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Generational Dynamics Web Log for 15-Jun-06
Jubilation as stock markets "panic upward" around the world

Web Log - June, 2006

Jubilation as stock markets "panic upward" around the world

Suddenly stocks are gaining sharply in synchronized markets in North America, Europe and Asia.

After big gains on Wednesday, markets around the world had a second day of major gains on Thursday.

New York markets gained another 2% on Thursday, topping 11,000, and the S&P index had its biggest one-day gain in several years.

European markets gained 2-4% on Thursday.

As of midday Friday, Asian markets are up 3-4%.

News anchors and analysts are smiling broadly, expressing open relief that those crazy, panicky investors who caused sharp selloffs have now come to their senses and buying back into the stock market. I'm sure that champagne corks are popping somewhere.

Unfortunately, this "upward panic" is just as dangerous as a sharp selloff.

Panicky investors buy when they're afraid of missing out on a big rally, and they sell when they're afraid of getting stuck in a big selloff.

Both kinds of behavior are equally dangerous, and could lead to a full scale panic.

In fact, what we're seeing is that all markets in the world are synchronized, all going up or down together. Investors are no longer making buy or sell decisions based on the valuation of any particular stock. If you're going to buy, then what difference does it make if you buy IBM or Johnson & Johnson, since all stocks are rising and falling together?

We no longer have a million different stocks. We have only one stock: call it "stock market." Investors are making decision in unison eithr to buy shares of "stock market," or sell shares of "stock market."

And just like any single stock, if it can go up or down 2-3% in one day, then it can go up or down 20-30% in one day. I know it would be exciting if the entire stock market went up 20% in one day, but that's never happened, and anyway, the stock market is overpriced by over 200%, same as in 1929.

We're still on the path for an early stock market crash, as I described in my May 30 essay, "Speculations about a stock market panic and crash."

What would it take to get off that path? On May 31, I said that there are three major possible ways:

A sustained rally. But this is actually pretty much impossible now, since interest rate hikes in Washington, Japan and Europe have substantially reduced the amount of liquidity in the world, and because investors' risk-averseness is much higher these days.

A sharp reduction in volatility. But this obviously isn't happening. If anything, volatility is increasing, with ever larger market increases and decreases.

A "de-synchronization" of the world's markets -- e.g., Asia goes up when Wall Street goes down. This would indicate that money is flowing from market to market, rather than being pulled out of all markets. But obviously this isn't happening either, as worldwide markets remained closely synchronized.

Any one of these three things would take us off the path to a major stock market panic, but none of them is happening. If anything, we're more firmly on this path every day.

As I've said many times, a stock market panic is a chaotic event, so it's impossible to predict the exact date of a stock market panic.

But we're in a very dangerous time now, with increasing volatility, and all the markets synchronized in lock-step. A major "generational panic" in the stock markets would not be a surprise to me, and should not be a surprise to any readers of this web site, but obviously it would be to Ben Bernanke and to champagne-cork popping investors around the world. (15-Jun-06) Permanent Link
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Generational Dynamics Web Log for 15-Jun-06 Jubilation as stock markets "panic upward" around the world

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Generational Dynamics Web Log for 15-Jun-06
Jubilation as stock markets "panic upward" around the world