Thirty years after Black Monday, where do we find ourselves today?
In October 1987 Time magazine, then themost authoritative current affairs publication in the world, featured on its cover a striking-looking man with penetrating blue eyes peering contemptuously, and triumphantly, out at the world.
Beside it was the headline: “The Lucky Gambler”. It was Sir James Goldsmith, the Anglo-French multibillionaire who was one of the few men to have foreseen what became known as Black Monday, or the Great Crash of 1987, when share prices on Wall Street fell 20 per cent in a single day, still the biggest fall in its history. It made him, for a time, the most legendary investor in the world.
This week marks the 30th anniversary of that terrifying trading session when the chairman of the New York Stock Exchange was forced to borrow a nuclear disaster phrase to describe what he perceived as the seriousness of the situation: world markets, he reckoned, were in imminent danger of a “financial meltdown”. And for a while it looked as if they were: the Hong Kong stock exchange, unable to face a second wave in 48 hours as the crash rolled around the world from East to West, closed its doors and in every market, from Frankfurt and London to the American west coast and on around to Japan again, the panic grew by the hour.
Some of the cleverest and richest financiers in the world were wiped out in that crash, including the Australian Robert Holmes a Court, while Rupert Murdoch lost US$700 million in one day, most of it in a single hour, which was then 50 per cent of his net worth. Oddly enough, one of the few billionaires who agreed with Mr Goldsmith was Donald Trump, who also claimed to have got out early – which, in fact, he did. But as his empire crumbled in the property crash on the US eastern seaboard a year later, his precautions looked pathetically inadequate. Mr Trump later admitted he went from a plus-billionaire to a minus-billionaire in less than two years, although he got it back later.
As the anniversary of Black Monday has approached, financial analysts and commentators have been taking a long, hard look at the lessons to be learnt from 1987 and their implications for today. Monday’s Financial Times, under the headline: “How big is the risk of another Black Monday?” reckoned that “the market is different but has similar characteristics to trading strategies that could accelerate a trade-off”. But its conclusion was that “even leading market sceptics, many of whom believe stock prices could start to drop, doubt that another extreme sell-off in equities might be imminent.” The Wall Street Journal
struck a similarly optimistic note: “After an eight-year bull market and cheapest borrowing costs in history, the big surprise isn’t that the stock market’s high but that it isn’t higher still.”
Joe Kennedy, the father of president John Kennedy and another legendary Wall Street investor, used to tell the tale of how one morning in 1929 his shoeshine boy asked him for stock tips and boasted about how much he had made the previous day. That was enough for the shrewd old man – if even shoeshine boys were investing in the market, then it was time to get out. He continued on to his office and sold everything just days before the crash. Mr Goldsmith loved that Kennedy story and reckoned many of the same signs of euphoria that carried share prices to absurd levels existed in the autumn of 1987. By the time the crash came he had more than $1 billion in cash and gold bars, and not a single share.
“A lot of financial managers in the US and Europe must now be wishing their name was Sir James Goldsmith,” a Wall Street broker was quoted as saying that week.
Thirty years on, however, there are few signs of the “irrational exuberance” which have caused investors to mis-price risk and driven asset prices too high in previous bubbles. Investors and markets have learnt valuable lessons not just from 1987 but from two further sobering jolts in a decade, the dot.com boom and the housing and credit bubble of 2007.
“Why are taxi drivers still talking about politics and
Investors and markets have learnt valuable lessons not just from 1987 but from two further sobering jolts in a decade
sports, when they should be offering stock tips and thinking about packing it all in and day trading,” wondered the Journal?
The fact is that Mr Goldsmith was right on the day but wrong in the longer term. Within a year share prices had reversed all the losses of Black Monday and a historic chart of the Dow shows it to have been no more than a blip in a bull market, which effectively ran from 1982 to 9/11 in 2001. The sub-prime crisis and the Lehman collapse were of a different dimension altogether, but they have served to make investors more cautious and too wary to be carried away. Share price valuations, based on price-earnings ratios or any other measure, have seldom been higher but they have not lost touch with reality and a world economy that is growing at its fastest rate since 2010. Inflation is still low, money, although it may become more expensive, is still cheap and share prices still look relatively attractive.
No doubt, as has happened all through history, there will be another Black Monday. But not yet.