London Times: Markets ‘are like 1987 crash’

[DeepModem Mom]

Markets ‘are like 1987 crash’
David Smith, Economics Editor

CONDITIONS in the financial markets are eerily similar to those that precipitated the “Black Monday” stock market crash of October 1987, according to leading City analysts.

A report by Barclays Capital says the run-up to the 1987 crash was characterised by a widening US current-account deficit, weak dollar, fears of rising inflation, a fading boom in American house prices, and the appointment of a new chairman of the Federal Reserve Board.

All have been happening in recent months, with market nerves on edge last week over fears of higher inflation and a tumbling dollar, and the perception of mixed messages on interest rates from Ben Bernanke, the new Fed chairman.

“We are very uncomfortable about predicting financial crises, but we cannot help but see a certain similarity between the current economic and market conditions and the environment that led to the stock-market crash of October 1987,” said David Woo, head of global foreign-exchange strategy at Barclays Capital.

Apart from the similarities in economic conditions, during the run-up to the 1987 crash there was a sharp rise in share prices worldwide and weakness in bond markets, Woo pointed out. “Market patterns leading to the crash of 1987 resemble the markets today,” he said....

http://www.timesonline.co.uk/article/0,,2095-2189601,00.html

[wtmusic]

1. Worse than 1987

In 1987 the markets had fully recovered within six months.

We should be so lucky this time around.

[Joe Bacon]

9. Dont forget the debt!

It just takes an angry China or Japan to stick a needle in the debt bubble and we're toasted!

[wtmusic]

16. Absolutely -- our very own SE-Asia-style meltdown

and welcome to DU, Joe Bacon!

:bounce: :toast: :bounce:

[katty]

57. these warnings are increasingly cropping & India's market fallout

just this past week.

[camby]

2. oh why not -

as if things aren't going bad enough already, let's just add a little stock market crash - just to make things more interesting.

[Robbien]

3. How about this one: Ten days that shook the world's markets

US interest rate fears sparked a torrid fortnight, with £45bn wiped off London share prices. What will happen next, asks Heather Stewart

From Stockholm to Tokyo, New York to Istanbul, market mayhem swept across the world last week, unleashing violent movements on stock markets and foreign exchanges everywhere, and hammering down the price of commodities such as copper and gold.

. . .

All investors are waking up to an alarming new world. After five years in which credit has been plentiful as central banks kept the cash taps on, the cost of borrowing has gradually begun to grind upwards. In the US, the Federal Reserve has raised interest rates 16 times, to 5 per cent, from 1 per cent two years ago. The European Central Bank has also raised borrowing costs, and even Japan, the home of the zero interest rate for many years, has responded to a stronger economy by promising to start tightening monetary policy.

In this new climate, with money rapidly becoming more expensive, investors will be less keen to take enormous bets using borrowed cash. The unwinding of some of these risky positions was responsible for some of last week's upheaval.

http://observer.guardian.co.uk/business/story/0,,1779587,00.html

Reading the foreign papers this morning is gut wrenching.

[Syrinx]

4. Republicans are fiscally sound, eh?

Economics was my weakest subject in college. I had to study like hell just to pass those courses. Can someone explain simply what effects a market crash would have on the wider economy? I just don't understand this stuff.

[mcscajun]

13. The economy, like the stock market, is in part driven by perception

and the perception of "the man in the street" is negatively impacted by a market crash.

In the current market, there are far more Americans invested than there were in 1987. Pension plans of the defined benefit type have largely been replaced with defined contribution plans and 401k's and the like, most of which are invested in the stock market. Day traders, ordinary investors, and pensioners alike would all see their wealth take a hit in a crash. Many who saw 30%-50% of their investments wiped away in the 2000 market downturn have yet to recover from that.

Even if you are not personally invested, your perception of the overall economic strength of the country following a market crash will impact your buying decisions, and the timing of those purchases, if any. Aggregate consumer pullback resulting from a market crash, in an environment already darkened by reduced consumer spending, would have a tremendous ripple effect in the national economy.

[many a good man]

17. Personal versus institutional investment

You make a good point, but is it not true that pension plans were also heavily invested in the market? I can see that pension plans are run by more cautious investors and heavier into bonds, but all in all they also put huge sums into equities. Personal investors are at much higher risk now, but I wonder how the aggregate of personal investments compares to the age when most retirement plans were of the defined benefit type.

[mcscajun]

21. Pension plans are also heavily invested in the market

but the question I was answering didn't have as much to do with that as with the effects on the economy as a whole. In my answer I was addressing the issue of individual consumer perception, which I feel has a great deal to do with the original question of the effect of any market crash on the overall economy.

[femrap]

38. I was shocked to learn that some 401Ks do not

offer their employees a Money Market Fund to invest in....the most conservative fund was a bond fund....and Goddess knows how volatile bonds can be.

[Yupster]

56. I set up 401 (k) plans

and the choices I use all have mm's automatic, and then I can choose seven or so other funds from a list of 50 or so. I don't have a choice on the mm. It's there from the beginning.

[tsuki]

39. Economics 101, as far as I went. The Professor told us Reality

was 9/10 Perception. It was about the only concept that I retained, but I put it to use two years ago.

[Syrinx]

44. thanks!

:thumbsup:

[1932]

18. If companies lose money, cut employees, and then there isn't enough

wealth accumulating among people who work for a living, there won't be enough aggregate demand to stimulate the market back towards full employment.

People will be miserable and poor.

[Yupster]

55. A couple of things

1. The government defecit will skyrocket another notch as the government will not be getting any unexpected capital gains tax receipts. Instead, many more people will be deducting capital losses from their next year's taxes were the market to tank this year.

Remember during the tech boom in the late 90's? Every quarter the government would announce the defecit was $ 30 billion less than they predicted it would be even though there hadn't been any new laws passed since the last prediction. A good part of the reason for that was people selling their JDS Uniphase stock for $ 105,000 that they bought for $ 5,000. When they did that they had to send a check to the government for $ 20,000 and the government said thanks.

2. Many older people especially live off of the income from their investment accounts. When they see their accounts go down they will cut back their monthly spending and everything from restaurants to car dealerships will notice their sales going down.

Hope that helps a little.

[pezdespencer]

5. Maybe thats why theres no traction on the issue

Faux News and the likes have been spouting about how wonderful the economy is. Why are the repukes not talking it up? Maybe because the repukes know whats coming and don't wanna put there foot in there mouths again for the 3497 time.

[Tellurian]

7. Heh, they're the ones doing the heavy selling

and responsible for the impending cra$h!

[barb162]

52. I suspect they are selling (or sold) and put their bucks in some

safe foreign currencies or companies. Sort of like Ken Lay talking up Enron towards the very end.

[Rainscents]

6. Shit, I was thinking more like, 1929 crash.

[ConcernedCanuk]

12. 1929 will look like a financial hiccup when the impending crash comes

.
.
.

USA is in for one HECK of a ride - other countries boycotting their products AT THE PERSONAL LEVEL

even myself, I check produce and products, and I will pay MORE for it rather than buy "made in the USA" or "grown" in the USA . . .

and other countries marketing their goods elsewhere, even Canada is marketing its lumber, steel, petroleum products, beef etc., etc. overseas as a result of the USA's abuse of the FTA and ignoring decisions of the WTO

I believe I said it years ago after sHAWKnAWE"

History repeats itself

As all Empires go, reads

"The Rise and FALL of the _____________ Empire"

BuhBye USA as a World Power

[NorthernSpy]

19. if we go down, we're taking Canada down with us

The United States is Canada's biggest trading partner by far, and will be for some time to come -- probably forever. What happens to us happens to you too.

[SoCalDemGrrl]

53. If you were really a CONCERNED CANUK you would not spout such

trash. Since you are a DUer you have to realize that most of us U.S. citizens do not support this clown BUSH!!!
It is painfully obvious that we have suffered the theft of two consecutive elections by 21st Century FASCISTS.

Most Americans DID NOT support "Shock & Awe" and are not deserving of the hatred you spew and any ECONOMIC REVENGE you are advocating!!

[TomInTib]

8. Thank Heavens I stashed my $197 under my mattress.

We are about to do the Tequila Wobble down a spiral staircase.

[amandabeech]

30. On the other hand, if interest rates start rising like mad,

like they did in the late '70s and early '80s, you will want to take your money out from under your mattress and put it in any interest bearing accounts.

During that time, money market interest reached the high-teens, and you could make at least 12% in long-term certificates of deposit at reputable institutions. Stocks and real estate went into the tank. Can you imagine a 17% interest house loan?

[femrap]

37. May want to exchange for some cute gold coins....! nt

[barb162]

50. thanks for the chuckle!

[eppur_se_muova]

10. Thanks for posting that. The markets have me feeling pretty jumpy lately.

[roguevalley]

11. great. my accounts lost 56,000 dollars then. I can't wait.

:sarcasm:

[adigal]

34. My coop apt in NY went from 80K

to 19K - only just recovered a few years ago.

Ugh.

[roguevalley]

45. I feel your pain, darling. HUGS!

[fedsron2us]

14. Copper Trade Losses Spark Fear of Defaults

The risk of defaults was hanging over the London Metal Exchange last night after a clutch of clients failed to meet margin calls on losing copper trades, leaving brokers struggling frantically to match their books.

The liquidity crunch follows another day of wild gyrations at the exchange, where copper, aluminium, zinc and lead all tumbled on bad US inflation data after failing to conquer new highs.

Copper fell 3.3pc to $8,080 a tonne in late trading. "The hedge books of the banks are seriously underwater on copper, but apart from that there are now brokers in trouble because clients can't meet the margin payments," said a market source.


http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/05/18/cnlme18.xml&menuId=242&sSheet=/money/2006/05/18/ixcity.html

It looks as though some traders positions have already sunk to the bottom. The financial community has got used to easy money. Now that interest rates are on the way up those days are over. I suppose the big question is how bad is it going to get ?

[DeepModem Mom]

15. Thanks for adding this info, fedsron2us. nt

[thethinker]

20. Question

What is the best thing to do with cash in this type of market to preserve it's value?

I would like to hear what other people are planning to do in case of a crash.

[mcscajun]

23. You may want to post that same question in the

Personal Finance & Investing Group.

You're likely to get some detailed answers there.

[AX10]

22. It's going to happen. There is no way to avert it now.

The twin deficits and debt are just too high to be managable.

[dickthegrouch]

24. Well if we can't toast Repugs any other way....

A stock market crash should guarantee a Dem landslide in November and make * completely irrelevant for his last two years.

Bring it on!

[texanshatingbush]

25. The obvious problem with that outcome is......

that the Democrats are left to try to clean up the shit caused by the Repukes. That cleanup will be painful for everyone in the country, and Dems might be stuck with the reputation of pain-givers. It's a no win-no win situation.

[femrap]

40. FDR cleaned up after Hoover! He was a hero. nt

[bling bling]

54. Don't bring it on please.

Lot of people's retirement is hinging on stock market performance. A crash could mean many people's (obviously, including Dems) life savings would be diminished. A Dem landslide wouldn't be much of a bright side for those people.

[EVDebs]

26. Shhhhh. When the world realizes that it all hinges upon paper

'profits' that are based upon a US consumption market that is unsustainable, and the adoption of same consumption pattern by China and India--again unsustainable, the markets will go into freefall.

At that point foreigners will want their now worthless money back and the US will not be able to pay up, starting a vicious downward cycle of deflation.

Lester Brown's book Plan B 2.0 spells this out, however, you have to read between the lines.

[teryang]

27. Currency crisis

The selling triggering the market dive is also an opportunity. Avoid the psychology of fear but recognize that a lot can and will be lost here.

I am not going to sell everything and walk away this time. I may reduce positions and get out temporarily to limit losses but I will be buying natural resource equities and etfs on severe intraday and weekly dips. I will try to buy foreign companies to diversify.

The selling in natural resources and their equities is being triggered by a variation of the plunge protection strategy. In part, these markets were ripe for a technical sell off because MACD and stochastics have been pegged to the ceiling while they have traded way above moving averages. Why were they going up? International growth. Dollar weakness on outrageous debt and trade imbalances. Supply shortages caused by earlier depressed prices. These stocks are overbought but they are not an "asset bubble" or pure blue sky such as characterized the NASDAQ bubble.

The dive of the US dollar resumed with a vengeance. One factor was all this talk of sanctions or war with Iran. Haven't heard much of that in the last several days have we? My opinion is that the big money interests and Europe have told bush and company to shut their war mongering traps because they were destroying the US currency. They didn't do this out of any moral concern. Bushco were accelerating the decline and ignorantly encouraging the need for radical readjustment in exchange rates. Part of their stupidity is their naive propaganda concerning free markets. Shit happens. The free market is self correcting, etc. The federal reserve increased interest rates and talked of further increases, talk of war temporarily ceased, and large investment interests began programed dumping of equities and shorting derivatives.

We are no longer center of the financial universe. Gold selling by central banks is off. Asian nations and Russia are probably buying gold to enlarge and diversify their reserves in lieu of purchase of US debt. A quarter percent interest rate hike isn't going to save the dollar from totally irresponsible economic policies, if not outright neglect by bushco. The effort now is to create the illusion that the dollar will go back up and all will be well. Bernanke is acting against of the stereotypical image as "helocopter Ben." Many economists feel that the US cannot recover from its current status as the worlds greatest debtor without monetizing the debt. Any effort to raise interest rates to double digits as was done in the eighties by Fed Chairman Volker to resolve much less significant imbalances will be a catastrophe. So eventually the dollar will continue its devaluation.

The Euro is projected to go to 1.40 and the loonie to 1.00 US if we are not Volkerized.

[jmatthan]

28. Last Monday I saw my pension fund dive 2.5%

Early morning on Tuesday I sent an email to my personal adviser in my bank to move all my Pension Funds in Stocks to a fixed interest 2.5% return account.

By noon on Tuesday, she rang and told my wife that she would carry out my instructions if she did not hear from me by 15:00 hours. I was tied in a meeting, so she moved all my pension funds as promised at the appointed hour out of the stock market.

Even as she was doing that the stocks were falling and by evening it had moved down another 3% and similar moves were seen till Friday morning.

I am glad that my wife and I were able to save our small pension funds from this crash this time. I sense it is going to go down substantially further as the Iranian Bourse gains strength.

[Iowa]

36. I wish you well, but I'm not a fan of market timing...

...My approach is quite different. FWIW, and to provide another view, these are a few of the things I consider when making investment decisions:

1. First, I don't use financial advisers. The financial services industry is riddled with conflicts of interest. More often than not, a financial adviser will do more harm than good. Furthermore, planners, brokers, and advisers raise investment costs - usually significantly.

2. Nobody knows what the market will do. NOBODY. There is an entire industry of people who claim to know - but their odds of getting it right are consistent with pure chance.

3. There has been more money lost trying to time the market than just about any mistake one can make. Market timing is almost always a losing proposition over the long haul. Why? Because one must be right twice - once to get out of the market at or near the top, and once again to get back in at or near the bottom. And studies have shown that you must be right over 80% of the time as you move in and out of the market over the years - just to break even. It's a good way to lose money.

4. I prefer to determine a reasonable asset allocation - one that has held up well under a variety of economic scenarios historically - and stick with it. I hold stocks, bonds, cash, and real estate and invest a good portion of the stock portfolio internationally - roughly 40%.

5.The WORST thing one can do is react to internet board recommendations that are based on fear. Keep your head when everyone else is running for the exits.

6. Avoid debt if possible.

7. If at all possible, spend less than you earn. How much one saves is FAR more important than investment skills.

8. Regarding cash investments and guaranteed interest accounts... these are good places to park cash for the short-term. Such investments typically keep pace with inflation (barely) which means they return ZERO in real dollars. In your case (you mentioned 2.5%) the purchasing power of your investment doesn't even keep pace with inflation. Money Market Funds are yielding almost twice that now, while CDs are paying 6%. I would not place a significant portion of my investment portfolio in cash. TIPS, I-Bonds, and short-term bond funds are probably under-utilized by most people seeking safety.

9. Pay attention to investment costs. Don't buy mutual funds with loads or insurance/bank investment products that carry fees or withdrawal penalties. It's a waste of money and can lock you into inferior products. Keep your costs low. Mine are roughly 0.15% annually (fifteen one-hundreths of one percent) per year. People who use brokers and planners pay 20 times that while simultaneously taking on a whole boatload of other problems associated with the financial services industry. This can be a big mistake that costs a great amount of money over the long haul.

10. There are potential consequences and downsides to every investment decision you make. There is NO magic bullet - if there was, everyone would go there and it would cease to be magic. Most people who understand the history of the markets invest in a well diversified portfolio, they keep their investment cost very low, and they don't let emotions, fear, or advice from self-proclaimed gurus cause them to veer from a historically sound and predetermined asset allocation. Make a plan and stick with it. And when everyone else is running for the exits, it's probably a good time to re-balance your portfolio and buy what the masses are selling.

11. Don't put money into the stock market that you're likely to need in the next 5-10 years. The stock market, by its very nature, tanks occasionally; anyone investing in the market should already know that. It isn't news and it shouldn't come as a surprise. Just assume the market will lose half of its value tomorrow - because nobody knows when the market will decline. In other words, invest for the long term and don't sweat inevitable market swings.

I've seen a lot of gloom and doom expressed here lately. Upheaval may be coming our way - or maybe not. Nevertheless, market timing isn't the answer. Diversification (including international stocks), low costs, avoidance of brokers/planners/advisers, regular re-balancing, keeping emotions out of investment decisions... these are strategies I prefer.

[jmatthan]

42. Thanks for the advice

However, being well past 60, my wife and I are retired, have beaten inflation in living costts Finland continuously over the last 22 years (we are the authors of the book "Handbook For Survival in Finland), have no debt, but still use our unused pension funds as our nest eggs as we get nearer 70 so that we can enjoy ourgrandchildren as they get older.

As we both will get healthy State Pensions till we are no more, we do not really need to bother. But when I saw the writings on the wall which have been getting bolder over the last three months, I rang and advised my adviser what to do, not the other way around.

I did not want to just lose my money which has shown a steady growth over the last two years after two bad years. I had kept my investment on ice during those bad years. There are many ways to beat inflation and +2,5%+ is better than -30%.

What I saw was a huge decline ahead and I can see this lasting at least for a period of 2 years. That was why I got out.

[Iowa]

46. Hi jmatthan...

It's clear you know what you're doing. My post was more for the benefit of some of the younger among us who might be tempted to go 100% to cash in an attempt to time the market and avoid a crash that may or may not be upon us. Just wanted to point out that there's a potential downside to market timing.

[Zynx]

29. Hot damn! That means quite the buying opportunity.

[Yavin4]

31. It's All Very Simple

Since Bush came into office, this economy has been propped up by debt on all levels, individuals, government, corporations, etc. For a good long while, the interest rate on this debt was low and the borrowing went wild. But like all things in the universe, things fall back into a balance. Interest rates have to rise because the borrowing is out of control.

Higher interest rates will dramatically slow down or even crash this economy, and we don't have a growth industry in this economy to bail us out like we did in 1987 when the I.T. sector came along and brought growth and jobs back into this economy. This time around, we don't have a dominant sector that we can lean on to bring the economy back to its feet.

[Piscis Austrinus]

32. Alternative energy?

I'm no economist, mind, but it looks to me as though the combination of events we're examining here is going to fuel (bad pun, sorry) a drive for greater development and production of alternative fuel sources. Remember, the 1987 crash preceded the bulk of the rise of the IT sector. Did Yahoo, Google, Cisco, et al even exist in recognizable form before 1987? A few of the big players - Microsoft, Apple and the like -were around, but many if not most were much smaller operations then.

My guess, and it's just a guess, is that conventional sources of energy (read: oil) are going to prove overexpensive as the deflation runs apace. Either that, or it's going to become obvious that the oil market's being jobbed and that prices have been held artificially high by one means or another. Either way, I sense that there will be much greater demand for alternative energy at the consumer level, and that demand is what would spur greater R&D on all levels, from individual entrepreneur to multinational monolith.

The IT boom of the 1990's was by and large a boon to the developed world in general - with occasional disgusting glitches like data mining and electronic election jobbing - and my feeling is that a similar effect is achievable in the energy sector. The economy's in for a terrible period - I don't doubt it - but we're not left with nothing but huge debt and burnt fields and towns.

Besides, alternative energy is likely to prove desirable even without an oil crunch, since we're overheating and overpolluting the planet, and the millions of people who live on our coasts probably don't savor overmuch the notion of kayakking to work.

Peace
PsA

[truthisfreedom]

33. we'll just let Al be the president we never had. let's start responding to

everything he says as if he's actually in charge. that will drive bushco bonkers... they're dead in the water anyway.

[Yavin4]

35. One Huge Difference

There was no Big Oil paying off the politicians to block the development of I.T. like there is for alternative energy.

[femrap]

41. The opium crop in Afghanistan is harvested in June.....that

could bring some money into the markets. I think The Rich make lots of $ off the drug trade.

[upi402]

48. Exactly

Well put.

[TrogL]

43. Won't be allowed to happen

with the computerized checks and holds put in place. Otherwise it would have crashed last week, when the 'now just hooooooooooooold on a minute' systems kicked in to prevent it.

[dipsydoodle]

47. That was part of the problem in 1987

There were no "now hoooooooooooold on a minute's " at that time. Part of the problem was in effect computer aided / assisted by projections. Don't change the fact that most of the factors which started the slide and currently in place. See :
http://www.sniper.at/stock-market-crash-of-1987.htm

[upi402]

49. Agreed, also -things are very sick economically now

and that's why we stand to see our standard of living decline for a long time. Unless that guy in Florida makes energy from water (HHO) work, or something like the IT boom.

[barb162]

51. Actually I am surprised there hasn't been a crash yet

[katty]

58. me too-a precipice balancing act

[sweetheart]

59. 6 years of incompetence

Reagan had 7 to make a mess, bush is *better*, he's destroying more value, faster!!!

Think of all the new investment opportuntities he's created by felling all those trees!

[reprobate]

60. It's been predicted for a couple of decades...world economy meltdown.

It seems far more likely and closer in time now that Commander Simian has royally screwed us by handing the treasury over to his cohorts.

It begs one question for me. Just how bad will the slide be? It seems to me that whenever the masses of people are deprived of their daily bread (metaphorically) things get dicey for the oligarchs in charge. Will they be able to keep the great unwashed quiet and respectful? Tsar Nicholas couldn't control them in 1917, and Louis XIV lost his head trying to.

Pure speculation of course, but just how bad do you think things are likely to get nationally and globally? And just how bad before the masses globally rise?

I certainly am not wishing for anything like this, but if it does happen there may be one ray of hope. It will supply the opportunity for a complete revamping of the economic system that has controlled us for the last two centuries at least. We have been taught from infancy that the Capitalist system is the best for everyone, and the "Free Market" will provide all we need. What Bullshit!

The Capitalist system is best only for the capitalist, and it's in his interest to keep down the economic interests of everyone else (except for the politicians in his employ).

And as for the "Free Market".....well there ain't no such thing. As soon as one participant in the market gains more than the others, the market will be twisted in his favor and cease to be "Free".

I'm interested to hear the viewpoints of the others on the board.

How bad will it get and for how long?

Will we reach meltdown?

What will replace the twisted system we slave under now?
'
I'd like to know.