“However,” Gabriel ads, “a few sectors are still in a positive long-term trend, despite a current strong correction. This is the case of the Metals & Mining sector. The main support of the long-term bullish trend remains in place, and proved to be well tested in September 2007 and end of last January. Both times this support had been considered by investors as a good opportunity to buy back the sector. No major change therefore for this sector as long as this support holds.”

“The same is true for the gold sector. The XGD well rebounded in January on the support created by the previous high of August 2007 (it is a classic technical pattern). The recent sell-off is more a correction rather than a real change in investor’s attitude. A break of this support would lead the prices toward the low of last September.

All in all, the sense of imminent Armageddon has abated. But we reckon the culmination of all the recent trends is still in place, it’s just later down the line. That culmination includes a liquidation low for stocks, and a much higher high for gold. Between now and then, there will be a spirited battle between inflationists and deflationists, buyers and sellers, and the Fed and gold.

The psychology of investment has a lot to do with the “social mood” as Bob Prechter says. The market reflects social mood. Social mood leads the market. Right now, we reckon the market is moody, which means investors are moody. They are weary of losses and would like a return to the good times. Bernanke seems happy to oblige.

What do you need to manufacture good times? You need a lie, a leader, and a crowd. All three seemed to come together last week.

The lie is that the bear market in credit is over, bank losses and bad news are fully priced into stocks, and that the Fed is in control. The leader is Ben Bernanke. Every revolution needs a strong man. Bernanke is an unlikely revolutionary. But he’s taken the Fed to places Alan Greenspan never dreamed of.Check out the cover of the latest issue of Business Week and you’ll see the striking resemblance between Ben Bernanke and another famous socialist and advocate of government intervention in markets, Vladimir Lenin. Separated by decades, but ideologically joined at the hip?

The crowd? It’s anyone willing to go along with charade. There are a lot of useful idiots out there right now willing to buy financials and sell commodities. Yet like last September, this seems like the kind of rally that allows the insiders to sell and recoup some losses, while the public goes all in, wishing to be clever and call the bottom.

All successful lies come from an idea that the crowd latches on to. The French psychologist Gustave Le Bon, writing in 1895, said there are two types of ideas, the accidental and the fundamental. “Accidental and passing ideas [are] created by the influences of the moment: infatuation for an individual or a doctrine, for instance.”

The other class of ideas are, “fundamental ideas, to which the environment, the laws of heredity and public opinion give a very great stability; such ideas are the religious beliefs of the past and the social and democratic ideas of to-day.”

Today’s accidental idea is that the Fed’s particular plan can undo the damage of ten years of mis-allocated credit. It is a dangerous idea only if you allow yourself to believe it. The more dangerous idea is the fundamental idea behind the Fed. It is the big lie behind the entire modern financial system, that a committee of men knows what the price of money should be all the time. This is a fundamental lie at the heart of the current banking system.

It’s the lie that led Alan Greenspan to create the housing bubble in order to undo the damage of the dot.com bubble. It’s the lie that led Wall Street to create entire industries to speculate with borrowed money. It’s the lie that led million of people to take out mortgages they can’t repay and led to those mortgages being re-sold to investors as triple A quality bonds.

Quite simply, it’s the great financial lie of our times. And we wouldn’t expect it to go down without a fight.

Dan Denning
The Daily Reckoning Australia

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