Ugh. Some thoughts on today’s market crash that wasn’t
Whew, some ride! What started as a “normal” skittish day in the markets nearly turned into outright disaster. In case you didn’t see it, around 2:25 PM, the market began to inexplicably plummet. Within minutes, the market was down over 8%- a veritable crash. It was truly stunning was just how fast things turned. Usually there is a little warning- a sense of impending action, bad news on the tape or other confluence of events that ease everyone over the falls. Not so today. Rather it came like a bolt out of the blue. Naturally everyone immediately sought reasons- a hung British election, spreading of the Greek debt crisis including riots at roughly the same time, possible liquidation of a hedge fund or program trading. Early indications seem to point, in part at least, to a system malfunction or rogue trade. P&G traded from $62 to $39 while Accenture traded down from $42 to $0.10! That just doesn’t happen in functioning markets and clearly some glitch plagued the market today.
Yet “bad prints”, which is trader terminology for a mistake, happen often and don’t unglue the system. One view might be that the market was exceptionally skittish going into today. Many metrics indicated that the market had overly bullish sentiment, “overbought” conditions, expensive valuations and had largely ignored recent negative economic developments in Europe. Complacency on account of “the recovery” is rampant.
One example of how investors seem to be throwing caution to the wind lately is how they have reacted to, or failed to react to, Greek woes. The situation in Europe has been known for months yet the markets have been complacent. Did investors just wake up for the first time today and notice how pathetically the EU is dealing with the situation? That is very plausible and if true, then caution had certainly been thrown to the wind and we could be in for a sizable correction. Just as a relatively small amount of subprime loans crippled the entire banking system, Greek debt along with Spain, Portugal, Ireland and Italy could also cripple the system.
Then again, this may have been a very random event; a mere matter of coincidence which we’ll all soon forget. At this junction, it is impossible to tell yet. While it may be comforting to hear pundits (yes you, CNBC!) definitively claim this or that, the reality is that we don’t know how this will play out.
We’ve witnessed nearly everyone bash the US Dollar over the past few years. As I’ve often commented, the dollar is indeed a weak currency- except for all the rest. The Euro is not a currency; rather it is a currency experiment and we’re in the lab right now. The ECB has been quiet and largely powerless, Germany and France have made promises
only to reneg, while the Greeks seem to want their cake and to eat it too. Spain, Portugal, Ireland and even Italy face huge issues. As painful financially and politically as TARP was- at least we dealt with the issues in about a month and on short notice. The EU hasn’t done anything to address Greece after months and months of fair warning. Yet some continue to insist the Euro should be the stronger currency? I think not.
Watching CNBC today, I heard discussion on the possible rogue trading include comments such as “where are the regulators?” and “where are the checks to make sure these things don’t happen”? I must laugh at the hypocrisy- CNBC is a bastion of pro free-market, anti-regulation rhetoric. God forbid someone want to regulate market processes- how dare they! Let the private sector decide if program trading, high frequency trading, co-location and hedge fund algorithim flows are okay. As soon as something goes wrong however, out come the calls for adult supervision! Those pundits really ought to think about their positions a little more than superficially. Alas, they’re just talking heads I suppose. Too bad people take them seriously.
I’ve wanted to address high frequency trading since it surfaced as a potential abuse last summer, but didn’t get to it. Perhaps now it is time. Coming soon…
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