More from “Market Wizards”, by Jack Schwager. This time, the interviewee is none other than Jim Rogers, Fox News business block guest, and author of “Adventure Capitalist” and “Hot Commodities”.
This discussion on the crash of Monday, October 19th, 1987, is particular interesting when considering today’s environment, with US trade deficits reaching historic levels, American politicians currently in China trying to strong-arm the Chinese into changing their trade policies, and the Dow and S&P exploring new 5-6 year highs on decreasing breadth, not to mention a brand-spanking new Fed Chairman in Bernanke. Greenspan had only been the Fed head for a couple of months in October ’87:
A lot of people blame the October 1987 break on program trading. Do you consider that scapegoatism?
Absolutely. The people who blame it on that do not understand the market. Politicians and people who lose money always look for scapegoats. In 1929, they blamed the crash on short sellers and margin requirements. There were lots of good reasons why the stock market went down. What they should focus on is why there were sellers on October 19, but no buyers.
I remember why I became even more bearish on the weekend before October 19. The week before, [Federal Reserve Chairman] Alan Greenspan announced that the balance of trade was getting much better and things were under control. Two days later, the balance of trade figures came out, and they were the worst in the history of the world. Right away I said, “This guy is either a fool or a liar. He doesn’t have any idea what is going on.” Then on the weekend before October 19, you had [Treasury Secretary] Baker telling the world we were going to stick it to the Germans by letting the dollar go, because the Germans weren’t loosening monetary and fiscal policy as Baker had demanded. It looked like the trade wars of the 1930s all over again.
I was in a panic— and I was already short! I called Singapore that Sunday night to add to my shorts. [Singapore opens earlier than we do.] So all those guys who came in Monday to sell had very, very good reasons to sell, and there were no buyers around. There were no buyers, because there was no reason for people to buy. Even the buyers were scared and bearish that Monday.
Are you saying the crash was caused by Greenspan and Baker?
There were a lot of causes: Greenspan, Baker, the fact that money was tight, the steady worsening of the balance of trade, and you had a market that had spiked up to 2,700 six weeks earlier. If you check, you will see that, during 1987, while the S&P and the Dow were going up, the rest of the market was quietly eroding away. In December 1986, I shorted the financial stocks, and throughout 1987, I didn’t lose any money, even though the Dow and the S&P were going through the roof.
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