October 24th, 2008

Take Stock. Turn Off The Tech. Turn Off The Echo Chamber. Think.

Posted by Tom Steinert-Threlkeld @ 2:11 pm

Categories: Apple, Earnings, General, Government, Retail

Tags: Algorithm, Stock, Chairman, New York Stock Exchange, Way Thing, Engineering, Financial Accounting, Investment, Financial Services, Finance

I had just plunked down $1.50 for the morning New York Times in the Atlanta airport. By the time I think plunked down $1.19 for a breakfast hot dog (don’t ask), I wanted to toss out the newspaper. The New York Stock Exchange had already halted trading in Dow Jones futures, when their selloffs hit 550 points. The market hadn’t even opened yet and the cable news network blasted out the cheery forecast to all bleary-eyed travelers that we were in for a historic meltdown, that would make the swings of the past three weeks look like minor price perturbations.

 

Didn’t happen. The market did have a bad day, losing 3.6% of its value, again. But the loss was “only” 312 points, with about 100 of that coming in the last 20 minutes.

 

Once again, we’re at a weekend. Hoping for a breather. But the NYSE had the right idea with the lockdown on futures trading.

 

Time to take a timeout.

 

Now, the tension never stops. Once the U.S. markets close, all eyes turn to foreign markets. Then, when they close, it’s the Dow futures. Then the live trading. The back again.

 

But we live in an echo chamber now. Screaming on screen begets more screaming on screen. Markets follow other markets. Traders don’t trade, they let machines figure it out. Automated trading turns on the slightest whiff of bad news – and amplifies the result. Algorithms have replaced a lot of brain waves.

 

Which is how we got to the subprime fiasco and the credit crisis in the first place. Determining who could really pay off a loan ceased being a matter of human judgment. Bankers, ratings agencies, investment houses no longer look the customer in the eye or eyeball the financial justification for a loan. They let the algorithms do the work.

 

The way things are set up now, it would take a 1,100 point drop in the Dow to halt trading on the NYSE.

 

Unless some human judgment intervenes. This whole mess has spun out of control because there’s been no adult supervision. There’s good news out there (leading indicators up, oil prices plunging, decent earnings in tech — think Apple — and non-financial sectors). Retail sales went down 1.2% in August. Nobel winner Paul Krugman says that is falling off the cliff. By most accounting, 98.8% remains. That’s a decline that is not anything like the end of the world for the world’s largest economy.

 

Heads need to get back into the game.

 

Setting up what looked likely to be a freefall on Friday was former Fed chairman Alan Greenspan admitting, basically, to being asleep at the switch.  Who’da think that corporate executives would think about their own personal equity (i.e., compensation and bonuses) instead of the equity of their company’s shareholders (i.e., retained earnings and market capitalization)?

 

The world will not end if the current Fed chairman or the current president or the current NYSE chairman just calls a timeout. Tell investors to calm down.

 

We never know the future. So how much demand is disappearing as the echo chamber reverberates is basically impossible to predict.

 

But, in an era where the echoes never stop, the best way to start putting the investing economy back on something approaching an even keel is to stop trading, for a day or week. Stop automated trading, for a longer period. Force traders to actually think, not react or let the algorithms do their work.

 

And in so doing, stop the echoes.