Tuesday, October 16, 2007

Crash of 1987

The popular media is full of reminiscing about the crash of 1987, replete with touching stories about what people were doing at that particular time. This is our generations version of where were you when Kennedy was shot. So here is my story.

I was working for Olde Discount at the time. Olde was the 1980's version of the pre Internet, low cost discount broker where they charged $40 a trade, a level that would be laughable now of course. They had just opened a new office on Long Island, and I was the only broker in the office, fresh from Series 7 school. It was a frightful day watching just about every stock ticker go down, while contemplating that maybe I had chosen the wrong career.

The second part of the reminiscing stories ask whatever pundit happens to be on TV the question - Could it happen again? The usual answer is no, because of "liquidity," and the regulation/circuit breakers that have been put in place since then. I will take the contrarian opinion, because, after all that is the point of this blog.

Yes, it could happen again. Liquidity is a specious argument. Liquidity can evaporate in an instance, as we saw over the Summer. Liquidity is there until its gone. There is nothing magical about it. It's like saying that humans can breathe because the earth has an atmosphere that contains a Nitrogen/Oxygen mix. Well, duh.

The second argument is also flimsy, as circuit breakers, while closing the market for various amounts of time, can actually accentuate the panic as sell orders queue up with nowhere to go. Also, more volume trades off the exchange now than in 1987 so the "market" will really not close at all.

I would say that it is not very likely that it will happen again.


Mark said...

funny some of your last posts have emerging markets and the 87 crash. I was acually just thinking about the two together. I don't know much about the major Chinese companies but I looked at the FXI chart and I know their is a lot of hysteria and more importantly specualion fueling the China market so if the valuations are out of control(haven't checked yet) I think there will be a crash soon,1,2,3 years.

Adventures In Money Making said...

"I would say that it is not very likely that it will happen again."

don't you mean that it is likely to happen again.

we've been seeing 6-7 standard deviation events with regular occurance since the russian market meltdown in 1998.

apparently a 7 SD event is only s'pposed to happen once every 3 billion yrs.

Eric J. Fox said...

mark....I think one day that the Chinese stocks will be great shorts but this could go on for a long time. People starting talking about shorting homebuilders back in 2003 and look how long it took for them to crack.

There are three China ETF's I keep on my radar - iShares FTSE/Xinhua China 25 Index (FXI), SPDR S&P China (GXC) and PowerShares Golden Dragon Halter USX China (PGJ).

Eric J. Fox said...

Money Maker - you may be right about it happening again. I just hope I am on the right side of the market when it does happen. I think it would have to be a major macro event to trigger it (nuclear terrorism, super spike in oil,etc)