I wanted to call this article 'Will the Internet and Markets Survive growth' but that was too complicated to get an idea I have across. It's a big idea.

Over 70 PCT of market volatiltiy in stocks, and I am sure the majority of other markets is electronic program trading by places like hedge funds. They are done on supercomputers Nasa would envy with over 10,000 transactions a SECOND.

This behavior was suppsedly responsible for the Flash Crash a year ago roughly that let to a 1000 point Dow drop in about 5 mins one day. The 'culprits' were never caught.

But I am concerned about a large scale issue with the internet. Not only the fact that there are thieves, big ones. Or that the technical complexity is getting to out of hand (does not mean out of control but its pretty messy, consider the Wikki case).

And to move ahead faster, imagine what would happen if, because of that huge diplomatic scandal they instituted internet licenses. Then you would be tracked, but that doesn't bother me.

But the really big danger? (or one that I am thinking of that is very real) is an internet 'war' where countries cause so much damage to each others networks that huge parts of the economy and millions of people can't get into their accounts, or markets crashed on their own and there is no liquidity.

In such a case your world would be turned inside out, because most of us are so tech immersed now in computers, or laptops, or Ipods, or internet phones that they don't even realize they are literally living inside an electronic world that is developing and growing like mad, unlike anything anyone has seen in human history...(I know I am professionally trained in the internet and databases)

A very BIG perception problem

From a theoretical standpoint, I am very concerned over the immersion people have inside the internet. If you are not careful, as with anything of such power (how much power is not yet clear but the internet is so powerful that it is transforming the world right in front of us) you can literally get hurt - or drawn into evil things that are on the net as well, not just your personal business or the markets.

So the internet is so huge and powerful. News sites. Chat rooms. Bulletin boards, pornography, markets, videos, live broadcasts. Cyber wars like Wikki.

Governments are afraid of the internet. So, you can count on the internet becoming regulated. And taxed. And, governments are going to try to control this social networking pheonomenon that is like a plague of locuts whenever the social networks 'go viral' on any issues from pollution in China (leads to a protest developing with like 10,000 people in about two hours to the consternation of the Chinese authorities, or for example how the social networking methods vastly increased fund raising for candidates or resulted in a one million person march on Washington over the Tea party which kicked their enemies out of office by the droves, and got the US Congress to complain, something not good for the internet's future believe me.)

Or, how about a fast crash, or flash crash or a world electronic market that gets out of control and crashes and spreads so fast that the worlds banks shut down. That almost happened in Fall 2007 and again in Fall 2008.

See, people don't need to crash banks in person to get their money out in person like in 1930. Now, electronic flight or panic can happen, and there are a lot more people today than in 1930 (1.4 billion compared to 7 billion today). There are reliable sources who stated the US was on the verge of a total bank collapse or other major banks were in Fall 2008, and there was so much money being withdrawn from banks that the US Fed was handing out literally trillions of USD that fateful day to panicking banks. The Fed had to gurantee US money market funds to stop it. Something that was not in FDIC purview or anyones. The Fed stated they were within two hours roughly of losing control of the situation. About two hours from total world bank meltdown.

Mathematicians stated that markets are now so huge and spread around the world it is just a matter of time before the complexity alone causes a total crash, and perhaps even a technical breakdown shuts the internet down for days in the middle of a crash, allowing some to get out before the others....I am thinking of large traders being given preferential treatment since the markets are not trackable in huge crashes. (Flash crash for example).

Spritual dangers

And then there are the spritual dangers of getting so caught up in the internet that people are becoming virtual people, and not going out, not exercising, and becoming frankly some kind of internet addict with many of the same harmful psychological effects of other known addictions.

The interent is a world. It is a wild west. One thing of major concern to me as a financial writer is that the internet puts itself between you and the rest of the world (and your bank accounts too; have you ever counted your money in cash?).

This makes it easy for financial media to plant stories, manipulate markets, and generally lead you astray while the mega investors get privy information (impossible now to track insider trading and how many cases have you seen tried since the crashes of the last several years?) the regulators basically exist in a vaccum. By the time they try to find out what happens the people have erased all the tracks like emails so they give up. I am serious.

So, you like the virtual power of the internet, the speed, the convenience. Well by interposing the internet (or allowing its interposition) between you and the world, you are easily led or decieved. Credibility of sources are a concern of the internet. News sites and financial media try to vet their sources but the speed of news on the net makes that very difficult. But of more concern is deliberate misinformation by meida and internet sites our sources. This is not a rare occurance. This causes mistrust. It leads to panics. It will lead to revolutions.

So not only is the internet huge and growing fast and absorbing the spirit of the markets in total now, (it dominates everything it touches) but the world is changing so fast because of this that in the 'real world' that things are out of control

They are out of control.

There are things you can to do try and mitigate the disinformation problem. One is to have a market researcher who can see what this technical revoultion means, not only to market newswriters, but to market makers, and also geopolitically.

In any case, get ready for an exciting next few years/decades because things are moving fast!

I had one potential subscriber ask me if our newsletter has much more content than these public articles, ie, if it was worth subscribing. The answer is that the public articles have less than 10% of our research and conclusions that subscribers see, not to mention the subscriber email alerts of important breaking financial news. We have anticipated many significant market moves in the last year, such as imminent drops in world stock markets within days of them happening, and big swings in the gold markets within days of them occurring. We have also made a number of good calls on big currency swings, such as with the USD, the Euro and the Yen. For example we called the USD rally right at the start in November.

We invite you to stop by and have a look.

Copyright 2010

Christopher Laird

Editor in Chief


Disclaimer: Chris Laird is not an investment advisor/professional. This article, and the PrudentSquirrel newsletter and alerts, are general market commentary only. They are not intended as specific advice. You should talk to your own investment professionals for specific advice. Information here is deemed reliable but should be verified by you if you think it's important.