China & Grey Tuesday
Having said that, I think it is worth pointing out one aspect of last week's sharp and sudden drop in the financial markets. Dubbed 'Grey Tuesday' by some, the events of February 27, 2007 -- where the Dow Jones dropped by more than 400 points in a matter of minutes (a rate of decline that had been hitherto unprecedented) -- garnered a lot of attention.
A lot of the 'analysis' that was given on television seemed to focus on a lot of things (the terrorist attack in Afghanistan while Dick Cheney was visiting, etc.) that seem to me to be largely irrelevant. The one bit of news that probably did have a significant impact was the sharp drop in Chinese share prices that immediately preceded the drops in Western stock markets.
China had been experiencing eye-popping rise in stock market valuations. This brought the Chinese markets (in Shanghai and Shenzhen) to the attention of wary Chinese policymakers who were concerned about over-heating markets and rampant irrational speculation. These concerns moved Chinese regulators to talk down their stockmarkets as early as January of this year. Apparently all of these attempts to cool Chinese markets came to a head at the end of February ... much to the chagrin of traders and investors around the world.
'Grey Tuesday' -- or whatever one wants to call it -- should serve as a wake-up call to the investing community. This is yet another example of how much global markets are inter-connected to one another. Claims of adequate diversification via a simplistic approach to 'global' investing is -- as the most recent Buttonwood column (in The Economist) points out -- should be met with skepticism. Correlations and covariance between financial markets in different geographic regions are not static ... they are dynamic and market values tend to move together in the most inopportune ways (in downward directions almost simultaneously).
The rapid drop in market prices is also another example of the often 'wild' nature of randomness. Events in financial markets is a lot more jumpy than what most finance textbooks would suggest.