JEFFREY BROWN: And for more on the recent volatility and attempts to better stabilize markets, we turn to Nick Perna, head of Perna Associates, a consulting firm specializing in economic analysis, and James Angel, a professor of finance at Georgetown University.
Nick Perna, let’s start with today, 376 points down, including a sharp drop right at the end. What’s going on?
NICK PERNA, Perna Associates: It was a real nail-biter today.
It is sort of like the accumulation of lots and lots of anxiety that started about three weeks ago. So, we’re off a total of over 1,000 points for the Dow since the last week of April.
I will point out, however, that, even with that 1,000-point decline, we are still some 50 percent ahead of where we were at the lows of April of 2009. So, it is a case of high anxiety and some revaluation, revisiting as to whether or not the market had too high hopes for the U.S. economy. I think a moderate recovery is in store, not a big one.
JEFFREY BROWN: All right, we will get to some of the specifics in a moment.
But, James Angel, let me bring you in. What — a correction of 10 percent drop from a high, sort of a technical term, but what do you see happening in terms of the volatility of recent weeks?
JAMES ANGEL, Associate Professor of Finance, Georgetown University: Well, we have got a lot of natural volatility in the market as a result of the situation in Greece, not to mention the jitters in Korea and in Iran.
So, there’s a lot of natural uncertainty in the world, and that’s reflected in the volatility of the market.
JEFFREY BROWN: So, the — so, you look to Greece. Tell us, what do you see there? Today, there was — well, it is Greece and Europe, which we have talked about a lot on this program. And, at certain points along the way, it looked as though governments had stepped in enough to stem the problem. But, apparently, that’s premature.
JAMES ANGEL: Well, we will see.
Yesterday, the German government took a unilateral step without consulting the other governments to ban so-called naked short-selling in certain instruments. The fact that the European leaders are not working together is a serious sign that there are problems in Europe.
JEFFREY BROWN: Nick Perna, pick up on that. What about — what about Europe? How is that driving what is happening here?
NICK PERNA: Well, I think it’s one of these things that, you know, Greece is damned if it does and damned if it doesn’t.
You know, if it doesn’t abrogate its debts by living up to all the requirements that are going to be put on it to bring its budget deficit down lower, then it worsens its recession. So, it’s not an easy and clean way of resolving this. Just because they came up with something like a trillion dollars of aid, a package — the Europeans came up with a package to try to deal with this, it doesn’t mean that the European economy wouldn’t suffer as a consequence.
So, you know, you solve one problem, maybe, but another problem just pops up right away.
JEFFREY BROWN: Well, Nick, the other thing that people were talking about today was the — the unexpected jump in claims for unemployment benefits. Now..
NICK PERNA: Yes, you know…
JEFFREY BROWN: Go ahead.
NICK PERNA: Go ahead.
JEFFREY BROWN: No, go ahead.
NICK PERNA: Sure.
I mean, if that had happened, and there were no problems with Europe, it might have been dismissed as a — as a quirk. But there are a few other things, in addition to what is going on in Europe. Number one, you know, we — we got some evidence that, you know, maybe housing isn’t at strong as some people thought. Building permits fell the other day, although housing starts rose.
But permits tell you something about the future, the news that increase in initial claims for unemployment insurance, suggesting that maybe firms are laying off a little bit more than we thought they were. And then we found out that foreclosures and delinquent mortgages were still at a very, very high level, and so on.
So, I don’t think that this stuff says that the recovery is imperiled. But it says, if you had a very ebullient view of the U.S. economy, you have to revise that down to a more moderate outlook.
JEFFREY BROWN: But you’re — just to stay with you, one more thing here, I mean, you — you are looking at all these things, and here we are back again in the days where every day seems to be a several-hundred-point jump, mostly downward.
And all that is — again, it goes back to what we talked about — we used to talk about a year or two ago, was really about psychology. Is that what it is adding up to?
NICK PERNA: I think psychology is very important, because the market, the stock market, is both reflective of psychology and formative of it.
If — if traders start to get nervous and investors get nervous, the market goes down. But then — then that feeds, and consumers start to get nervous and businessmen get — start to get nervous. But I think there is a lot of other stuff going on here. And I think it has to do with, you know, all these nanosecond trades and the like that are going on and making the responses to any event outsized, as opposed to smaller.
JEFFREY BROWN: Now, James Angel, speaking of uncertainty, there’s still all this uncertainty about what happened earlier this month, when there was the plunge. We reported earlier about these steps that the SEC is taking.
Explain this new circuit breaker idea for us, and how is that intended to stop something like that from happening?
JAMES ANGEL: Well, it is not a new idea. Germany has been doing this for over a decade.
The idea is pretty simple. You have the computer monitor stock prices in real time, and when a stock jumps too far too fast, 10 percent in five minutes, the computer will call a pause, and then that gives the humans time to look and see what’s happening, make sure all the circuits are working, and restart trading using the normal procedure we use every morning to reopen trading.
JEFFREY BROWN: And then we were — just Nick Perna was just talking about the high-frequency trading. That’s something we have heard a lot about since that happened. And the shadow markets beyond the ones we talk about, for example, the New York Stock Exchange, would — how would — how would all that be affected by these new rules?
JAMES ANGEL: Well, I think the market will be a lot more stable as a result, because one of the problems we saw on tornado Thursday, May 6, was that the circuits were so overwhelmed by all the volume that people’s data feeds were not working properly. There were a lot of technical glitches at a lot of different places.
And that led to the confusion that made things worse.
JEFFREY BROWN: Now, of course, on that day, interestingly enough, I mean, the other thing we were looking at that day was riots in Greece. That is what we originally all thought had happened. And here we are again still talking about Greece and Europe.
So, explain the balance here between the technical stuff you’re talking about, the machines, the computer trading, and then this sort of market psychology or looking at particular things like what’s going on in Europe. How does one feed the other?
JAMES ANGEL: They feed back very closely, because, even though we talk about computers trading, all those computers are attached to people. You know, it is not like these are computers from outer space that are eating the planet.
They have been programmed by people mostly to do things that traders have always done, like buy on the dip and sell on the rebound. But, when the market is really jittery, well, those computers get jittery, too.
JEFFREY BROWN: And…
JAMES ANGEL: And when everybody tries to run for the fire exit at once, you got problems.
JEFFREY BROWN: And a last word from you, Nick Perna.
You put these together, too. I mean, do you expect the jittery market to continue?
NICK PERNA: I hate to use the phrase, but I think jitteriness is the new normal. I think that, until we get clearly out of the woods in terms of financial fragility, even in terms of things like, are we at the point of a political upheaval in the United States, upheaval in the sense of changing control of Congress, if you will, until all these things are resolved, jitteriness — jitteriness is the — the order of the day.
JEFFREY BROWN: Jittery is the new normal. OK.
JEFFREY BROWN: Nick Perna and James Angel, thanks, I think.
JAMES ANGEL: Thank you.