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The Next Black Swan

Twenty years ago today, the New York Stock Exchange fell off a cliff, the Dow Jones Industrial Average losing 22.9% of its value (508 points) in a single day. As a percentage of value, this was the greatest single-day market loss in U.S. history. The US crash was preceded and followed by crashed in other markets throughout the world. By the end of October 1987, the U.S. market had rallied a bit, climbing from 1739 to over 2000, but the Hong Kong market had lost 45.8% of its value, Australia 41.8%, and the UK 26.4%. To put this in modern context, if the DJIA had lost the same proportion today, it would have to lose 3,181 points. The modern market has grown 618% in the last 20 years, recovering - for some investors - everything they lost and providing a strong return for half a generation. Consequently, there is a certain sanguinity regarding the situation, which may or may not be a wise attitude. The reason I say this, is because the specific cause for the one-day crash has never been adequately explained. Assumptions were made and blame placed on a number of causes, largely focused on automatic trading programs which trigger actions on certain conditions - and yes, such programs are still in operation right now, although the companies running them promise there is no chance that 1987 will happen again, don't you feel safe and secure now? But there was also concern about the effect of the U.S. dollar's strength on market conditions, as well as the collateral effect of one market on other world markets Once again, officials rush to assure the public that there is no similar danger now, although the need for consumer confidence is so great that they would certainly say exactly the same thing if there were no protection at all.

The 10/19/87 crash is described by some analysts as a "Black Swan Event", a term used to describe something utterly unexpected and impossible to predict. This provokes the obvious question; what will the next Black Swan look like, and when will it happen?


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Comments (15)

I remember that day: I was ... (Below threshold)

I remember that day: I was in my second year of college and someone said to me that no one graduating the following May would be able to find a job. How wrong she was.

hmm ok...10/19/07 no "Bla... (Below threshold)
Knightbrigade:

hmm ok...10/19/07 no "Black Swan" but, lmao maybe a Black Duck? Dow -366.94 go figure...

Today was certainly another... (Below threshold)

Today was certainly another tough day on Wall Street as well. With oil prices still near $90 a barrel, up sharply from the $2 a barrel in 1973, inflation will certainly result. 9 out of 10 times in the last 50 years when oil prices rose sharply a recession resulted.

9 out of 10 times in... (Below threshold)

9 out of 10 times in the last 50 years when oil prices rose sharply a recession resulted....I'll take your word for that but I'm not sure the price of oil is the major driver in forcing the economy into a recession.

The 1982 recession was the result of a restiction in monetary policy as Reagan weaned the economy from "money supply" Fed Policy to lower taxes and reduced monetization inherited from the Carter years. In fact, oil prices peaked in the Carter years and plummeted in the early term recession of 1982.

Also, FY 2002-2007 saw dramatic swings in energy prices and the cost of money, but tax policy probably more influenced recovery from the dotcom binge/bust of the late Clinton years.

Hugh, I agree that oil may ... (Below threshold)

Hugh, I agree that oil may not be the primary element leading to recession as well. Many other things have to go wrong to complete a "perfect storm" cycle that reduces income available for consumers to spend on goods and for massive job losses and layoffs to result to create a recession.

PaulMany oth... (Below threshold)

Paul

Many other things have to go wrong to complete a "perfect storm" cycle that reduces income available for consumers to spend on goods and for massive job losses and layoffs to result to create a recession.

Federal, State and Local taxes do more to reduce income available for consumers to spend.There is no greater resraint (or incentive) on disposable income...that's why politicians are embrace it.

Federal tax policy was changed in a significant way in 1982-1983 by the Reagan tax cuts. Plot this graph with the changes in tax policy.

http://moneycentral.msn.com/investor/charts/chartdl.aspx?D3=0&CE=0&ShowChtBt=Refresh+Chart&DateRangeForm=1&Symbol=%24INDU&ComparisonsForm=1&D5=0&D4=1&ViewType=0&C9=2&DisplayForm=1&CP=0&PT=11


Our 23 year old son is work... (Below threshold)
nogo war:

Our 23 year old son is working two jobs while going to school because he and two friends are going to Europe do some travel and spend New Years eve in Paris. He found out today that he would have to pay $140 US for a two day stay in a Paris Hotel that is $90 Euro's....

Wake up people...the Euro is replacing the U.S. dollar....(watch oil prices rise then)

Living in the west (natural gas)we don't deal with heating oil...forget about the gas pump..
heating homes will suck the money for many..
...maybe the non-global warming higher temps in winter will offer a respite.

Dow (has Rupert bought it yet?)losing 366 is just the beginning...
Anyone who forget the Nas at 5,000 under Clinton?..
I hear all this crap about how many Americans own stock...but for many...we can't sell when we want like the big folks. Most 401's etc..make ya wait at least 3 mos. to make any changes...

How long has that house on your block been for sale?
Anyone really think a booming economy will be an issue any Republican will run on next year?

<a href="http://biz.yahoo.c... (Below threshold)
nogo war:

http://biz.yahoo.com/ap/071019/stretching_paychecks.html

Ya think this is the time to teach Iran a lesson?

The automated trading took ... (Below threshold)

The automated trading took the blame for the 1987 debacle, and it certainly seems to have been the controlling factor, although certainly not the only one. But in the longer term, looking at the price chart of the Dow over the years, it is evident the drop in 1987 barely interrupted the progress of the market, which had broken out of eighteen-year doldrums under Reagan. One scary day, to be sure, but with no real lasting effect.

Disappointing earnings reports fueled today's minor echo of the event - especially Caterpillar's, which predicted a recession (in a transparent attempt to defuse stockholder vengeance over management's poor performance). But again, the close at over 13,500 was an all-time high when it was first hit a few months ago.

Perspective is imperative. Those who achieve the best results in the markets are often those who buy when such panic selling occurs. Those who bet against the American economy have always lost in the long term. As Jayson Javitz is fond of saying: "Buy low, sell high - not vice versa."

> ... a "Black Swan Even... (Below threshold)
Arthur:

> ... a "Black Swan Event", a term used to describe something utterly unexpected and impossible to predict. This provokes the obvious question; what will the next Black Swan look like, and when will it happen?

By the definition you included, you CAN'T know when the next Black Swan will happen. If you did predict it, it wouldn't be a Black Swan.

nogoDow (has... (Below threshold)

nogo

Dow (has Rupert bought it yet?)losing 366 is just the beginning...

I think you may be confusing the Dow Jones Industrial Average with the Dow Jones Company.

I sold almost all of my "hi... (Below threshold)
g. c.:

I sold almost all of my "highs" in Sept. and sitting in a large cash position now has let me nibble at some very good companys on the down swing. The only one I stuck with big is Google and that has proven to be a plus. Pleeeease, panic somemore and I will continue to buy. When things start to look much better down the road and the average investor comes back, it'll be time for me to start selling again. This is how I make a living.

Hughs:Not to take aw... (Below threshold)
RicardoVerde:

Hughs:
Not to take away from Reagan, but the boost in interest rates by the (Volker) Fed started under Carter's administration. The interest rate boost was likely the primary triggering event of the early 80's recession and probably the best thing done under Carter's term, even though he had very little to do with it. It was painful medicine, especially for mechanized farmers, but instrumental to starting the low inflation/strong growth economy that followed.

Thank you Arthur for your p... (Below threshold)
Regret:

Thank you Arthur for your post. The question is oxymoronic - or is it just moronic?

The market will vary.... (Below threshold)
kim:

The market will vary.
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