The Crack-Up: After Stock Market Gloom, Doom
October 27, 1987
RECALL FOR A moment the balmy days of last August. The Dow was comfortably above 2700. The only thing on Wall Streeters’ minds was whether it would break 3000 by year-end; more cautious souls feared that might take until mid-1988. You (literally) couldn’t find a bearish ad from a tipsheetmonger in Barron’s. Economists said a recession was possible — in 1988 or 1989. Until then, the economy was in fine shape.
The market started drifting lower in late August. Analysts weren’t sure where it might end — a 5 or 10 per cent “correction” was likely — but it was all quite healthy. The market had gone three years without even a 10 per cent drop, the longest stretch in modern history. Stocks had gotten ahead of themselves, and the market had to squeeze out the weak hands. Once the market had corrected itself, a buying opportunity would be upon us. Prices stabilized around Labor Day and then rallied. Maybe the ride — to 3000, or was it 4000? — had begun.
On Wall Street, October is the cruelest month. It was the month of the 1929 crash, several mini-crashes in recent years, and now the month of the 1987 crash. Comparisons to the granddaddy of all financial disasters are not out of line. Black Monday 1987’s decline was the worst since World War I — almost twice as savage as that of Black Tuesday 1929.
Most of the time, the gyrations at the corner of Broad and Wall matter little to ordinary mortals. As the saying goes, the market has predicted 10 of the last 4 recessions. But not in 60 years has the real economy depended so much on the jugglers of fictitious capital. In New York City, a quarter of the new jobs in recent years were finance related. The local real estate market bucked the anemic national trend because brokers were willing to pay 23-year-olds $100,000 a year to hawk their products. Those salaries, and the booming stock market, made it seem rational to pay a quarter-of-a-mil for a studio apartment or $20,000 for a summer rental in the Hamptons. Nationally, about 40 per cent of this year’s gain in consumer spending— one of the few bright spots in the U.S. economy — depended on the boom. Countless corporations used their high stock prices as collateral to borrow insane sums at 14 per cent interest. Corporate and personal debt, usually forgotten in Calvinist homilies about the federal deficit, are at record levels, much of it secured by ephemeral paper value. And as stocks fall, lenders will demand real money, setting off a whole new wave of selling.
In many ways, the U.S. is in even worse long-term economic shape than it was in 1929. Then the U.S. was an international creditor; now it’s the world’s biggest debtor. In 1929, the U.S. was on the verge of world leadership in technology and manufacturing; now, with Rust Belt industries struggling to keep up with Japanese competition, America’s prosperity is built on the same financial services that were hurt worst on Monday.
This is very, very serious stuff. And it probably has a long way to run. Last Friday, after a 108-point drop in the market, I visited the bars at the South Street Seaport to see how the young gunslingers were taking it. Not a worried look on any face; not a worried word on any lip. Today, after a 500-point drop, small-fry investors interviewed on FNN were in a buying mood. These folks are almost always wrong.
Why did it happen now? The market actually lacked some of the classic signs of a major top. Interest rates had been rising, but not to fatal levels. (High interest rates are a stake in the heart of a speculator.) But the bubble had to burst sooner or later. However you counted, either by ratios of prices to earnings or by dividends, stocks were massively overvalued by historical standards — worse than in 1929 by both measures. Wall Street was an accident waiting to happen.
Here’s how the latest Diagnostic and Statistical Manual, the handbook of psychiatry, enumerates the phenomenology of mania: elevated, expansive, or irritable mood; increased activity; talkativeness; thoughts racing in a flight of ideas; inflated self-esteem, delusional grandiosity; distractibility, with attention too easily drawn to unimportant or irrelevant stimuli; excessive involvement in activities that have a high potential for painful consequences, like (debt-financed) buying sprees, foolish investments, reckless driving. Recall Grenada, standing tall, junk bonds, Reaganomics, Baby Jessica. Then recall what usually follows a manic binge: depression.