Wall Street pundits have called the current market correction “a collapse without a cause.” I agree this December collapse has been illogical but no more illogical than the record 1,086 jump in the Dow during one day. As I type this, Dow futures are down 344 points. The individual opinions of economists and analysts did not cause this volatility. There is no explanation for this behavior in economics or finance. Maybe, technology?
Some call it “momentum investing.” Some call it “trend-following.” Algorithms are programmed by humans to look for patterns and changes in relationships. Then, computer makes the decision to buy or sell in nanoseconds — far faster than any human. Let’s look at a very simplified example”
Our computer could be programmed to buy a set number of shares of certain stocks whenever there are five consecutive sales with a rising price for each sale. When that happens, the computer buys instantly – no human involved. Conversely, the algorithms could be programmed to watch for three consecutive sales with a falling price. When that happens, the computer sells instantly – no human involved. This is both mind-less and soul-less! Some analysts have estimated that computerized trading programs (including passive- investing ETFs) now execute 80-88% of all trades. While that seems high to me, I would be worried if it was only 50%.
Advocates argue this is not a takeover by the machines, because the computers simply follow algorithms that are programmed by humans. However, it is just a matter of time before “artificial intelligence” does the programming. Why not? There is no law against it! Why not?
If you watched the Congressional hearings of tech billionaires on privacy in the age of technology, you already know politicians are pitifully unprepared to supervise technology. With all due respect to the SEC, so are they. Technology changes too rapidly to regulate. Nor is technology self-regulating.
I have long argued that a recession is very different from a financial crisis, and I know how to deal with them separately. While I haven’t come to any conclusion yet on a way to handle a tech-dump, I must remember that they are self-correcting, although there should be a penalty for producing great volatility and increasing the frequency of heart attacks.