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Update: Time to shut down the markets

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Not content with doing its worst to humanity, coronavirus is infecting the capital markets, due to fear of its impact and attempts by traders to profit from the situation.

All sides are suffering from a global variant of Generalised Anxiety Disorder. It may soon get to the point where stock markets will need to shut to help us achieve sanity. 

Despite the opposition of US regulators and stock exchanges, that’s not such a stupid idea.

According to online service provider WebMD: “GAD is characterized by excessive exaggerated anxiety and worry about everyday life events with no obvious reasons for worry. 

“People with symptoms tend to always expect disaster and can’t stop worrying about health, money, family, work, or school. In people with GAD, the worry is often unrealistic or out of proportion. 

“Daily life becomes a constant state of worry, fear, and dread. Eventually, the anxiety so dominates the person’s thinking that it interferes with daily functioning, including work, school, social activities, and relationships.”

The syndrome has evolved out of our survival mechanism, where we flee to avoid danger. Our insights take control because this is the best way to reach safety.

Judson Brewer, associate professor at Brown University, points out humanity has developed the power to create and plan through the prefrontal cortex.  It puts together simulations, mapping out the scenarios for future events, based on past experience.

If, however, situations become uncertain, and threats multiply, the prefrontal cortex cannot cope. Anxiety develops, as our mind produces stories of fear and dread. 

In this scenario, our anxiety become reinforced, every time we talk to someone else who is worried, or come across a piece of data which has worrying implications. 

And when we can’t control anxiety, we panic. According to Brewer in The New York Times: “Wall Street is a great example of social contagion. We watch the stock market spike and crash, the stock indices being a thermometer for how feverish our collective anxiety is at the moment.” 

The plot thickens because computer algorithms trading the markets are preset to respond to a range of inputs.  And one of the most significant inputs relates to their volatility.

Traders get forced to cut positions when volatility spikes, even when they are a sure-fire bet. Risk-parity, momentum and relative-value trades can add further fuel to market booms and slumps. These trades can net off, but they almost always magnify the impact of powerful sentiment.  

The Wall Street Journal has calculated that the Dow Industrials index has closed more than a thousand points lower on six trading days since mid-February and recovered more than a thousand points on four of them. We have never seen market sentiment deteriorate so quickly

Markets typically rally strongly in the hope of a co-ordinated government rescue, then fall when that piece of news is in the open. 

Promises of government support for industry are running to hundreds of billions of dollars. Anatole Kaletsky, co-chairman of Gavekal Dragonomics, advocates an emergency helicopter drop of money equivalent to 25% of GDP.  

But is any of that enough to satisfy the hunger of capital markets for performance?

Cash thrown at the problem could even distort the market further, as when the liquidity produced by easy money after the credit crisis was driving the market coronavirus. 

Gold has been falling along with bitcoin, recently billed as a safe haven. US Treasury bonds have displaying unprecedented swings, as hedge funds have desperately tried to arbitrage between futures and physicals.

Some say we should not look at our portfolios at all, in the current scenario. In a column for the financial services group Morningstar, Ben Johnson says: “The less often we look at our portfolios, the less likely we’ll be upset and tempted to think.”

Peter Atwater of Financial Insyghts studies the impact on behaviour finance on stock markets. He recently said the close proximity of the virus is really starting to make an impact on Western markets. 

He says the US authorities have no choice but to take the kind of forthright action which led to planes being grounded across the US during the 9/11 crisis.

“Over the next several days it would not be at all surprising to see all schools and most businesses close – likely the financial markets too.”

Securities & Exchange Commission chairman Jay Clayton begs to differ, telling CNBC: “Markets should continue to function through times like this.”

Stock exchange authorities speak of the importance of keeping markets open and the danger of repercussions. Whether they would be worse than the current chaos is another matter.

Doctors advise relaxation to deal with GAD.  Researchers need time to produce vaccines against coronavirus. Market professionals, like the rest of us, need a break. Traders need to be taught a lesson. Investors need time to start acting logically. They should reflect on the possibility that traders might be a cause of our problem, rather than a symptom.

Yes, it is time to shut the market.

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