The 'Electronic Herd' Rides Again

TOKYO, Feb. 28, 2007 — -- "Highly speculative" is what the seasoned analysts call the Shanghai stock market -- it's a reasonable description given that local Chinese call it Shanghai's "slot machine."

A slot that has paid off handsomely over the last year, doubling almost every bet.

It is also what the experts might call a "frothy market," or more ominously, "a bubble." So, for many it was no surprise when Shanghai suddenly sold off by 9 percent in one day, its biggest plunge in a decade.

The sell-off was prompted by rumors that the Chinese government was set to impose new rules on its wild equities market, to try to rein in the speculative excess.

Not true, the Chinese government announced in a very transparent effort at crisis management. And, almost immediately, the slots were paying off again -- the market went up today more than 4 percent.

It would all be a curious anomaly if the world's equity and bond markets were not so interconnected these days -- by the Internet, by global institutions awash in cash, by international investors the world over chasing higher and higher returns.

As New York Times columnist and author Thomas Friedman keeps reminding us, the global market and the electronic herd shows no mercy.

Any perception of weakness, any bureaucratic misstep by governments, any misguided attempt by financial markets to change rules to benefit their societies can lead to a harsh and brutal market reaction.

Nothing personal. It's just globalization.

Was there any logical reason to believe that an effort by the Chinese government to impose some rational behavior on its unruly markets would somehow fundamentally damage the Chinese economy, the world's fastest-growing economy with tentacles reaching every corner of the planet? No.

In fact, it is the sort of action the investment world has been urging China to undertake.

I've been whipsawed through a few of these global equity panics during my years in Asia.

In 1987, it was Black Monday and eventually the bursting of Japan's enormous asset bubble. In 1997, it was the attack on SE Asian currencies and the start of the Asian contagion that affected markets around the globe.

The economic reality that we must all live with in today's high-speed, hi-tech, interconnected global marketplace is that nervousness, fear and panic also know no boundaries.

Today, there is uncertainty and insecurity the world over -- markets are at record highs; real estate values are plunging in some markets; there are wars in Iraq and Afghanistan, and warnings of a U.S. recession.

Suddenly, one market plunges and the fear and nervousness become tangible, palpable, global. A sell-off in Shanghai may have no real economic effect on any of us, but we can all vicariously feel the fright of a scary plunge.

The analysts now say that Shanghai was just "the excuse everyone was looking for to take some chips off the table."

Usually it's the big institutions and hedge funds that trim their bets before the next markets in the next time zones even open for business. The individual investor is left looking (or fearing to look) at his or her 401(k) to see how bad the damage is. And then to worry for hours or days or weeks if the equities market, as we've been lectured over and over again for the last two decades, is really the place to be for the long run.

So, what will it be this time? A short-term correction? An opportunity to buy? The beginning of a bear market? The start of a period of frightening volatility? All of the above? An anomaly? There have been 50 of these big sell-offs in the last half century. Roughly half of them bounced back immediately, half didn't.

The Shanghai market that sparked the sell-off may seem somewhat irrelevant now. The focus will shift to other markets, other economic fundamentals, the warnings or encouragements of other experts.

These events leave nerves frayed and raw. But raw nerves leave us all more aware, more alert, more focused.

We don't need all that when we're monotonously pumping cash into a slot machine. We do need it when we're investing in our future. And when investors in every other market are piling on the chips or taking the chips off the table at a faster and faster pace.