What, We Worry? by Robert Gore

NORMALLY THERE WOULD BE A PICTURE HERE AND ALFRED E. NEUMAN’S WOULD BE THE OBVIOUS CHOICE. HOWEVER, I DIDN’T KNOW IF THAT WOULD VIOLATE MAD MAGAZINE’S TRADEMARKS, COPYRIGHTS, AND OTHER INTELLECTUAL PROPERTY RIGHTS, AND I’M NOT GOING TO WASTE TIME CALLING A LAWYER TO FIND OUT. HAVING GREAT RESPECT FOR MAD, I DID NOT POST ALFRED’S PICTURE, ALTHOUGH I’M SURE I COULD GET AWAY WITH IT. YOU ALL KNOW WHAT HE LOOKS LIKE ANYWAY.

Crowd psychology, not news, drives markets.

SLL reviewed Robert Prechter’s The Socionomic Theory of Finance, the thesis of which is that financial markets, particularly equity markets, are driven by endogenous social mood, not news developments or other “fundamentals.” If ever a market session supported the socionomic hypothesis, yesterday’s did.

Over the weekend hundreds of thousands of computers around the world were afflicted by ransomware called WannaCry that encrypts files and makes them inaccessible unless the owner forks over a Bitcoin payment. The ransomware exploited a bug in Microsoft software of which the company was aware and for which it had made available a patch. However, users had to download the patch, and for an older version of software, users had to pay for it, so many computers were still vulnerable. Although the hackers who distributed the ransomware are unknown, apparently they used an exploit codenamed ETERNALBLUE, originally developed by the NSA, to penetrate Microsoft’s software.

A computer security expert discovered a kill switch in WannaCry that stopped the program from spreading by diverting it to a dead-end on the internet, but there may be a variant that does not have the kill switch. It is unknown how far the program will spread or what havoc it will ultimately wreak. What is crystal clear, however, is what many computer experts have warned of for years: many of the world’s computers and much of the infrastructure, including the internet, is highly vulnerable to disruption or outright shutdown.

This was just ransomware that hit Microsoft software, demanding $300 ransom per machine. It doesn’t take much imagination to envision scenarios where the ransom is say, $10 billion from a government, and the threat is that a substantial chunk of the Internet, electric grid, the government’s defense and intelligence systems, or some other critical function goes down. This cannot be dismissed as far-fetched because nobody on the planet knows but a small fraction of who has what hacking capability or access to what computers and networks, or what’s already been hacked. As the NSA just demonstrated, Intelligence agencies, who you might think have the best handle on the matter, have had their hacks hacked. (Wikileaks Vault 7 release disclosed the CIA’s hacking tools.)

How did the stock market react to this blatant demonstration of technological vulnerability? The Dow was up 89, the S&P up 11, and the Nasdaq composite was up 29. The stock market has been powered this year by Alphabet (Google), Amazon, Apple, Netflix, Facebook, and Microsoft. Any kind of extended disruption of the Internet or pervasive, disabling computer virus or worm would cost these companies billions of dollars and whack their share prices. Yet, Alphabet was up $4.08, Amazon down $3.98, Apple down $.45, Netflix down $.70, Facebook down $.13, and Microsoft up $.05. Hardly earth-shattering moves.

The legions of speculators, investors, and commentators who look for exogenous causes of stock market movements will perhaps say that WannaCry was dismissed because the damage was limited. However, the reported number of computers that have been affected rose all day, and there were news stories that at least one variation of the ransomware had no kill switch, which means it could proliferate unchecked. So during the trading day, nobody really knew how bad the damage was or how bad it would get. Also, while all the implications for computer and network security are not fully known, this incident, the worst of its kind so far, is a loud and clear warning of proliferating risks. Those risks are especially worrisome for companies whose business models depend on computers and the internet.

All of which was apparently irrelevant to the stock market yesterday, joining a lengthy historical list of exogenous factors that “should” have moved the market, but didn’t (see Prechter’s book for many more examples). Crowd psychology drives the market, not the news, and right now the crowd is manifestly bullish.

Disclaimer: Robert Gore has no position in any of the stock indexes or technologically vulnerable and richly valued companies mentioned in this article, and thinks anybody who does is living on borrowed time.

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