Stock Market Crash – 19th October 1987 – It felt like it was all over even though we knew most of the world’s economy was in good shape!

Stock Market Crash – 19th October 1987 –

 

It felt like it was all over even though we knew most of the world’s economy was in good shape!

 

Most people remember Thursday 15th October for BBC’S Michael Fish’s inaccurate weather forecast. Unforeseen damage and devastation shattered many parts of the South East of England, which cost 18 lives. Many felt that it was the precursor to ‘Black Monday’ on Monday 19th October which precipitated the collapse of global stock markets.

 

On that fateful Monday the DOW fell 22.6%, wiping $500 billion off valuations. FTSE 100, only in existence since 1984 (30 before that), lost 22% and the loss was exacerbated by the end of October – down 24.4%.  In the same period HK fell 45% and Australia -41%. They also closed the Hang Seng for 4 days (Tues to Fri) & the exchange Chairman was arrested, attempting to run for the hills! Happy days! The Nikkei over the same period fell 18.5% to 22000 – a mere bagatelle.  We must remember that the Nikkei regained its poise to 38900 in 1989 until their equity bubble burst.

 

In those halcyon days James Baker was the US Treasury Secretary and Alan Greenspan had only been chairman of the FED since 11th August 1987.  Cheap money policy in the latter years of the Reagan administration made financing deals too easy.  Add that to the fact that takeovers and M&A activity struck at ludicrously inflated prices, made share valuations look far too very rich.  Many companies used to sell junk bonds to finance these transactions.  Those of you over 50 years of age plus will remember Michael Milkin of Drexel Burnham Lambert fame.  He was one of the great exponents of this instrument. 1986-7 were stellar years for stock markets. They rose sharply. Frankly they over-heated, aided and abetted by some excessive and sometimes shady IPO business.  This compendium of items created a very toxic cocktail for a crash.  The market was delivered it in Spades!

 

LIFFE was still fairly immature. Though this futures exchange started hostilities in 1982 under the innovative guidance of Sir Brian Williamson, it was still fairly impotent in comparison to the copious futures exchanges in Chicago. Also TIFE did not get its act together until 1989 and Singapore sometime after that. So it was left to the Chicago futures markets and LIFFE to ‘take arms against a sea of troubles.’ To use the vernacular, its ‘spivs & vagabonds’, alias floor traders, joined in all the fun of the fair. They correctly perceived that the market looked weak bloated and hopelessly over-priced. These traders waded in to the ring and ‘gave it some welly!’ – Just sell, sell, ell!

 

The situation was exacerbated by the emancipation of BIG BANG in 1986.  Hence Goldman, Salomon Bros, Deutsche Bank and UBS were rampant as the ‘heavy hitters’ of the day.  Fortunes were lost by retail and wholesale investors. 

The cash market traders did not know what hit them. The market makers and execution brokers had hardly got their feet under the desk post the change of the rules, when this metaphorical tornado all but up-rooted their desks. There was no bottom to the market with the futures traders always in the driving seat. The standard of media reporting at the time – both written and visible was moderate at best, apart from a few Ivan Fallons, Christopher Fyldes, Patrick Sargents and Anthony Hiltons. So communications were poor. Technology was not much better than ‘Heath Robinson’ class at best. Bloomberg was non-existent.  Reuters was not terribly sophisticated and Telerate and Knight Ridder were embryonic.

 

 

At the time meaningful spread betting in indices had just got under way.  IG, which was set up by Stuart Wheeler and City Index owned by Jonathan Sparks and later by Michael Spencer had to find fresh investors from their very rich friends to stay in business.  Many of their clients were unable pay their margin calls after the 87 crash! IG has risen like the phoenix from the ashes and is now valued at £3.07 billion!

 

Could this kind of catastrophe happen again? One can never say never but unlikely. Why?  Regulation is much tighter. Credit management is better controlled as are dealing limits.  Also technology and screen based trading is on a different level.  Its quality offers so much more security and it is appreciably more sophisticated. 

 

Those were the days!

 

 

 

David Buik

Market Commentator

 

D +44 (0)20 7886 2775

Panmure Gordon & Co  One New Change | London | EC4M 9AF | United Kingdom www.panmure.com

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