The Crash of 2:45

When a lot of snow falls on a steep slope, things can get scary.

If the wind blows just right, the snow forms a deep hardpack and the crystal connections break down. A fracture in this crust can then spread and a slab can dislodge, displacing other slabs and starting a chain-reaction. A slide’s destructive power is truly awe inspiring. During a storm, most people stay out of avalanche terrain. But even in fine weather pockets of instability can form, and a stray hiker or skier can trigger an accidental event.

That’s what seemed to happen in the stock and bond markets last week. The Euro crisis was loading us with instability, and a couple of large trades triggered a cascade of events that created 30-90% price moves within minutes. Circuit-breakers at the NYSE helped, but for that period many trading systems assumed that the computers were down and went to other venues. Those smaller exchanges were overwhelmed, and Accenture and Excelon went to less than a penny.

Just as avalanches spend their energy and run out on the flats, so this panic reversed itself pretty quickly. The EU’s trillion-dollar package helped. But pockets of instability in the markets remain. Market regulation needs to catch up with the latest technology.

Its long past avalanche season, but slides and market panics can still happen. The best approach to both is to keep your eyes open and stay out of the way.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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