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Peter Atwater: Why Markets Are Panicking


Market explosions start as small sparks.

The following was shared by Peter Atwater with the clients of Financial Insyghts on July 31, 2015:

High Anxiety: Why Global Markets Are Panicking

We must deal with the world as it is, not as we might wish it to be.

It's time to get real -- very real.

With the media following social mood, this chart from the New York Times says it all:

We are overwhelmed today, historically so.

While the physical and mental health consequences of extreme stress are well known, what is less appreciated (particularly by market participants) is the impulsive and over-reactive behavior that naturally accompanies our overwhelmed state. In those moments, we don't just merely react to events; we REACT!!!!!!!!!!!!!!!!!!! A small spark can quickly turn into an explosion.

At the risk of overgeneralization, I'd offer that the sudden and dramatic rise in mass shootings and college suicides are just two consequences of today's high anxiety-driven impulsive overreaction.

That students at our top colleges are struggling in this anxiety-filled environment to achieve "competitive perfection" and are increasingly resorting to suicide as a coping strategy is hardly a surprise when you see how "relentless" and "overwhelmed" tie together, too.

Why all of this grim-filled backdrop matters is because it is shaping market behaviors too. The more extreme sentiment becomes, the more likely it is that markets will impulsively overreact.

At the risk of offending my bullish friends, nowhere has that been clearer already than at the intersection of Silicon Valley and Wall Street.

The speed at which money and technology have come together over the past seven years is the picture of "impulsive overreaction." Earlier today, the Wall Street Journal reported that Uber crossed the $50 billion valuation threshold even faster than Facebook (FB) -- just five years! And just look at the extraordinary ascendency of tech leaders into billionaire ranks. Based on their age and the age of their companies, many were all but born into it.

Now I realize that this next chart will offend some readers, but I don't think this relationship is purely coincidental:

Nor, I would add, is this seemingly random pairing:

Given their true emotional state, investors have been more than happy to rely on global central bankers.

Forget religion. Central bank actions have become the opiate from the financial masses.

While investors' positive impulsive overreaction to Silicon Valley's opportunities and central banks could continue, I am afraid that not only is the upside limited, but betting on it could be fatal.

From what I see as far as an emotional/confidence backdrop, the markets could easily become bi-polar. The impulsive overreaction that has propelled equity and bond prices to record heights could easily turn the other direction.

Not to be flippant, but this is a market that out of nowhere could have a major panic attack or even a major depressive event.

While economists are focused on the Fed and others on the IPO market, China and Greece, it is the backdrop of extraordinarily high anxiety that may be the most important factor for what is ahead.

Please, please, please consider what the environment might look like as investors, policymakers and Main Street experience a collective panic attack. The New York Times Chronicle charts above suggest that the veneer of civility is extremely thin here.

While I don't wish for it, a small spark could quickly turn into an explosion, taking the financial markets with it as confidence collapses.

Editor's Note: T3 Live cordially invites you to our first annual Finance Festival, scheduled for November 6-8 in sunny Miami, Florida.

This is the perfect opportunity to get a jumpstart on trading successfully in 2016.

You'll interact with and learn from a truly impressive team of Wall Street experts, including Scott Redler, Evan Lazarus, Barry Ritholz, Nicole Sherrod, Todd Harrison, Doug Robertson, Josh Brown, JC Parets, and many more.

Read about the event here.
Twitter: @Peter_Atwater
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Position in SH; Creditor of JPMorgan
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