Editorial Panic devastates financial markets

Nobody — but nobody — in the entire financial community has ever witnessed anything quite like the market debacle and bloodletting that has taken place on leading stock exchanges around the world this week — the rewards of a 5-year bull market wiped out in a single day. The panic selling and resultant losses far exceed that of 1929 which led to the Great Depression.

Nor at this stage does anyone know for sure just what it all means. Is the frightful market crash simply a long overdue correction or an ominous prediction that the global economy is about to slide into another deep recession — or depression?

The overnight wipeout of hundreds of billions of dollars here and in the U.S.A. is bound to affect the whole economy. Yet politicians remain sanguine, pointing out that the drastic collapse of share prices is out of step with advances in the economy both here and in the U.S. That may or may not be so. Hadn’t we been assured that built-in market safeguards precluded anything like the October ’29 massacre?

Almost overnight everyone simply wanted to get out of the market or at least get liquid. Sell at any price regardless of the consequences was the order of the day. It was in reality a crisis of confidence, if not of capitalism itself. Economists, of course, were quick to offer all kinds of reasons for the resulting bloodbath, attributing such factors as rising interest rates, fears of growing inflation, vulnerability of the overpriced U.S. dollar, that nation’s staggering trade deficits, the Reagan administration’s apparent inability to cope with massive and rising debts, etcetera. But really nothing new.

Certainly triggering and exacerbating the panic dumping of stocks was the new and scary automated selling technique of a computerized arbitraged program that now dominates market trading throughout the world. A phenomena that didn’t exist in past market crashes, it can automatically initiate massive selling when stock indices and other market indicators breach certain levels. (It also dominates the sharp and dizzy market upswings that we have been witnessing of late.) With mixed blessings, this is something we haven’t yet learned to cope with.

Hopefully this crash simply represents a culmination of a 2- month selling spree that already had investors nervous. Because our markets traditionally trail in the wake of the big New York board, we in this country are prone to brand Americans the whipping boy. However it is no secret that they have been living over their heads for some time, consuming imported goods at an unquenchable rate, incurring massive federal debt in the process. But who are we to be calling the kettle black? Haven’t we only ourselves to blame?

Not surprisingly, gold bullion has stood up well through the crisis, for this is a traditional haven in times just such as this. But gold mining shares, like all the rest, took a terrible beating. Much of this reflected forced selling as margin calls went out. For when stocks have to be sold to raise funds, it is usually the best that go. Furthermore, many of these gold shares had grown pricey and hence vulnerable.

Despite the shattered market confidence that unquestionably exists at this time, fact is there has been a buyer for every seller albeit much of which was in-house buying from the so-called market makers. This, in turn, has given rise to rumors that some houses could be in financial trouble.

Past market panics, typically, burned themselves out in four or five days. This one, of course, has run much deeper then anything we have ever seen. But it, too, will do the same in due course as sanity returns. Indeed as of this writing a marked turnaround was in evidence. But there will be a lot of digging out ahead.