To­day we still wake to a world made overnight and we will con­tinue to do so as long as there is a Wall Street

The Weekend Australian - - BUSINESS REVIEW - TERRY McCRANN

In 2017 we still wake up ev­ery morn­ing to a world made overnight in Amer­ica, es­pe­cially on Wall Street, and we will pretty much con­tinue to do so for so long as there is such a thing as “Wall St”, even if in­creas­ingly in vir­tual re­al­ity form.

Thirty years ago we did as well ex­cept some­what more lit­er­ally. In those days be­fore the in­ter­net, be­fore 24/7 real-time cable news and busi­ness chan­nels — heck, Fox­tel pay-TV was still nearly a decade away — you did mostly, ac­tu­ally, wakeup to what had hap­pened on Wall Street overnight.

As I did on a cer­tain Tues­day morn­ing around 6am at the jan­gling of a phone — one of those old-fash­ioned, not so smart, real phones. It was my then edi­tor Eric Beecher: “Have you been watch­ing what’s been hap­pen­ing on Wall Street?”

“Ac­tu­ally, no, I’ve been sleep­ing.”

“Well,” came back, “it’s dropped 500 points.”

“Oh yeah?” I said, while think­ing: edi­tors don’t nec­es­sar­ily un­der­stand num­bers that well; there must be a miss­ing dec­i­mal point; he’s read­ing 50point some­thing as 500.

Looked back from 2017, a 500-plus point fall in the Dow Jones in­dex, while not ex­actly in the ev­ery­day, dime-a-dozen cat­e­gory, would not be that ex­cep­tional. But it 1987 it was not just shock­ing — it had lit­er­ally never hap­pened be­fore — but in­deed seemed im­pos­si­ble. That is to say, looked at from the per­spec­tive of not just the day be­fore it hap­pened, but all 10,000 or so trad­ing days since the Great Crash of 1929, it just could not hap­pen. Yet it had. Back on that Oc­to­ber 20 morn­ing, we in Aus­tralia lit­er­ally woke up to not just a yawn­ing fi­nan­cial abyss, but to the com­plete un­known and in­deed un­know­able so far as the beck­on­ing, threat­en­ing, fu­ture was con­cerned.

One thing we did know all too clearly: our own mar­ket would go over ex­actly the same cliff when trad­ing opened. All Down Un­der in­vestors had an un­break­able ap­point­ment with the fi­nan­cial ex­e­cu­tioner.

And I had to try to make some sense of it for the sim­i­larly beck­on­ing mid­morn­ing first edi­tion of an af­ter­noon news­pa­per, the Mel­bourne Her­ald, along with its sta­ble­mates in the other cap­i­tal cities — which would all hit their streets just as the mar­ket opened.

Apart from ra­dio and TV sound bites, af­ter­noon pa­pers would be es­sen­tially it for me­dia re­port­ing and dis­cus­sion un­til the morn­ing pa­pers the next day.

The only com­para­tor was 1929 when the Great Wall Street Crash would flow on to a decade of the Great De­pres­sion, it­self only ended by the “pro­duc­tion boom” of World War II.

That was also on a Mon­day in New York “Black Mon­day” — and also in Oc­to­ber. But that ear­lier fall was just 13 per cent; 1987’s was a numb­ing 22.6 per cent. But omi­nously, the 1929 Mon­day Wall Street crash had been fol­lowed by a fur­ther 12 per cent on the Tues­day.

Would our Down Un­der mar­ket not only fol­low Wall Street’s Mon­day plunge, per­cent­age point by per­cent­age point, but in­cor­po­rate a fur­ther ex­pected fall com­ing up that Tues­day night? In a con­text, re­mem­ber, for good or bad but so ut­terly dif­fer­ent to to­day, of vir­tu­ally no real-time me­dia or even mar­ket in­ter­faces? As it turned out, it would be 27 per cent; re­mem­ber, in a sin­gle numb­ing day.

Fur­ther, back in 1987 the Dow was at 2700, now it’s nearly 10 times as high, at 23,000. To show just how shock­ing the fall was, in all the years since, the big­gest one-day drop at the very peak, or bot­tom, of the GFC in 2008 was only 778 points or 7 per cent.

What de­liv­ered the great­est po­tency in 1987 was that what was hap­pen­ing was be­lieved to be lit­er­ally im­pos­si­ble. That “we” knew how to man­age the econ­omy and fi­nan­cial mar­kets, pre­cisely be­cause “we” knew, and I mean knew, how they had stuffed up in 1929 and all through the 1930s.

Yet sud­denly in that early Tues­day Down Un­der dawn we were wak­ing up to the re­al­ity that af­ter all “we” didn’t know.

What did come next? Ev­ery­thing and noth­ing.

The “ev­ery­thing” re­lated to the “eight­ies en­trepreneurs” — bet­ter de­scribed in my lex­i­con as “fi­nan­cial en­trepreneurs”, as they ma­nip­u­lated money rather than real, tan­gi­ble things like the Henry Fords of na­tion-build­ing yes­ter­days: Holmes a Court, El­liott, Spalvins and most icon­i­cally of all, Alan Bond.

They would all even­tu­ally be swept into the dust­bin of his­tory. Holmes a Court alone knew in­stinc­tively and im­me­di­ately that the game was over and set about on that very day liq­ui­dat­ing all his as­sets and “plays”. The core would go to Bond and “WA Inc” and ini­ti­ate yet more “eight­ies his­tory”.

In the most dra­matic in­di­vid­ual in­ter­ven­tion on that Down Un­der Tues­day, John El­liott went lit­er­ally onto the floor of the ex­change — back then, we still had a real floor with “chalkies” tak­ing and writ­ing down the quote calls — to buy across the board. This was an eerie, equally fu­tile, re­play of the buy­ing by in­dus­tri­al­ist Wil­liam Du­rant in New York on that 1929 Tues­day.

In 1987 El­liott was at the very peak of his power. He had just de­cided to for­swear be­com­ing leader of the fed­eral par­lia­men­tary Lib­eral party, on his ir­re­sistible — as he and a lot of oth­ers saw it — jour­ney to The Lodge to “save the na­tion” from Hawke and Keat­ing; to in­stead seize con­trol of Aus­tralia’s big­gest and eas­ily most im­por­tant com­pany BHP, to “save it” from Holmes a Court.

But he would end at the same des­ti­na­tion as Du­rant a half­cen­tury ear­lier. By 1936 Du­rant was bank­rupt; by the early 1990s El­liott’s dreams and fi­nances were sim­i­larly shred­ded. But not by the crash it­self, but the 20 per cent in­ter­est rates that came with the eco­nomic boom that bizarrely fol­lowed it.

The crash proved al­most a one-day won­der. Within a year the mar­ket had re­cov­ered all its losses — but not the spe­cific stocks that crashed and burned or which would stag­ger on un­til they were fi­nally put to the sword by the high in­ter­est rates.

Un­like the GFC and 2008, far less the 1930s, the crash left no mark on the ac­tual econ­omy, ei­ther here or in the US or in­deed any­where. In 1986 our econ­omy had grown by 2.9 per cent; it did so again in 1987 and then kicked up to 3.5 per cent in 1988. US growth went from 2.9 per cent to 3.1 per cent to 3.9 per cent through those years.

It would be very dif­fer­ent in 2008. The en­tire world’s fi­nan­cial sys­tem did, re­ally, teeter on the brink and would have gone over but for the govern­ment bailouts and in­ter­ven­tions. The de­vel­oped world suf­fered its worst re­ces­sion since the Great De­pres­sion of the 1930s and is only now, nearly a decade later, be­gin­ning to emerge.

Yes, the world went into a much milder re­ces­sion in the early 1990s (ahead of 15 years of un­prece­dented sus­tained pros­per­ity) but it had noth­ing to do with the 1987 mar­ket crash.

Back then, the ten­ta­cles of the fi­nan­cial sys­tem lo­cally into the real econ­omy were al­most nonex­is­tent. The links glob­ally were much more lim­ited. The Aus­tralian dol­lar had only been floated and cap­i­tal con­trols re­moved just four years ear­lier.

In time it would come to be seen as a “mar­ket cor­rec­tion” — a seem­ingly bizarre but ac­cu­rate way to scribe the worst crash in global mar­ket his­tory.

Look­ing back on 1987, there was no great les­son to be learned, ex­cept the eter­nal one of booms and busts; 2008 and even more its af­ter­math and pol­icy re­ac­tions is, or should be far more deeply and broadly in­struc­tive.

But go­ing back to that 6am tele­phone call, it re­ally did seem to be the be­gin­ning of the end of the world as we had known it and the door­way to an un­know­able fu­ture.

Black Mon­day’s af­ter­math

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