SCRATCH ON THE POOL TABLE OF LIFE

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!”

FALLING SKIES

Last week, I discussed cataclysmic instances of a falling sky.  Once every six billion years or so, you don’t want to be here (on Earth).

In the interest of full disclosure, there are other instances of falling sky which are not quite so universal, but just as terminal on a local basis.  Consider a neighborhood volcano that explodes.  Forget about ancient times like Mt. Vesuvius wiping out Pompeii in 79.  That’s year 79, not 1979.  How about the city of Plymouth, Montserrat in the West Indies (I used to renew trademark registrations here!)?  Founded in the 18th century, it served as the capital of this British Overseas Territory in the Caribbean for over 200 years.  Until it was wiped out by the Soufriere Hills volcano in 1997.  Today Plymouth is a ghost town, population zero.

My favorite “sky is falling” incident is the one that occurred in Peekskill, New York on October 9, 1992.  Earlier that week, a resident of that fair city, 18 year old Michelle Knapp scraped together $300 to buy her first car, a 12 year old used red Chevrolet Malibu.  She must have been excited to drive her prize back home and park it proudly in her driveway.

chevrolet-malibu-1980-1

Introducing Chevrolet’s 1980 Malibu.