Tomyam domino effect

I don't comment, analyse or write a lot on economic and financial issues. Simply put, I'm not much of an economics guy, but more of a science guy. When you learn science, among others, you learn about the Newton Laws of Motion. But strangely enough, you can actually apply these laws to the economic and financial scenario of the moment.

Newton's first law states that:

Every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it.

Now, let's apply this to the stock market situation in the region. The Malaysian stock market was enjoying a good run these past few weeks. The upward trend shows a "uniform motion" indicating that the stock market would touch the 1,100 level. Suddenly, an "external force" is applied in the form of yesterday's crashing Stock Exchange of Thailand (SET). As a result, the Kuala Lumpur Composite Index (KLCI) fell by 1.96%. Other stock markets also plunged, which include India, Pakistan, Indonesia and even Singapore. More on this can be read here.

Now, the knee-jerk reaction to the situation in Thailand is very much in line with Newton's third law, which states:

For every action, there is an equal and opposite reaction.

When Thailand announced its capital control measures, people panicked and started selling their stocks. This resulted in the KLCI (and other stock market indexes) to plummet. KLCI suffered its biggest drop in 5 years. Details on this can be read here.

What about Newton's second law, you may ask. The second law stipulates that:

The relationship between an object's mass m, its acceleration a, and the applied force F is such that F = ma.

The heavier the mass, the more force is needed. The stronger the force, the faster the acceleration. Let's assume that m is a country's economic fundamentals, a is the rate in which the economy rises or drops, and F is the external forces at work. If an economy's fundamental is strong and sound, the external force that is needed to bring the economy down would have to be bigger, hence any negative effects on the overall economy would be minimal. Conversely, if the economy's fundamental is weak, it'd be easier for external forces to influence the economy, more often than not, in a negative way.

Anyway, before I start to blabber some more about physics, let's go back to the issue at hand. It is understandable that people are worried because the memories of the 1997 crash are still fresh. What began in Thailand yesterday has a sense of deja-vu. If it has the same domino effect as it did in 1997, then the region will be in for another round of economic turmoil.

Way back in 1999 while writing an article for my column in The Star, I dubbed this the "tomyam domino effect" because it began in Thailand. You can be assured that if we're in for the worst, it'll be hot and spicy.