Wednesday, August 10, 2011
Some years from now, this article will probably be woefully out of date. Well, the point of the article won't be out of date, but this particular instance will have long since been relegated to the history books, just one more exhibit in the freak show known as Modern American History.
At this writing, the world economies are in chaos. Major nations around the globe are watching their credit ratings melt. People are rioting in the streets. Budgets are being cut. Unemployment is very high and morale is very low. It's a tough time for optimists.
Among the strangest behaviors we're enduring are wild, mega-swings in global financial markets. Whereas a daily 20 point rise or fall in the Dow Jones Industrial Average was big news in the 1970's, swings of 400 to 600 points - in either direction - have become more commonplace. One explanation is that there are simply more shares and more people to trade them. Another is that we now have the technology to trade those shares much more rapidly than ever before.
It doesn't take a genius to do the math. When a micro-chip can observe, analyze, deduce a result and execute a trade order for millions of shares from hundreds of companies in less time than it took you to read this sentence, you know things are moving at a pretty brisk clip. It's not surprising, then, that market actions and reactions would occur with ever-increasing rapidity.
But that's not the real culprit here. The demon you want is hiding just below the surface, affecting far more than the price of today's stocks. As I've written here previously, technology speeds up just about everything except for human nature. As a result, it's technology, more than anyone realizes, that's adding to - if not causing - our recessionary times. Let me clarify this:
Unless you've been hiding under a a very large rock since 2008, you no doubt have heard about or painfully felt the very real effects of the global economic recession. If you're been fortunate enough to be spared the financial pain, I doubt you've escaped the unending re-hash and faux analyses by television "experts" whose simplistic explanations pass less for truthful explanation than they do for furthering political agenda. Most of those pundits draw their opinions by citing "similar situations" throughout history, including expansions and contractions dating back to the Great Depression of the 1930's. Although there are some similarities to be compared, there's one giant difference that, for some reason, negates just about all of their relevance to today's issues:
Technology. And here's how:
While technology can move data at nearly the speed of light, it does nothing to speed up human behavior. In the old days, both human behavior and data moved at the same speed, because both were powered by humans. For example, if you wanted to buy a stock, you called your stockbroker, who in turn called his floor trader, who placed the trade. The transaction could take hours or days. Same thing with selling. Today, however, there are fewer brokers and traders because everything has been reduced to a simple point and click.
So a huge problem arises when a political administration announces a long term plan to aid economic recovery, mainly, an economic plan takes time to be assessed, implemented and resolved. However, speculating on the viability of a long term plan takes less than a millisecond, which means unlike the days of yore, speculation moves at a far greater rate than real information, which in turn dooms all markets to higher risks of failure because technology is manipulating it based on fear rather than any wisdom borne of financial strategy.
That last part is something not to to be considered lightly. In the end, technology may speed up action but completely ignores wisdom, which means that market decisions - and the plans designed to affect them -- must incorporate technology's need for speed or face a higher risk of failure than necessary. This week the Federal Reserve took an unprecedented step by announcing its interest rate level would be maintained at low levels for the next two years. It's a hugely historic tactic, in that it's the first economic pronouncement designed to destroy the effect of speedy speculation by providing a base of stability for the long term. Previously, the Fed had encouraged speculation by offering only short term announcements. By removing the speculative data from its announcement, the Fed has effectively diffused at least one factor of market instability, which technology cannot distort -- and we need more of that.
The old days of deliberation are long gone, no longer a factor in the eye blink world of the microchip. No matter what your business, know that it's moving at a faster clip than you are -- and unless you manage it, it will mange you. If one truth remains, it's that bad news travel fast and doesn't often wait for wisdom to catch up.