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I was in high school on October 19, 1987, when the equities markets went into a death spiral -- losing a stunning 22.6%. My mom asked me: "Are we going to have a Depression?" I didn't think so. After all, by looking around, it seemed like things were fine (in the real world at least).
Well, the memories are coming back as we approach the 20th anniversary of the event. And, Barron's [a paid publication] has an excellent piece on the topic.
Despite events such as September 11th and the Long-Term Capital meltdown, the U.S. markets have proven to be resilient since Black Monday. Although, we had a recent close-call. That is, in August, it did look like the U.S. markets were headed for a crash. Goldman Sachs (NYSE: GS), Merrill Lynch (NYSE: MER), and other top financial institutions plunged. Hedge funds went into chaos. There was a credit crunch. Buyouts came to a halt.
The good news is that it looks like the Federal Reserve has learned some important lessons and reversed the carnage.
What's more, things are much different since Black Monday. The U.S. economy is more efficient because of technology and automation, there are many diverse industries, and the world economy is growing at a nice clip. It also helps that the U.S. continues to innovate, as seen with companies like Google Inc. (NASDAQ: GOOG).
So, might we never see another Black Monday? Actually, I still think it can happen. From time to time, markets do unwind. What if hedge funds need to dump securities because of over leverage? What if China falls into turmoil and growth slows? What if the U.S. dollar collapses? What if there is a major war in Iran? What if a small nuke blows up a part of New York City?
In other words, I think it's important to consider "worse case" scenarios, especially as the world seems to get more and more dangerous -- and that means not forgetting Black Monday.
Tom Taulli is the author of various books, including The Complete M&A Handbook
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Reader Comments (Page 1 of 1)
10-14-2007 @ 12:13PM
bhatnagar said...
the above comment was interesting. the writer has forgotten that they do not pay any cost for their treatment, education, social services etc
I know the hospitals are going bancrupt, most primary physicians struggling as they do not receive any payments given to these peeople through the hospital.Most Hospitals do not pay for their sevices. THey have to provide these slave services for the privilege of being on the staff. These things are not reported by anybody.Even the HMO's pay a small frction which hardly covers their overhead
10-14-2007 @ 7:18AM
hal c said...
I thought the biggest reason for the 22% drop in one day was program trading. The Fed didn't fix that, didn't the exhanges just decide to halt trading temporarily if stocks drop below a certain arbitrary amount?
The Fed is like the FDIC. One good run on a couple of large banks would quickly show that the FDIC hasn't got a prayer of actually paying off depositors. In the same way the Fed pretends to control economic cycles while its true effect these days depends on its psycological effect.
The last Fed Chairman who actually changed anything was Paul Volker. Without his stubborn draconian measures we would probobly still be mired in double digit inflation instead of the 6-8% we now pretend is only 3%.