Fear itself

Panic on Wall Street

The market's spookability quotient is just about off the scale. A few days ago I made what seemed a sensible buy of a solar technology company in China — who are taking the energy problem seriously — only to see the bottom fall out because the Market was worried about Greece. But worse was yet to come: yesterday the markets went absolutely bonkers for 20 minutes in the afternoon, with the DJIA plunging 1000 points then recovering. The Wall Street Journal called it a "flash crash." Something was so obviously wrong that the exchanges took the unusual step of cancelling out trades made during that period.

Dow Jones Industrial Average
Nasdaq composite

A similar sell-off happened this morning, except over a longer period of time and not quite as severe. But like Thursday, the market soon recovered its equilibrium and most of the loss.

For those who still think the market is rational, reflecting a careful analysis of fundamentals, macro-economic trends, fiscal and monetary policy, and so forth, wake up and smell the coffee! It's not Adam Smith's "invisible hand" guiding the market, it's raw, visceral fear fortified by adrenaline.

In today's world of instant communication and real-time data, news and rumors take on a life of their own, spreading in a nanosecond around the world provoking blind, unconsidered reaction. Psychologists have a word for this: hypervigilence, a state of heightened sensitivity to threats and super-sensitive reactions — over-reactions — to them.

There are no second thoughts when panic takes hold. It becomes a matter of follow-the-leader, do-something-do-anything. We see it in the market whenever a news item crosses the wire or an analyst issues an opinion. We see it whenever an act of terrorism occurs or even when one is thwarted. Nominally sane Senators (OK, we're cutting Joe Lieberman a lot of slack here) propose draconian and clearly unconstitutional measures like stripping citizens of their US citizenship without any due process if they "affiliate" themselves with terrorism. What's really scary to me is how many of our government officials seem ready to jettison the very principles that have made the US the envy of the world.

Make no mistake: there's a lot to be concerned about in the world. But it doesn't help to surrender to fear.

Now, with respect to Greece.

The world and the world's economies are highly interdependent; that's a fact of modern life. There is a real risk of domino or ripple effects, and a huge factor in the situation with Greece is uneasiness that Europe's response isn't big enough to solve the problem. The irony is that many of the people clamoring for Europe to do more to bail out Greece are the same ones who gripe that the US did too much to keep our own financial system from collapsing.

The economy of Greece in 2008 was $343 billion. By contrast, the economy of California in 2008 was $1850 billion, more than five times the size of the Greek economy. Rationally, Greece is not in the category of "too big to fail." People, keep things in perspective!

But just as the collapse of Lehman Brothers set off a chain reaction in the US, folks are concerned that Greece will set off a similar reaction in Europe. And if Europe is phase 2 of the world's economic frailty, can Asia be far behind?

That said, it's time for our elected officials — many, many of them — to pull their heads out of wherever they have them stuck (this is a family website, after all) and start facing up to problems and working on solutions.