It is good to be Stateside again. As much as I love spending time in England, some of the modern comforts of home are a welcoming sight – like angled parking places instead of the perpendicular ones in Britain. Yep, I know, the bar has been set pretty low. Now bring on a decent drive through and I will be in heaven.
Back in 1987, yes, I am old enough to remember that time. I was just getting out of University with a brand spanking new Finance diploma in my hand. Great timing – the crash of 1987 put all of my banking dreams to rest. I had so many letters of companies turning me down that I could have wallpapered my front room with them. With a little luck I was offered a spot in an options training/trading program with an options group in Chicago. Seeing as that was my only opportunity I took it and the $125 per week pay package it afforded me. What was wrong with getting paid to learn I thought? Well, firstly, you need to eat to learn and you need a place to sleep to learn. Didn’t really think that one through but I had to beg and borrow to stay in the program. It was my first great investment that I made and I happened to make it in myself. The reason I bring it up is that way back when, exactly 30 years ago, we had one of the biggest stock market crashes of modern time. Now I know there will be a lot made of the 30th anniversary and it’s just that, an anniversary. But there are some things that I think that should be pointed out that are a little startling -even today.
Black Monday – October 19th, 1987. I was sitting in Finance class watching my future go down the drain. Those were my actual thoughts. The Dow Jones Industrial Average fell 22.61%. For those of you keeping score at home that is 5,000 points off of today’s DJIA levels. We have a panic attack at anything over 200. Can any of today’s millennial traders even comprehend a 5,000 point sell off in the Dow? What is interesting to note is that the ‘Real Economy’ vs. the ‘Financial Economy’ back in 1987 were roughly equal at that time. What that means is that the value of the stocks and bonds out there was roughly equal to the real economy that we were experiencing. Now, what if I told you that the financial economy today is roughly 3.5 times larger than the real economy? See where I am going with this? We have levered up our system and it looks like an upside down pyramid. Not good.
I wrote last week that I am not going to try and pick a top in the market and if you are not in need of your retirement any time in the next 5 years it is probably best to try and not game the market but just stay put.
We have just passed another anniversary that was played up more in Europe than in the States over the last few weeks. It was September 16th, 1992. I was knee deep in a huge Short Sterling options position standing in the pits on the floor of the old LIFFE market. For those youngsters that cower at the notion of a 5000 point sell off in the Dow, imagine what happened only 5 years later to interest rates in London. When we came in on the morning of the 19th, the base rate in London was 10%. Today the rate in London is .25 – yep 9.75% lower. Anyway, we had an obligation in London, to the rest of the European Union to keep Short Sterling within certain, predetermined bands with other European currencies. So, to make a short story long, I saw the base rate in London rise from 10% to 12% – and then to 15% before being cut back to 12% by the end of the day. It is almost harder to imagine than a 5000 point swoon in the DJIA. Think about it. We hum and haw over a .25 move in interest rates now and we did the equivalent of 28 in one day. Now that will make you weak at the knees. I still have trading dreams about it to this day. That would be like watching the Eurodollars trade 200 lower, than 500 lower and then rally 300 tics to end the day. Think about it. It literally was the first time in my life that I ever felt like fainting. The swings were so severe that you had no real idea of where your P&L was at any given moment in time. For those of us that traded through it, where you were and what were you trading are frequently talked about and the stuff of many a pint consumed. I certainly will never forget it and was happy to have survived it. After 30 years in the business I feel as though my stomach lining is made up of calluses rather than good old fashioned stomach lining.
The reason that I bring up these two major dates up is to remind everyone that these things happen – and they could happen again. Now I am not going to be a Debbie Downer or Chicken Little but just keep in your minds. I am sure the main stream media will do their job in reporting them as we see September come to an end and October getting under way. Behaviors in the trading arena have become so muted and comfortable that those type of wild trading days and crazy swings seem like eons ago. Central Banks bailed us out when things got bad in 2008. With the leverage and money flows as they are today, who will be there to bail the Central Banks out after the next crisis?
These are very real questions with not a lot of good answers. Remember, getting into a profitable trading position is 10% of the revenue. Managing the book and getting out of the position is the other 90% of the revenue and where the rubber meets the road.