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Market Psychology: A Snapshot of the Money Managers' Current Belief System


Here's why money managers believe that the Greenspan "put" has been replaced with the Bernanke "bottom." That doesn't mean they're right, however.

Yesterday Zerohedge posted this image, which it attributes to Citi, with the arrow suggesting "You are now here."

While I will leave it to others to debate where precisely on this ring of fire the arrow now belongs, I love the picture (and its widespread republication) if only because it so clearly captures the current playbook among money managers today: Buy when things look grim and policymakers are forced to act and sell when things look better, and, to quote the chart, policymakers "dither."

Needless to say, after one look at this chart, which Barry Ritholtz posted on his Big Picture blog last week, you can see why money managers are behaving the way they are.

At least to me, when taken together, the two images above make it clear why money managers today so firmly believe that the Greenspan "put" has clearly been replaced with the Bernanke "bottom." Our current depression-era expert Federal Reserve chairman will do whatever it takes to prevent nominal financial asset prices from falling. And we now have three clear examples with equally clear positive results for equity investors to hang their hats on.

Put simply, stock prices can't and won't fall far.

My issue with all of this is not the truthfulness (or lack thereof) to the belief, but rather the certainty I see among money managers in this belief. Not only are money managers certain, they appear today to be certain of being certain.

I call this phenomena "self-assured certainty." I saw it in late 1999 among large growth stock managers. I saw it among housing investors in 2005. I saw it last summer among gold bugs, and even more recently among Apple (AAPL) investors. It is a level of certainty that is coupled with hubris-filled "you must be a f%*^ing idiot if you don't believe it" kinds of comments.

It is a very black or white world in which I am right and you are a loser.

Clearly today, those who have not believed that the Fed can and will put a floor on asset prices have plenty of losses to show for it. And judging by the news headlines recently, many of the perma-bears have capitulated to the reality of the images presented above. They, too, have come to realize that to not believe is to be trampled.

With many financial pundits suggesting that yesterday's headlines are an indication of the Federal Reserve's potential "dithering" and a reason to sell, let me be clear that that is not my concern. My price worries are not immediate.

My underlying concern is in the lower right corner of the top image where money managers have clearly tied together "policymakers take action" with "markets rally." To listen to money managers today, that pairing is as certain as night follows day.

We'll see.

But please appreciate that this is the belief system / the foundation on which this market now rests – "policymakers take action" = "markets rally."
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