You Can't Fool All The People Every Time

It doesn't seem that long ago that everyone was worried about the big end of year "event". Fortunately, the Fed eased monetary policy massively to placate the markets. And of course when December 31st rolled around and the world didn't end and the economy didn't fall off a cliff as expected,  January came and stocks took off...

It was of course a massive liquidity driven rally. Speculators came in and bought stocks with both hands using borrowed money. Margin interest was at a multi-year high. Stocks went up day after day for months, until everyone stopped thinking they could ever go down.

All of the economic concerns that had been looming at the beginning of the year, seemed to just magically go away, as if they never existed.  High growth stocks of course led the way, as always. The major indices hit new highs and CNBS broke out the party hats. Many saner folk, of course at the time, said that stocks were totally disconnected from economic fundamentals and that it was a liquidity driven rally driven by leveraged speculation, but they were totally ignored. "There is money to be made, don't you know?"

Then one day, the high growth stocks topped out and fell behind. No one was that worried though, because the Dow and S&P were still going up every day. They said that it was a normal "rotation" and that growth stocks were taking a "breather". They were not concerned that the stodgiest slow growth stocks were now leading the market higher. Until one day - in mid Spring - everything hit a wall. Amazingly, there was still a huge amount of liquidity coming into the markets - even more than ever, as the boneheads of the day threw their life savings in at the top thinking they were going to be rich, but the selling was incessant and eventually overwhelmed the buyers. Soon instead of stocks going up every day, they went down every day. 

And of course, once the stock market rolled over, all of the economic issues that had magically gone away, came back seemingly out of nowhere. It turns out that the stock market's artificial levitation had merely concealed the weakness in the underlying economy, so a recession was already underway and well advanced.

The year was 1999/2000. 

p.s. some say the current rally is not like Y2K, because small investors are not fully onboard now; to which I say, go back and read the title of the post - this time is all about hedge funds and HFT bots who may be less emotional but are no more intelligent. They take the incentives that are put in front of them...

(And yes, I know what it's like to be a "bonehead" - thanks for asking...)