Black Monday 1987
Today marks the 30th anniversary of the 1987 stock market crash. It's hard to believe that it's been 30 years. I still remember where I was when the crash happened and my reaction to it. It happened just after I had graduated from the University of California at Berkeley. By the time the crash happened, I had already accepted a job in Newport Beach, California. I was going to be working in the commodity options market, but I hadn't started yet.
Lesson: The Market Goes Up
The crash began a few weeks before I was on the job, but I do remember when I first got there, I met a guy who had a lot of S&P 500 puts for clients and for him, anyway the crash was a great thing because he was able to make a lot of money on those puts. Of course the S&P was a fraction of its current value. The market is up dramatically since the 1987, which is the lesson that everybody hope that you learn: "Hey don't worry about the market. If it ever goes down, it's going to come back up."
Trade Deficit Tiny Compared to Now
I remember some of the catalysts that were weighing heavily on the stock market leading up to the crash of '87 was the fact that the dollar was weakening as a result of a increase in the trade deficit - trade deficits that are tiny in comparison to the enormous one that we run today. Yet nonetheless, people were rightly worried about it back then. They couldn't care less about the trade deficits now.
Interest Rates at 9%
Also interest rates were rising. The yields on the 30-year bond (nobody really talked about the 10-year back then) were 9% and they were going up. So you had 9% interest rate, interest rates rising, the dollar falling, the trade deficits getting bigger and the stock market had pretty much ignored what everybody agreed was bad news at the time. The stock market kept going up anyway, despite all of that. Eventually it all came crashing down in 1 day.
Good Company
One of the things I remember about that was how Alan Greenspan reacted. I mentioned this on a prior podcast. Greenspan had not been the Fed chair that long when the market crashed. He took over from Paul Volker. I knew Greenspan, and was familiar with him because he was a libertarian and an Austrian economist. He had written an essay on Gold and Economic Freedom, which I had read, in addition to Ayn Rand's Capitalization: the Unknown Ideal.

 

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