February 28, 2007

Stocks, Drops and a Fear of Money

Obviously the news of the day (and perhaps moving forward, the weeks to come) is the broad-based sell-off of stocks throughout global financial markets on Tuesday. According to a large swath of the popular press, the consensus culprit appears to be the sudden unexplained drop in the Shanghai and Shenzhen stock market indices exacerbated by technical glitches from Dow Jones and the NYSE. And, just like that, presto, the economy becomes front page news with warnings of doomsday and gloom.

With no obvious sudden macroecomic shock (like 9/11), how does one explain this sudden fear and panic? If the market supposedly is "efficient" and all information is known and reflected in stock prices, why do these sudden gyrations happen if no big external event has happened? I don't have any definitive answers to these questions. If I did, the Honchos would be sitting on a beach somewhere sipping pina coladas. However, it does seem like herd mentality and chrematophobia have taken place. Yes, chrematophobia, or the fear of money. While a 3.5% one-day drop in the Dow is nothing to sniff at, as an isolated event, it's really no big deal. One has to go back to this day to really feel the hurt. If the 3.5% drop is a sign of things to come, an omen for the future, we're probably all in for a world of hurt. But for all the people who've been happily watching their stock returns increase for the past one, two, and more years, all also for no apparent reason other than vague notions of "increased profitability", it's probably good to see a drop here and there to chase out some of the weaker money from the markets.

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