Today at TILE… What the heck happened last week?

May 11th, 2010

With Amy out of the office on maternity leave (busy explaining derivatives to young Carson), Team TILE is occasionally left to fend for itself when it has questions about the economy. Last week was a great example of this, as an oil well continued to spew black stuff into the Gulf of Mexico, and the stock market appeared to crash… for twenty minutes. We didn’t know what to think, so we asked our friend, the Internet.

The unfortunate giant oil spill of 2010. An explosion on a drilling rig April 22nd has caused at least 3.5 million gallons of oil to leak into the gulf as of May 11th, and there’s no good solution in sight. While it’s clear (and tragic) that this spill will damage local ecosystems for decades to come, we wondered how something like this would impact the American economy.

BP has already spent $350 million fighting the spill, and experts estimate that when all is said and done, the whole mess will cost the company more than $10 billion. The price of BP’s stock has dropped more than 18% since the rig exploded, but apparently the company is expected to survive because of enormous profits in 2009. Besides that, the company has announced that it will only pay for damages claims it deems “legitimate,” so it may end up off the hook for damages that are hard to quantify – like long-term environmental damage and loss of potential income for people who depend on gulf waters for their livelihood.

Of course, BP isn’t the only one affected by this spill. If the government responds to the crisis by tightening regulations or severely curtailing off-shore oil drilling, the whole U.S. oil industry could be negatively impacted. (Some argue that that would be a good thing, while others point out that a decline in U.S. oil production will simply lead to heavier reliance on foreign oil.) And what about local economies? Louisiana waters yield 10% of the country’s seafood – the impact on fishermen and other workers who rely on the health of this ecosystem could be shocking to the state’s industry. Plus, what harms animals will undoubtedly be bad for people, too. Is an increase in health care costs coming to the Gulf Coast?

Just as we were getting to the question of why oil prices didn’t shoot up after the spill, the stock market crashed. And then… uncrashed? A satisfying explanation for the bizarre activity between 2 and 3pm on May 6th has yet to be found, but the precipitous drop and recovery of the market has everyone talking about the danger of relying on systems that nobody fully understands. Investigators can tell that there was “unusual trading action” taking place at the time (duh), but because there isn’t a clear history of trades made in error and then canceled, they’re basically fumbling in the dark. There are plenty of rumors flying around about “what really happened,” but we thought the most interesting point was that the major electronic exchanges had no way of syncing their “circuit breakers,” which are systems designed to automatically slow down trading when stock prices go into a free fall.

As employees of a web-based company, we know that without a central organizing structure (and a good puppet master, or CTO), the many parts that make a system work have to play nice together or the whole thing’s going to heck. The major exchanges learned that last week and, to their credit, they’ve already agreed on a basic outline to make each electronic trading system compatible enough that they can respond to chaotic trading activity (or the actions of one rogue trader) in unison. But this one bizarre afternoon shook the confidence of many investors – especially those of us just starting out. Has your perspective on the security of the market changed since last week?

As always, our final question is, “What does all this mean for the TILE community?” In both situations last week, the systems that were in place to manage crises failed… but they didn’t have to. Clean-up plans for a potential oil spill were more than 20 years old when they were called into action, and it’s not unreasonable to think that companies that rely on electronic markets should have done more to protect against an inevitable system error. It’s easy to point a finger and say “they should have anticipated this.” But do you have better emergency plans in place? What would you do if an emergency came up in your own life? Your car gets a flat tire, your apartment floods, your credit card is stolen, your computer crashes, you lose your passport in a foreign country. Do you have insurance? Emergency savings? Even a rough plan to make sure you, your family, your pets, and your stuff are safe if a disaster strikes?

Being prepared is different from being afraid. Even though the world and all its markets are subject to wild twists of fate, they’re normally pretty safe. Don’t be afraid to get out there and get your hands dirty… just make sure you’re prepared to deal with the exciting parts when they inevitably arise.

- Team TILE

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