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ECONOMIC ANALYSIS:

Thinking About Volatility

by FRED CEDERHOLM
Click/action, click/reaction, click/response happens so fast that there is little (if any) time to think and let true reason and wisdom prevail--and can set in motion a financial panic, a military attack, or even a new war.
I’ve been thinking about volatility. Actually I’ve been thinking about the stock markets, the global economy, technology, efficiency, speed, and glitches. Last week we experienced something new, something scary, and something very costly. We—of the investing public—were taken on quite a ride!

You see, the global stock markets experienced one of their highest trading volume weeks ever.

Pricing of equity securities on the world’s stock exchanges for the most part headed south—way south. In the cases of many of the planet’s financial trading bourses, the declines for a week period set records. In even more cases, a record volume of shares changed hands. At the New York Stock Exchange last Tuesday, overall declines had not seen such a one-day drop since the declines when the markets re-opened in the aftermath of the attacks of 9-11 for the week beginning September 17, 2001.

On Tuesday, February 28 alone, 2.25 Billion NYSE shares and 2.70 Billion NASDAQ shares traded. The Dow industrials were down 4.3% for the week, the Standard and Poor 500 were down 4.4% for the week, and the NASDAQ composites were down 5.8% for the week—closing at 12,114.10, 1,387.17, and 2,368.00 respectively. While the declines – both in terms of points and percentages of the market – were not as severe/extreme as those of Black Monday week in 1987, or those of Black Friday week in 1929, literally TRILLIONS of “paper” wealth evaporated in less than five trading days. True, there was much intra-period ratcheting experienced with some companies regaining lost valuations; but for the most part, it was a week investors and brokers want to forget and wished had never happened.

What made the financial events of this past week so noteworthy was literally the complete absence of a “noteworthy triggering event.”
What made the events of this past week so noteworthy was literally the complete absence of a “noteworthy triggering event.” There was no earth-shaking terrorist event. There was no catastrophic occurrence of nature. There was no sudden change of a nation’s governing leadership. There were no energy production/distribution cutbacks. There were no new wars declared, or enacted. In fact, overall things (and market motivating factors) were pretty much as they have been for some time now—not any better, but certainly no worse. Still... there was more than some undercurrent of instinctual edginess, or an overriding “malaise of paranoia,” on the part of investors—both individual and institutional—at work here. It wasn’t even the sound of a “pop” that sent investors to the bunkers, it was the perception of one.

The US economy (hence, our very way of life) depends on a constant influx of foreign energy, of foreign capital investment, of foreign credit, and of foreign goods, materials, and services. There is no hope that that sorry situation of vulnerabilities will change any time soon.
Anyone familiar with my weekly columns—either in print or on-line—knows how I’ve been harping about the escalation/ development of a global economy and a global society; and particularly about our own dependencies on this developing “unitary planet” system. Whether we as a nation-state like it or not, US/us can no longer function very nicely, thank you, as some island blessed by the warm fuzzies of splendid isolation. The US economy (hence, our very way of life) depends on a constant influx of foreign energy, of foreign capital investment, of foreign credit, and of foreign goods, materials, and services. There is no hope that that sorry situation of vulnerabilities will change any time soon.

The technological revolutions of computer hardware (and software) and the information highway capabilities of the internet have connected the world. News is instantaneous. There are efficiencies for thousands of transactions to occur and be processed in a second—even in a thousandth of a second. Never before in the history of our planet can so much transpire so fast and be known worldwide so quickly. Enter, click, send... has become a mantra of society. This really scares me, and with good reason.

Click/action, click/reaction, click/response happens so fast that there is little (if any) time to think and let true reason and wisdom prevail. As we have just seen, enter, click, send... can literally set in motion a financial panic. Or worse... enter, click, send... can launch a military attack. Enter, click send can even initiate a totally new war. We have become so fast—make that efficient in our enter, click, send world– that the so-called checks and stop gaps of our “programmed” system protections may not work/function as we expect, want, or need them to perform. Unfortunately, so often we don’t know that is the case until after an “event”—when it is too late to undo (or stop) what has been set in motion.

The systemic glitches of a technologically connected world, our planetary interdependencies, and an underlying overriding contemporary uneasiness of fear; all contributed to the declines of past week. The unreal (or at least unsubstantiated) perceptions behind the drop of the markets in Shanghai, China triggered a financial tsunami rippling around the Earth. What would be the case if a truly identifiable catastrophic event were to occur? We can only hope and pray that we won’t find out.

I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.


Copyright 2007 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at asklet@rochelle.net.

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This story was published on March 6, 2007.