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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: Ilaine who wrote (13867)	1/24/2002 2:30:36 PM
From: Maurice Winn	Read Replies (1) \| Respond to of 74559

CB, I think the herd effect can work either way [from macroeconomics via malinvestment into the sharemarket or from malinvestment in the sharemarket into the macroeconomics]. If the herd suddenly decides to get rich quick in the stockmarket, they start bidding it up. Prices rise. They get richer [in their minds] because they look at share price, not profit. So they bid some more up and decide to take out a mortgage on the house and a margin loan to bid some more up. Hordes of people see the wealth appearing and want a piece of the action. So they spend their money on buying a piece and then borrow a bunch too. The lucky ones quit their jobs because they are rich enough and everyone has started spending because they are now rich and enjoying the wealth effect. Because they don't actually have a lot of money, they spend borrowed money from margin loans, or refinance their house to borrow money. The economy booms as people buy goods and services like crazy. Then, the share buying stops because nobody else is keeping the buying going because they don't have money or don't believe the game. Then, a few people notice prices slipping so sell. So that causes more selling. Suddenly, there's a margin call or two. Which causes more selling. Which causes another bunch of margin calls and some nervous selling. Nobody wants to catch a falling knife, so those with cash are NOT going to come to the rescue unless they see a real bargain. So prices fall and keep falling and accelerating as fear sets in and the poverty effect gets a grip. Then, they wish they hadn't quit their job, they aren't rich, they have stopped spending, which makes the macroeconomic world look sad so profits decline etc...and it goes down some more. People give up day-trading and get another real job. This continues until balance is re-established. Mq