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The quote of Warren Buffett is pretty instructive, not just in the "buy low sell high" way. It is a basic investment realization that market trends are determined not so much by actual prospects of economy, but of perceptions thereof. Surely, perceptions do "neurolinguistically" define much of economic reality - but with limits. Anyway, playing with human perceptions and impulses is frequently easier than playing with economic data.

In particular, fear and greed (as in Buffett's quote) determine most jitters of financial indices. Those market cycles tell more about human patterns of greed and fear than about "inherent" economic structures. I guess American cycles of greed and fear are different from Chinese or other ones - hedge fund modelists may know them all very well. At least those empirically determinable from the statistics up till now.

The flux of capital into asset markets was increasing faster than ever in America, China and other markets. Shares rose not so much because of better buisiness performance (though it is much easier to perform when the whole economy enjoys so much cash Viagra), but just because so many new greedy entrants in Americas, China and the rest of Asia and the world. The common wisdom was to "invest" whenever you have spare cash - and to borrow and invest more is you dare "as a man".

But now perhaps comes inevitable interaction with reality of cash flow sustainability. Still, this year will see a lot of game of fear and greed in the markets. Some ejaculation (if you pardon me) of the dear stiff global economy must be inevitable eventually, but the trigger will most likely be some rational measure to curb financial follies. Libertarian apologists would blame the rational "socialists" or "protectionists", never minding that the absurd sensitivity of the saturated markets is wholly thanks to the "supply" incentives to fuel cash from everywhere into one or few markets.

by das monde on Sat Aug 11th, 2007 at 12:52:09 PM EST
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