These days it seems a lot of Keynes' market irrationality is due to leverage and program trading. You know the underlying economy is good, but will we see that represented in the markets?
I agree with a lot of this. Not necessarily in full agreement on the economy portion, I actually don't look at the markets for indicators on the economy. I look at the market for expectations, and if you need to know anything about expectations versus reality go look at the SECr predictions then what actually happens.
The point on leverage and program trading really is a sticking point to me. Investors felt the loving hand of the Fed and levered up big time, then when the Fed acts like they're pulling allowance when the market turns 18 they want to bitch about it. Program traders don't cause these massive swings outside of a few episodes that Nanex will pick up on. Leverage changed this from a 20-30 basis point move in rates to a 50-70 basis point move in rates.