Dow Jones at 6,000? (page 2 of 2)

Typical examples of crowd actions are the witch-hunt, the crusades, communism, socialism, the Nazi movement, lynching, revolutions, and so on. What is of interest to us, in terms of the US stock market, is the question as to when a crowd reverses its expectations, abandons an idea, or panics.

In other words, when will the investing public abandon the US stock market and send stocks through mutual fund redemptions to far lower levels? Common to crowds is a certain 'loss of touch with reality'. Le Bon says that the crowd is 'not prepared to admit that anything can come between its desire and the realization of its desire' while 'the notion of impossibility disappears for the individual in a crowd'.

Le Bon also adds, 'a long time is necessary for ideas to establish themselves in the minds of crowds, but just as long a time is needed for them to be eradicated.' At the same time panics occur when there is an imminent danger or when the association and sentimental attachment of the crowd is weak or has been weakened by the loss of 'prestige' of its leader.

According to Le Bon, prestige is a mysterious force, which gives 'great power' to ideas propagated by affiliation, repetition and contagion. He writes that, 'prestige in reality is a sort of domination exercised on our mind by an individual, a work, or an idea. That domination entirely paralyses our critical faculty, and fills our soul with astonishment and respect'. Prestige of a person or an idea is gained through success, but once success is replaced by failure, prestige is called into question and a panic can ensue.

Therefore, investors' faith in equities could be eradicated suddenly if there was a serious danger of loss of capital, a situation which would arise if stocks drifted down much further or if there was a sudden and unforeseen very unfavorable economic or political development. But, if we look at recent events, it is more likely that the continuation of the 'prestige' or success the stock market has enjoyed in its 18 years bull market is now increasingly called into question.

This especially, given the large number of earnings warnings and the earning disappointments which were recently announced. Thus, while the high tech bubble has already been punctured, I expect that it will take quite some time before the idea that stocks will always outperform all other assets is rejected.

But, once it has been rejected, the idea will be out of favor for a very long time, as we know from Japan post - 1990 and from other asset bubbles, which came to an end (such as gold and silver after 1980). In the meantime, however, investors will have to continue to live with very high volatility, and recurring sharp bear market rallies.

Finally, I should like to mention that 'propaganda' plays a very significant role in the formation of crowds and their believes - a fact leaders like Lenin, Stalin, Mussolini, Hitler and Mao understood perfectly well. All these leaders had a very low opinion of crowds and believed that crowds depended on strong leadership, which had to be achieved by means of 'enthusiasms' and 'interest.'

Thus, in order to keep the masses in a state of easy manipulation (loss of critical faculty, credulous and receptive), they had to be relentlessly bombarded with propaganda. Hitler said that the propaganda could also contain some 'big lies,' since the crowd would never suspect a leader to be as reckless as to spread 'big lies.'

There is in my mind no doubt that the propaganda machines spreading 'big lies' have kept despots like Hitler, Mussolini, Stalin, and Mao, and so on in power for far longer than would otherwise have been the case. In the same way, a bull market can be kept alive far longer than one might think possible through clever propaganda, which aims to continuously fuel the 'enthusiasm' and 'interest of the investing public'.

This is not difficult to understand given the widespread monetary interest among politicians, corporate leaders, financial institutions, strategists, CNBC, CNN, and the public in the bull market never ending. Just about everybody gains from rising equity prices, large transaction volumes, merger & acquisitions, new issues, the launch of new financial products, large number of eyeballs or viewers, and so forth.

So the propaganda stressing the merits of equities will continue, and lead from time to time to the powerful bear market rallies, I alluded to above. The Wall Street propaganda machine will never admit that a bear market is already underway, but will advise investors to switch from one group of stocks into another in order to generate commission income.