Wallet woes hard to diagnose

While talking to friends over the weekend, the conversation veered from disquiet over Julius Malema's benefactors and Desmond Tutu's proposals to tax wealthy whites to alarm over the demolition of their savings.

"In my profession I can make a reasonably accurate assessment of a patient's condition by analysing test results and examining a scan and, if need be, prescribe medicine that will treat the symptoms," a doctor friend said.

"But in your game, no matter how much information you gather, it's almost impossible to diagnose the outcome."

It was difficult to disagree. After observing stock markets for nearly four decades, I've discovered no matter how attentively you pore over the news or how vigilantly you monitor price screens, it scarcely equips you to fathom human behaviour.

For some time it's been common knowledge the US has been living beyond its means and that its economy was destined to slow as businesses put the brakes on employment and householders tightened their belts.

The sovereign debt crisis in Europe was familiar news, spreading across the Mediterranean, while spiralling inflation in emerging economies like China, Brazil and India was well-documented.

Even the possible downgrading of US debt was broadcast to investors after Congress's 11th-hour solution to a budget reduction plan fell far short of promise.

On the other hand, earnings from the private sector exceeded expectations. Company balance sheets were brimming with cash and, although management had warned trading conditions remained tough, their outlook for profits was moderately bright.

With giant international corporations in excellent health and offering substantially higher returns than the unstable fixed-interest markets, there was little incentive to seek safety in debt instruments.

But as my medical friend explained, financial markets did not necessarily conform to logic and could sometimes react to situations in ways that defied reason.

Rating agency Standards & Poor's decision to downgrade US government debt by a notch was intended to warn investors the risk of the country not meeting its future obligations had increased.

The agency's evaluation of the liabilities of the US and the state of its economy came as no surprise to the market, although the timing of the announcement was challenged, taking place when investors were still voicing anger over the debt ceiling debacle. But, still, it served as a stark reminder to the world that a country once admired for its economic and political might was being pressed over its future commitment to creditors.

Rather than push interest rates on government-backed bonds higher, investors afraid that sagging confidence would drag the world economy into a fresh recession, hauled funds out of equities, fleeing largely to the safety of US treasuries. The rush of money plunged yields on short- and long-term government securities to their lowest levels since the collapse of Lehman brothers three years ago.

Back in the late 1980s, legendary investment guru Mannie Simchowitz counselled me to make certain that when investors started running for the door I was first out.

That's sage advice when you're battling earthly beings for the exit, but when you're tussling an armada of cyber-bullies, you're likely to be trampled.

When I returned from an investment conference in Omaha in May, I wrote about fund managers' anxiety over the growing influence of hi-frequency trading systems on prices in financial markets and how equation-driven computer programs had been creating sharp movements in bond, equity, currency and commodity markets.

Concerns were expressed that global markets were being transformed into cyber-casinos, where traditional measures of value were being overlooked by techno-traders searching for microscopic price advantages.

There is no doubt a large portion of the recent downward movement in markets resulted from a megaton of algorithmic trades, generated by these complex machines.

While the dramatic collapse in share prices is bound to raise misgivings about the sanctity of the stock market, not all the blame can be pinned on the manoeuvrings of mechanised trading systems.

Americans, annoyed that their leaders had abandoned the call to create jobs - focusing instead on cutting spending when this was needed most - provided the initial spark that ignited the computer-driven downward spiral.

Markets have bounced from their lows and could continue to claw back some of their recent losses as investors re-evaluate forecasts for corporate earnings and recalibrate the outlook for global growth.

But until world leaders co-ordinate efforts to address eroding confidence in the leading industrialised economies by providing hope things will get better, brace yourself for further volatility.