Panic

[We wrote here recently that last week’s panic attack on Wall Street is unlikely to be the last.  The markets have since rallied strongly, but that won’t change the outlook, says a wise friend of ours who has been following the markets for thirty years. In the essay below, he explains why shouting “Fire!” on Wall Street is not quite the same as shouting “Fire!” in a crowded theater. RA] “Many years ago, while reading John Kenneth Galbraith in “The Speculative Episode,” it dawned on me that the world wasn’t necessarily becoming a safer place, particularly on Broad and Wall. If you think about military history, we’ve gone from flintlocks during the Revolutionary War with a range of 40 feet to the Spencer Repeating Carbine at Pickett’s Charge in the Civil War (every Confederate soldier died), to Hiroshima. On Wall Street, we went from the ticker tape running three hours late on 16 million shares in 1929 to program trading in 1987 when we didn’t have the Internet and you had to call your broker to know what was happening that day in the market. “Today, everyone has a quote in the corner of their screen at work or they watch CNBC at home. They are responsible for allocating their 401K online and many trade the rest of their nest eggs there too. The data processing capabilities out there can handle tens of billions of sell orders in a single day and on top of that, we have the CBOE and the E-Mini. Algorithmic Trading programs do umpteen trades a millisecond and make up 70% of the volume, one HAL versus another. Technology Produces No Buyers “The biggest problem, getting back to Galbraith, is that in the process of facilitating sellers, all the new technology does not produce any buyers. I

So, was it thinking machines that put stocks into a death dive last week, or was it primal human fear?  Either way, there’s a neurological disease at work and therefore little likelihood of a cure.  Even worse, since these diseases tend to be degenerative, we should expect something still more disruptive in the future. Ham-handed regulations won’t be able to stop it, either.  Let the exchanges install all the circuit breakers they want; supply will out someday, catastrophically overwhelming demand when buyers go AWOL. This is inevitable when you create a global electronic trading network connecting ten billion ganglions that at any given moment can channel the sum of all fears. Thus enabled, the stock market is like a vast nervous system lacking a brain -- kind of like Los Angeles, with mayhem always lurking just below the surface.  Last week, for a few minutes, some large clusters of ganglions in the trading network got overstimulated, resulting in a five-alarm panic whose cause has so far defied forensic explanation. The sleuths should save their breath: It was an anxiety attack. Humans have them all the time. We once knew a guy who started having panic attacks whenever he dined in a restaurant 50 miles or more from home.  If you’ve ever felt your scalp crawl, this is the sensation the guy said swept over his entire body, paralyzing him with a wave of cold fear. Heal Thyself He put himself through an endless battery of neurological tests, including an EEG, a brain scan, and all the rest.  The results came back negative, but he kept having the attacks.  Still more tests revealed nothing of medical interest.  Finally, physically and psychologically depleted after being poked and prodded for months, having epileptic seizures induced by tormentors in white coats, and being treated