.
“This time is different,” they say, boasting of modern insights and twirling their six-guns. “The business cycle still exists, just not the downward sloping part.”
Another wave of selling pressure then pushes prices lower, to levels where buyers are willing. Buyers respond to every wave of liquidation with fewer bids at lower prices. So as the bear market proceeds, transactions occur at ever-lower prices. Once the downslide begins, the ability of the market to absorb selling determines the price of stocks.
It’s far from definite
It’s difficult to figure out what’s going on. The first symptoms of trouble seem restricted to the stock market, sometimes accompanied by isolated distress in an over-extended borrower or lender.
But the real economy holds together, so even if instability and slowdown threaten, economists can’t define the problem. They don’t have the data. But they have enough experience to know the probabilities. Feeling the need to restore confidence, the government injects the economy with fiscal and monetary stimulus.
Unfortunately, this therapy just makes the patient more anxious. That’s not good, because a negative attitude about the economy has a way of spreading and causing the trouble the stimulus was intended to prevent. But it can’t be helped. The world rides the Red Wheel. With each downward lurch the market throws more investors off-balance. Only lower prices can restore liquidity now.
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