Why panic spreads through the stock market

Lunch at the strip club

The sleep deprived, drug and adrenalin fueled stock market is about to turn from greed to fear over the Greek and EU debt crisis. Things could get ugly very quickly. Yesterday the Dow Jones dropped 900 points before recovering.

When I was living in Toronto in the 1990s, the Financial Post profiled stock brokers and traders during the dot.com boom. The report said many of them used drugs like cocaine to keep up their energy level.

Stock market types from Bay Street would descend on the Zanzibar strip club just up the street from the stock exchange. Lunch with naked dancers got their adrenalin pumped up to make it through the afternoon.

Stock traders also worked long exhausting hours, many drinking their evenings away in bars searching for market rumors and relief from the stress.

Having met traders in Toronto, it made sense. They were a sleep deprived, nervous bunch constantly switching from greed to fear.  The story in the paper made sense and several brokers confirmed it was true.

The attention span of a stock broker or trader is today, this afternoon, now. Stocks are up stocks are down. Buy! Sell!

That’s why the debt contortions over Greece are unnerving the market. The fact that Greeks are seriously in debt is not news. The fact they don’t like to pay taxes is not news. The impact of Greece’s debt crisis should have been “factored” into the stock market.

But the bad news was ignored except for the days when the media reported progress on solving the problem.Then it was forgotten.

All of a sudden yesterday afternoon, the market paid attention to the Greek crisis. The government passed their austerity laws. People were rioting in the streets. The market dropped 900 points in minutes.

Dow Jones drops on Greek parliament announcement

A commentator said the crisis could spill over to Portugal, Spain, Italy, Ireland. Another predicted a crisis in Britain within 2 years. Apparently the British have the highest debt-per-capita in the European Union.

None of this is news but the market reacts with nervous energy. Look at the dip after lunch. The boys are back from their liquid lunch and oops, the world is going to hell in a handcart. Sell!

Of course the EU and World Bank are going to shore up the Greek $420 billion debt. That makes today a good day for greed to take over.

Another report says Portugal and Spain may be in trouble. Not that their debt is as bad as Greece. It is just that nervous money brokers have turned negative. They worry and in their nervous exhaustion, selling and shorting take over from benign neglect.

Last night they were predicting the stable countries in Europe would revert to their own currencies and abandon the Euro. Most chaos will ensue.

These debts are owed to banks. If the banks have to report bad debts, their shares and capital will fall. The world banking crisis will enter a new phase that could be nastier than the first since most countries have spent their stimulus money. All of the stimulus money was borrowed as well.

If the dominoes start to fall, the nervous, tired, drugged and adrenalin pumped traders will move quickly.

In the meantime, in my little corner of the world, the PEI government goes on spending borrowed money like it will always be available.

While consumers are trying to pay down debts and get their financial houses in order, governments like PEI pretend nothing can happen.

What drugs and hormones are keeping up their optimism?