This is the quiet moment of the pre-crisis. Right now. Enjoy it. It might go on forever. But they might not.
Today is an anniversary day, October 18, 2017, the last day of the pre-meltdown calm before Black Monday.
The quiet before Black Monday, 1987. I was a new financial advisor, having been in business for eighteen months. The stock market had gone up nicely during the period of my employment. People had bought stocks at my suggestion and their accounts were up. Everyone was happy.
A pro-business Republican was president. Tax reform had just been passed, cutting marginal tax rates. The stock market was chugging upward, indeed up some 45% for the year.
There was a little decline in prices in the week of October 12 and the market on Friday had lost some 5% for the week, but in the context of the huge gains and a strong economy there was an easy explanation: normal consolidation. The general understanding of the world was intact: prices go up, but not straight up.
Then on Monday, October 19 the bottom fell out. The Dow lost 22.6% in the day. The trading completely overwhelmed the technology, and trades could not be entered, or they were entered and got lost, and people had no clear idea of what prices were because the reports were delayed. Few clients were calling me to say "Sell, Sell!" and indeed clients actually calling were hoping to buy bargains. The trading activity was stopped twice by the exchanges to try to let buyers and sellers be aware of current prices, but when trading resumed sell orders overwhelmed the markets. It was a spiral. Sells begat sells begat sells.
Computers took over. Massive sell orders were entered automatically . It was "program trading" as was learned in the aftermath. Computers were programmed to sell stocks and stock futures if prices hit a certain level, and those sales triggered more sales as new lower levels were hit, then more sales. Markets weren't rational; they were caught in a feedback loop.
Investors and financial advisors looked back at the pre crisis period and tried to figure out what signs they should have seen prior to the event. Surely, an event that shocking and devastating was giving off signals before hand.
The program trading systems were set up to protect assets, not devastate them. They were technologically very complex and sophisticated and they were triggered in a fraction of a second, based on price point signals. The whole idea was to beat the rush. To get in ones own sell orders before others could sell theirs. Self protection created a systemic risk, people realized in the aftermath.
At the time the professional understood there were potential hazards but everything looked everyday normal and calm--until things fell apart. The technology designed to work instantly to respond to threats turned out to be the hazard itself. Hair trigger defense creates a systemic hazard.
Meanwhile, Donald Trump.
Donald Trump made news this week with a warning: "Maybe it's the calm before the storm."
This comment need not have big suggestive meaning. Trump likes to make news and create suspense. Now people will wonder, he may have thought with his impromptu comment, "What is Trump going to do?" Stay tuned. Don't look away for even a second. He is probably not teasing some specific upcoming crisis. It is just the same-old, same-old. The calm before--maybe more calm.
This 30th anniversary of the last day of calm before the storm of 1987's Black Monday came with an email from a former client, one who had been a heavy recipient of Facebook and email chain letters now understood to be of the kind that Russian and East European hackers found would easily go viral. I consider him an anecdotal primary source. He gets the stuff that goes viral and he passes around the stuff that goes viral. He sent me an email chain that began: "If you are worried about North Korea, here is precisely why you shouldn't be." And then there were a dozen photos of our second-strike capability.
There was enormous technology involved, systems in place to destroy any country that attacked our cities. It was enormously complex and retaliation could take place nearly instantaneously. It makes us safe
Moreover, it is a beautiful fall day in Southern Oregon. All is calm.
And maybe it will stay calm. But every adult reader of this blog knows through experience that sometimes unlikely things do happen. And readers know that sometimes bad things happen to people who act prudently and safely, but that bad outcomes happen more often to people who do dangerous things. Brinksmanship is dangerous.
The lesson of the 1987 stock market crash was that sometimes the technology--designed to act in a split second--creates a hazard. The hazard, in the days and weeks before a crisis, will seem manageable and normal, just the normal, everyday experience of living in an uncertain world.
As I said, it is a beautiful fall day in Southern Oregon.
Everyman, the Medieval Morality Play:
"Death: "Fill little he thinketh on my coming. 'Everyman, stand still. Wither art thou going thus gaily? Hath thou thy Maker forgot?'
Everyman: 'Full unready I am for such reckoning to give. Thou comest when I had thee least in mind.''
A pro-business Republican was president. Tax reform had just been passed, cutting marginal tax rates. The stock market was chugging upward, indeed up some 45% for the year.
There was a little decline in prices in the week of October 12 and the market on Friday had lost some 5% for the week, but in the context of the huge gains and a strong economy there was an easy explanation: normal consolidation. The general understanding of the world was intact: prices go up, but not straight up.
Then on Monday, October 19 the bottom fell out. The Dow lost 22.6% in the day. The trading completely overwhelmed the technology, and trades could not be entered, or they were entered and got lost, and people had no clear idea of what prices were because the reports were delayed. Few clients were calling me to say "Sell, Sell!" and indeed clients actually calling were hoping to buy bargains. The trading activity was stopped twice by the exchanges to try to let buyers and sellers be aware of current prices, but when trading resumed sell orders overwhelmed the markets. It was a spiral. Sells begat sells begat sells.
Computers took over. Massive sell orders were entered automatically . It was "program trading" as was learned in the aftermath. Computers were programmed to sell stocks and stock futures if prices hit a certain level, and those sales triggered more sales as new lower levels were hit, then more sales. Markets weren't rational; they were caught in a feedback loop.
Investors and financial advisors looked back at the pre crisis period and tried to figure out what signs they should have seen prior to the event. Surely, an event that shocking and devastating was giving off signals before hand.
The program trading systems were set up to protect assets, not devastate them. They were technologically very complex and sophisticated and they were triggered in a fraction of a second, based on price point signals. The whole idea was to beat the rush. To get in ones own sell orders before others could sell theirs. Self protection created a systemic risk, people realized in the aftermath.
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| Click: 30 second video. |
Meanwhile, Donald Trump.
Donald Trump made news this week with a warning: "Maybe it's the calm before the storm."
This comment need not have big suggestive meaning. Trump likes to make news and create suspense. Now people will wonder, he may have thought with his impromptu comment, "What is Trump going to do?" Stay tuned. Don't look away for even a second. He is probably not teasing some specific upcoming crisis. It is just the same-old, same-old. The calm before--maybe more calm.
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| Ohio Class Subs |
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| We can retaliate |
There was enormous technology involved, systems in place to destroy any country that attacked our cities. It was enormously complex and retaliation could take place nearly instantaneously. It makes us safe
Moreover, it is a beautiful fall day in Southern Oregon. All is calm.
 |
| Click: Foreign Policy Magazine: October 18, 2017 |
The lesson of the 1987 stock market crash was that sometimes the technology--designed to act in a split second--creates a hazard. The hazard, in the days and weeks before a crisis, will seem manageable and normal, just the normal, everyday experience of living in an uncertain world.
As I said, it is a beautiful fall day in Southern Oregon.
Everyman, the Medieval Morality Play:
"Death: "Fill little he thinketh on my coming. 'Everyman, stand still. Wither art thou going thus gaily? Hath thou thy Maker forgot?'
Everyman: 'Full unready I am for such reckoning to give. Thou comest when I had thee least in mind.''
2 comments:
You never get hit by the bus you are waiting for...
The stock market is somewhat disconnected from the overall economy, but is an indicator of confidence.
The stock market changes daily and is more compelling to watch. The more significant measures in my view are unemployment, GDP and growth which are measured monthly and quarterly. Politicians typically avoid using the market to brag about their effectiveness knowing it can turn on them quickly, which makes Trump's taking credit a risky move. It takes several quarters for these other indicators to move, but once they start trending they move for some time in one direction or the other.
Trump has not done anything to affect the economy, with much of the current rise due to the expectation of business friendly policy promises. If they don't materialize it could well be the "calm before the storm".
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