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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.