Lessons From Three Crashes

Wednesday was a crash trifecta.

First, there was a drop in Chinese stock prices, coming on the heels of a month-long decline. Then came the crash of United Airlines’ computer system, causing the airline to keep its planes on the ground for two hours. That was followed by a glitch at the New York Stock Exchange, where trading was halted for more than three hours.

Here’s my take on which crash should cause the most concern.

Let’s start with the Big Board, where I once worked as manager of the news bureau. Back in the days when I shepherded TV crews covering the action on the trading floor, the Exchange was the location where about 80% of all trading in NYSE-listed stocks took place. The remainder was done on regional exchanges, most of which no longer exist in physical form.

Today, only about 20% of Exchange-listed stocks trade on the Big Board. And to be accurate, the vast bulk of that 20% takes place via Exchange computers, not on the floor. The magnificent trading floor is retained, in part, for its value as a setting for photo ops, which is bittersweet for those of us who remember when it bustled with activity.

In the long run, and even in the short run, the crash at the NYSE won’t mean much for investors. Yes, it shows how vulnerable we are to computer outages in general, but on Wednesday trading continued on other exchanges, of which there are about a dozen, and on institutional marketplaces known as “dark pools,” of which there are about 20. This market fragmentation is good in the sense that buying and selling can continue even if an important trading node goes down. Whether the fragmentation is of any other benefit to retail investors is another story. But as far as the impact of the Big Board’s system hiccup on the average investor, it’s pretty minimal, even if it did dim the halo of an American institution. Click here to see some of the technical glitches that have wreaked havoc on Wall Street.

The system failure at United Airlines probably had more of a personal impact than the NYSE stumble. Thousands of passengers were delayed across the country, with crowds quickly making O’Hare, LAX and other United hubs look like Times Square on New Year’s Eve. Air travel has become an unpleasant ordeal for anyone other than those who can afford the stratospheric price of non-economy carriage. From the incompetent and unpleasant TSA screeners to the sardine-style seating to the endless delays, cancellations and missed connections, the once uplifting experience (both literally and metaphorically) has turned into something to be endured. Add United’s system mess to the list of reasons the skies are no longer so friendly.

Finally, China. While markets there rose between 3% and 5% in Thursday trading, that’s still not much of a consolation for investors who have seen the value of their shares tumble about 30% in the past month. The government is taking the typical steps of blaming the mess on short sellers and foreign banks rather than admit that its easy credit policies fueled the speculative frenzy. Yet if history is any guide, once the air starts coming out of the bubble, we’re in for tough times. And those tough times won’t be limited to the Mom and Pop Chinese investors who’ve lost their savings.

China, of course, is a huge player in world markets. While Greece has been getting all the attention, its economy is so small that the ripple effect on most other countries is relatively modest. Chinese problems, on the other hand, spell big trouble for everyone.

China is America’s largest trading partner, the world’s second largest economy and a major buyer of commodities. If the Chinese economy sneezes—which is what often happens when a speculative financial bubble bursts and the contraction’s effects spill into the real economy—the rest of the world is likely to catch a cold—with some countries likely to catch bronchitis or pneumonia.

Many analysts say the Chinese economy already is slipping, pointing to the continuing slide in commodity prices. A depressed economy would cause big problems for China’s Communist leaders, who have been able to maintain control because the average Chinese citizen has enjoyed rising living standards. So look for the government to do all it can—jawboning, prodding and credit manipulation—to keep the stock market from declining further. But also remember the words of the late economist and presidential advisor Herbert Stein, who said that “if something cannot go on forever, it will stop.” In this case, check to see whether your investments have exposure to China, because the Chinese speculative bubble can’t go on forever. For a quick perspective of China’s debt load and dividend paying stocks with exposure to China, click here.