Like Hollywood’s ‘Terminator,’ financial markets have no fear or remorse. Error is punished mercilessly. Unfortunately for Europe and other Western nations – they have a whole lot of error stored up, writes Clem Chambers, CEO of ADVFN.com and author of investment guides such as A Beginner’s Guide to Value Investing and 101 Ways to Pick Stock Market Winners.
A core player in the US market experienced a computer glitch of epic proportions last week. Its super high-tech robot trading system ran amok, buying and selling at random and blowing over US$400 million in 30 minutes.
After that initial brief period of chaos the market effectively swallowed the mistake. Within a few hours it had consumed the loss and redistributed it to the other market players.
One can only guess the looks on the faces of all those involved at Knight Securities, from the guy that pressed the “on” button on the newly updated software, right the way up to the CEO.
Discovering some IT guy in your organisation on around US$80,000 a year just incinerated US$400 million, putting your company and the livelihoods of 1400 people on the line with a single keystroke must be mindboggling.
Yet that’s the way the market works. Error is punished mercilessly. The market – like the Hollywood Terminator – has no fear and no remorse. It will not stop.
Empires such as the USSR fell because the market cannot be defeated. Whereas empires that choose to harness it – like the West – rise, based on the market’s efficiency in allocating resources to where they will be best used.
This is why people in the West live into our 80s rather than our 40s. Markets are rough and tough, but they’re also bountiful.
The lesson is; don’t fight the market, harness it.
It’s thus tragically ironic – or perhaps hilarious if your sense of humour is black enough – to find Mario Monti, the unelected prime minister of Italy, bemoaning that the “market” doesn’t understand Italy or how much it has done to reform itself – that it is consequently unfair of it to demand such high interest rates.
The market understands full well.
Italy has blown its capital and can no longer afford to service its debts at the commercial rate of interest demanded by markets. Italy is on the brink of not being able to roll on its debts.
The merry-go-round of free funding for sovereigns is grinding to a halt. And it’s a merry-go-round that doesn’t want to spin fast again.
What is referred to as “the market” is in fact made up of untold numbers of thinking, calculating agents constantly looking for the safest place to stash hard-gained resources.
Yet Italy thinks it’s the market’s fault.
The market is “wrong” say the borrowers who spent money like water and now think that they know best.
It is often claimed the market is dysfunctional, not efficient; a dangerous hazard.
Sadly, we have good cause to be scared.
For it will be the market that will level the broken systems choking the West. And a market, be it free or otherwise, is the transmission mechanism of economics.
When governments fight the market they are only storing up trouble by borrowing either financially or economically from the future. Economics can only be frustrated for so long.
Both Europe and the US are trying to build ever more elaborate defences against the basic economic principle that you can’t be in deficit forever without running out of resources in the end.
In a free market, the economic comeuppance is short and sharp, a fate experienced by Knights Securities last Wednesday. In a controlled market, the pain can be drawn out for a long, long period, the fate we are experiencing today.
To be getting on with progress, the former outcome is better than the latter, but we are all prepared to sacrifice some level of benefit in return for short term comfort and safety. This is where governments come in, as a force of economic mitigation.
It can now be said we are giving up too much upside for the price of that short term comfort. We are likely to finish much worse off economically as a consequence.
When the protective fiscal and monetary dams break – as they must if the West continues down the path it is on – we will rue swapping an acute economic crisis for a chronic one.