Dad and Chicken Little were both right; the trick lay in the timing and this time, they both hit jackpot!

But, in the end, it had little to do with credit cards.  Instead of a payout in a real jackpot, it was more like a “scratch” on the pool table of life.

The underlying explanation of the 1987 crash was the US dollar.  You see, the greenback had been way too strong for way too long during the mid-1980s and had contributed to record trade deficits.  Meaning, foreign goods were cheap, relatively speaking, and the US was buying all it could get its hands on.  On the other hand, sales of American-made products were getting crushed around world due to the super-dollar’s sky-high value in other currencies.

Even I had been in on the game the previous year, loading up on British clothes with the pound at parity to the dollar.

Anyway, too many people chasing too few goods tends to stir inflation.  To tamp that down, the Fed raised the discount rate by 50 basis points in September 1987.  Equity markets really don’t like that.

Nudging the markets ever more off of a cliff, the Reagan administration made some critical misstatements affecting the currency markets.  In response to the financial news on October 14, 1987 that the US trade deficit had hit an all-time high, bond markets tanked and the DJIA dropped more than 150 points, a record drop.

It had been a long bull market since January 1985, more than 2½ years previous.  The DJIA had more than doubled despite naysayers, like my Dad, Bernard Olcott, claiming that market was gonna come tumbling down.

“Credit card debt!” “Credit card debt!” “The sky is falling!” “The market will crash!”

But, like any game of musical chairs, once the music stops, it’s time to look for a seat — fast — since they’re just aren’t enough to go around.

As noted above, the melody had turned decidedly tinny that fall.  Add to the mix a convergence of weird world events.  Like Iran hitting two supertankers in the Persian Gulf with silkworm missiles.  A super rare hurricane hit England and France on Friday, October 16th, closing financial markets.

But the real heart of the matter was, as I have written above, the value of the US dollar.  Did the Reagan Administration intend to protect the value of the greenback or not?  If the international market got a whiff of any hint whatsoever that the dollar was about to fall in value, it would spark an immediate sell-off of the DJIA, which is valued in dollars, of course.

The weekend of October 17th and 18th was remarkable for numerous TV talk show appearances made by our very own US Treasury Secretary, Jim Baker.  On Saturday, he “publicly threatened to de-value the US dollar in order to narrow the nation’s widening trade deficit.”

Feeling the need to amplify the message, Baker went back on TV the next day to say that the US would “drive the dollar down” if necessary.

These were very intemperate remarks.

So that very Sunday evening – already Monday morning October 19, 1987 in Asian markets – a massive sell-off began and headed west.  By the time the New York Stock Exchange closed late Monday afternoon, the market had dropped a record 500 points!   About 25% of total capital value had been made to vanish!

According to Nasdaq.com:

Some said that Baker’s rash words, more than anything else, caused the Monday market crash: Jacques Delors, President of the European Commission, compared Baker’s remarks to “a pyro-manic fireman. When you’re living on the edge of the volcano, you don’t light matches.” Economist Pierre Rinfret also blamed Baker for the crash: “The Secretary of the Treasury started one of the worst panics in the history of the stock market.” Noted trader Jimmy Rogers agreed: “The crash had nothing to do with program trading or arbitrage or investment insurance. Greenspan and Baker simply panicked and blew it.”

That morning found me engaged in a bit of mini-trading on my own account.  I had a small – very small – account with my Dad’s stockbroker, Herby.  Meaning it was only big enough for one holding.  Herby had gone out the previous year and bought me 100 shares of Wix, which declined the very instant I started owning it.  Herby was with Shearson Lehman American Express, otherwise known as “SLAMEX.”  I phoned in an order that morning to short his stock and covered after an hour or two.  It was the only time I ever made money with him.  My moment of Robert Axelrod fame!

“Credit card debt!” “Credit card debt!” “The sky is falling!” “The market will crash!”

So here it is, peeps: what I have been building up to in the last few posts.  Every once in a while, and devilishly difficult to anticipate, Chicken Little is right.  The sky does fall.  To quote Hopi prophesy from the movie Koyaanisqatsi:

“A container of ashes might one day be thrown from the sky, which could burn the land and boil the oceans.”

Black Monday had arrived.  The stock market had crashed.  Dad got it right for a change.  And of course, he called for it to keep crashing, further.  Which it didn’t do.

black-monday

That’s quite a drop there in October isn’t it?

But the market break didn’t really have anything to do with credit card debt.  There was a deficit intimately involved, true.  But it was the US National trade deficit, not a surplus of consumer debt, whether credit card, non-revolving, or anything else.  These deficits were backed by the overly strong national currency which the Reagan Administration now threatened inexplicably to undermine.  The crash was the result of the action of international investors to get the fuck out of the US dollar before it tanked.

So never mind about all those dire daily warnings by my Dad for the market to crash.  He still got it right once, didn’t he?  That he did, albeit for the wrong reason.  One big bad day notwithstanding, his analysis remained suspect and undependable.

Look at it this way.  Ever play pool?  In order to score, it is required to call your shot.  Meaning the called ball must go into the indicated pocket.  If the player making the call drives another ball into said pocket, a “scratch” is called, the errant ball replaced on the felt, and the player’s turn is over.   Same thing if the called ball drops into a pocket other than the indicated one.

No one bets that in a future game of pool, a ball will drop into a pocket at some indeterminate time.  Such a wager would have no predictive value or risk to base it on.  That would be pointless and is of no predictive value.  In fact, I would try to bet Dad on some of his predictions and he would refuse with a smile.  He just wanted the ability to shoot random balls in random pockets.  Scratch!

 

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3 comments

  1. Great story, James; really, quite entertaining, which is not easy to pull of when describing the stultifying world of ‘high’ finance. When studying for the CFA (contemporaneously with the 1987 crash), I read a lot about Black Monday. The finance jocks argued passionately that put-protection strategies and program-trading by hedging baskets with market index futures precipitated the crash.

    When I dug a little deeper, l found that these people were talking about why the market went down so far, so fast. Nary a one mentioned what started the rush to the musical chairs already aflame when someone screamed, “Fire!” Now you do; thanks for filling me in. Ironic how the most refined knowledge often misses the most elementary of events…except in retrospect, of course.

    Liked by 1 person

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