# The probability of a 1987 style crash



## wayneL (2 March 2007)

In a word, zero.

I'm not saying there won't be a bear market, there will, but a calamitous single day crash is out of the question. Why?

*Downside trading curbs placed on the Us exchanges as happened briefly last night

*The existence of the President's Working Group on Financial Markets (AKA *P*lunge *P*rotection *T*eam or PPT) (the influence of which, is hotly debated) 

*The uptick rule on short selling stock

That's off the top of my head, but there are other measures, structural, and value differences between then and now.

This doesn't mean things cannot get extremely ugly, but the time it takes will be stretched out.


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## wavepicker (2 March 2007)

wayneL said:
			
		

> In a word, zero.
> 
> I'm not saying there won't be a bear market, there will, but a calamitous single day crash is out of the question. Why?
> 
> ...




Probably not, but does it matter whether the pain delayed or not?  If anything it would be better for it to happen in a number of days rather than grinding, ratcheting decline lasting a number of years.

Just look at the years of pain japan endured following the collapse of the Nikkei225.


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## wayneL (2 March 2007)

wavepicker said:
			
		

> Probably not, but does it matter whether the pain delayed or not?  If anything it would be better for it to happen in a number of days rather than grinding, ratcheting decline lasting a number of years.
> 
> Just look at the years of pain japan endured following the collapse of the Nikkei225.




Agreed. Would be better to just get it out of the way so all us bears can be bulls again... sooner rather than later.

Alas, there are other agendas.


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## chops_a_must (2 March 2007)

wayneL said:
			
		

> *Downside trading curbs placed on the Us exchanges as happened briefly last night
> 
> *The existence of the President's Working Group on Financial Markets (AKA *P*lunge *P*rotection *T*eam or PPT) (the influence of which, is hotly debated)



Are you able to elaborate on these, or link me to articles on the matter? I need some entertaining reading. Lol! 

Cheers.


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## wayneL (2 March 2007)

chops_a_must said:
			
		

> Are you able to elaborate on these, or link me to articles on the matter? I need some entertaining reading. Lol!
> 
> Cheers.




Last nights trading curbs:
http://uk.biz.yahoo.com/01032007/325/nyse-imposes-trading-curbs-stocks-fall.html
These were lifted as the market rallied off the lows

PPT
http://en.wikipedia.org/wiki/Executive_Order_12631
http://www.washingtonpost.com/wp-srv/business/longterm/blackm/plunge.htm
Their role is somewhat controversial. Some (like me  ) assign every unexplained rally to the PPT, whilst others deny they even exist (although it is fact that there is a group as per the above links).

The ex-pit traders on MIRC trading channels acknowledge that they are active in the market frequently, but pretty hard to prove really.

Enjoy


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## money tree (2 March 2007)

posted this before:

"--------------------------------------STOCK MARKET CRASHES-------------------------------------

Inexperienced investors could be forgiven for thinking a stock market crash is a common occurrence. Most people remember 1987. They remember stocks falling heavily and being the top news, stockbrokers jumping out of windows and people losing everything in a margin call. It’s funny how those negatives stick in people’s minds, and sadly still breed fear today. 

“The 1987 crash "marked the end of a five-year 'bull' market that had seen the Dow rise from 776 points in August 1982 to a high of 2,722.42 points in August 1987." Unlike what happened in 1929, however, the market rallied immediately after the crash, posting a record one-day gain of 102.27 the very next day and 186.64 points on Thursday October 22. It took only two years for the Dow to recover completely; by September of 1989, the market had regained all of the value it had lost in the '87 crash.” - www.facts.com

What is often forgotten about that year, is that markets were incredibly strong most of the year, and even after the crash, they were higher than at the beginning of the year. 1987 was not a crash, it was merely a correction. A crash is when the bubble bursts, and everyone’s wealth implodes before their eyes. Secondly, after the crash, markets climbed higher again. The only people who lost money in the crash were those who bought in August and sold at the end of October. Everyone else made money or broke even. As in any mania, greed was rife. People had been watching markets rise for so long they thought it would never end. Some borrowed heavily to invest, and came unstuck in mid October. 

So what caused the correction? Contrary to popular belief it did not happy simply because stocks were overpriced. If they were overpriced, why did they go back up after the crash? They weren’t cheap, that’s for sure. The market had simply gotten ahead of itself. In mid 1987 the economy was running out of control, interest rates were sky high and inflation was rampant. The Federal Reserve tried to slow things by increasing interest rates by 50 basis points in one hit. That was supposed to shock people back to reality, instead it had little effect. A 50 basis point rise was unheard of at that time. There was so much momentum built up, one scary rate rise was not going to do the job. Six weeks later, the Federal Reserve boosted rates another 50 basis points. This time the market started to take notice.

One major factor in the crash was European investors who owned U.S stocks. The U.S dollar was strong at the time, and U.S exporters were crying out for help. The foreign debt was spiraling out of control, and the Government finally took action. On the 14th October 1987, Treasury Secretary James Baker announced: 

“The strong dollar policy is damaging our export industry, and we must be prepared to let the dollar slide.” 

Now if you were a European investor with stocks or bonds in U.S currency, that statement is the worst possible news you could hear. A falling U.S dollar meant that your assets fell in value in your currency terms. Even if the stocks and bonds themselves went up or stayed flat, you lost money. This was the final straw. European investors sold U.S stocks in droves. They were the lucky ones because they got out first. It should have been obvious to most Americans what was going to happen, but few considered the view from Europe. From here the markets gained downside momentum, like an avalanche. On Friday the 16th October, the Dow fell more than 5%. 

This massive fall made the front page of the weekend papers, and people became very scared all of a sudden. Many vowed to sell all their stocks first thing Monday morning, before things got any worse. For the last week, Europeans and smart Americans had been doing nothing but selling. Nobody was placing buy orders. When the market opened on Monday 19th October, people were jumping over each other to sell but there was nobody who wanted to buy. Prices went into free-fall, as desperate punters sold at any price. Genuine sellers accounted for around 10% of the fall that day. Unfortunately, brokers had just begun using computers to automate trading. These computers had stop loss orders programmed in, so that they would automatically sell when prices went too low. The genuine sellers started to trigger these stop-loss levels, and the computers started selling on masse. Like a chain reaction, more and more computers did more and more selling, until the plugs were finally pulled. Buyers by this stage had smelt an opportunity, and happily started buying into the ever-increasing panic. Eventually prices stabilised. By then the Dow had fallen 22.4%. 

Many changes have been made since then, and many lessons learned. Clearly some of the comments made by prominent economists could have been toned down. Computers with stop-loss triggers have been modified to ensure the cascade effect does not happen again. What’s more, ‘curbs’ and ‘circuit breakers’ have been introduced into the NYSE. So much for free markets. Nowadays, when the market falls a certain amount, brokers are forced to buy into the fall. This creates the effect of steering markets where you want to go. A ‘circuit breaker’ is triggered when the market falls very heavily. The stock exchange simply halts all trading, to give investors a chance to calm down.

As well as these measures, the Federal Reserve has established a department called the “Plunge Protection Team” or PPT. This department’s job is to ensure the stability of the financial markets by buying large amounts of stock when markets are falling. Their actions are now becoming well known, and often they will issue a report stating how much money they are injecting into the market or taking from it. For many years it was believed the department was an urban legend, but recently certain politicians and economists have admitted its existence.

Another factor that suggests a crash can never happen again, is the information age. Millions of people on the Internet now trade stocks with exactly the same information their brokers have. Furthermore public participation in the markets is at a record and will only increase. The markets should have crashed in March 2000. They should have crashed again in Sept 2001. But they did not. Technology has improved. There have been policy changes. More and more investors know that any dip is a buying opportunity.

If you do not believe any of this, take a look at the Dow chart just after September 11. If the largest terrorist attack in U.S history could not cause the market to crash, what could? Someone was buying up the markets at that time, and buying so big that the markets actually went higher than they were before the attack. It stinks, because America is supposed to be the beacon of freedom, yet they have the most corrupt and manipulated financial markets in the world. We can whine all day about it, or we can accept it and use this knowledge to our advantage. There will never be another crash like 1987. Markets may fall over time, but a 22% fall in one day is pure history."


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## Kimosabi (2 March 2007)

wayneL said:
			
		

> Agreed. Would be better to just get it out of the way so all us bears can be bulls again... sooner rather than later.
> 
> Alas, there are other agendas.




Yes, we have a legacy to think about...


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## wayneL (2 March 2007)

Kimosabi said:
			
		

> Yes, we have a legacy to think about...




What do you mean?


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## nizar (2 March 2007)

wayneL said:
			
		

> In a word, zero.





Exactly.
When i read the thread topic i was going to say the same thing.

In the 12 months before October 1987 the XAO appreciated 88%. In the 12 months until now the XAO appreciated about 20%. BIG DIFFERENCE.

I dont even understand how those "Analysts" can compare it.


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## GreatPig (2 March 2007)

nizar said:
			
		

> In the 12 months until now the XAO appreciated about 20%.



It also appreciated over 21% in about 5 months.

GP


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## YChromozome (2 March 2007)

In the US markets, wouldn't the Circuit Breakers just trip . . . 

NYSE Announces First-Quarter 2007 Circuit-Breaker and Trading-Collar Levels

NASDAQ: Circuit Breaker Trigger Points and Trade Halt Durations for First Quarter, 2007


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## wayneL (2 March 2007)

YChromozome said:
			
		

> In the US markets, wouldn't the Circuit Breakers just trip . . .
> 
> NYSE Announces First-Quarter 2007 Circuit-Breaker and Trading-Collar Levels
> 
> NASDAQ: Circuit Breaker Trigger Points and Trade Halt Durations for First Quarter, 2007




Yes!

We can add those to the list


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## 2020hindsight (2 March 2007)

Just like to say thanks Wayne for your wide ranging contributions.   
I wasnt investing in 1987 - but I know people who wouldn't touch shares since then lol.  Once burnt twice shy - 

or as GW Bush would say - "fool me once , well ...... I forget, but something about one of us being a fool"


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## chops_a_must (2 March 2007)

money tree said:
			
		

> As well as these measures, the Federal Reserve has established a department called the “Plunge Protection Team” or PPT. This department’s job is to ensure the stability of the financial markets by buying large amounts of stock when markets are falling. Their actions are now becoming well known, and often they will issue a report stating how much money they are injecting into the market or taking from it. For many years it was believed the department was an urban legend, but recently certain politicians and economists have admitted its existence.
> 
> If you do not believe any of this, take a look at the Dow chart just after September 11. If the largest terrorist attack in U.S history could not cause the market to crash, what could? Someone was buying up the markets at that time, and buying so big that the markets actually went higher than they were before the attack. It stinks, because America is supposed to be the beacon of freedom, yet they have the most corrupt and manipulated financial markets in the world. We can whine all day about it, or we can accept it and use this knowledge to our advantage. There will never be another crash like 1987. Markets may fall over time, but a 22% fall in one day is pure history."



Yep. Good to see the man knows his history. They certainly haven't tried that one before. Just ask Richard Whitney!  

Another 1987 style crash wont happen anytime soon IMO because the current crop of traders have seen a crash, and naturally cautious because of that. However, my generation probably will see an '87 style one, because they wont have seen a crash. Largely like the traders who experienced '87.

It would be nice to see some more muppets though I agree:

"As the dramatic decline hit the news, there was some concern in the public that this was a sign that a economic depression would soon strike the world economy as it did with the stock market crash in 1929. As a result, there were concerted media efforts to inform the public while allaying their fears about an economic disaster.

For example, ABC News broadcast a television special about the situation which not only featured the major news anchors, but also Kermit the Frog and the other Muppet characters. Together, they presented an illustration of both the basic elements of the stock market and a realistic look at the consequences of Black Monday."


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## nizar (2 March 2007)

chops_a_must said:
			
		

> Another 1987 style crash wont happen anytime soon IMO because the current crop of traders have seen a crash, and naturally cautious because of that. However, my generation probably will see an '87 style one, because they wont have seen a crash. Largely like the traders who experienced '87.




Yeh true.
There wouldnt have been many traders in 1987 that had experienced that 1929 crash LOL


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## wayneL (2 March 2007)

nizar said:
			
		

> Yeh true.
> There wouldnt have been many traders in 1987 that had experienced that 1929 crash LOL



A lot that went through the 70's bear though.


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## Julia (2 March 2007)

Thanks, Moneytree, for that interesting background.

Could you elaborate on this sentence?
Quote
 What’s more, ‘curbs’ and ‘circuit breakers’ have been introduced into the NYSE. So much for free markets. Nowadays, when the market falls a certain amount, brokers are forced to buy into the fall. 
Quote

How are brokers "forced to buy into the fall"?

Julia


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## chops_a_must (2 March 2007)

wayneL said:
			
		

> A lot that went through the 70's bear though.



Yep, those Chicago Bears of the bond market were stuffed until they drafted Walter Payton.


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## money tree (2 March 2007)

Julia said:
			
		

> How are brokers "forced to buy into the fall"?
> Julia




Brokers like Goldman Sachs are owned by the U.S govt. PPT starts to buy, everyone else buys, or gets run over. They move the market by dictating futures.


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## money tree (2 March 2007)

also, when the PPT puts curbs in, it becomes illegal to short a stock on a downtick.


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## toothfairy (2 March 2007)

Hi Money Tree,
Thanks for the interesting article. When the 1987 crash happened I was in Hong Kong losing my pants as a novice punter. But your article reminded me of the two events that happened in HK at that time that make me think the Americans have pinched the ideas from HK:
1) the then HK stock exchange boss Ronald Li anounced that the HK stock market should stop trading for a couple of days for people to cool down. It did stop trading for a few days but fell just as much afterward. He lost his job. And the Americans now call it Circuit Breaker, pioneered by Mr. Li.
2) the Hong Kong Goverment subsequently bought a huge amount of cheap shares because with their surplus finance they could afford it. I think that did work, they stabilised the market and made profit by selling back the shares a few years down the track. The Americans now call it PPT.
So these are not original ideas.
Cheers.


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## theasxgorilla (3 March 2007)

toothfairy said:
			
		

> When the 1987 crash happened I was in Hong Kong losing my pants as a novice punter.




So you weren't investing in the markets at that stage then??

Sorry, couldn't resist


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## toothfairy (3 March 2007)

theasxgorilla said:
			
		

> So you weren't investing in the markets at that stage then??
> 
> Sorry, couldn't resist



Lucky after that I invested with what I got left into their property market and bought an appartment in mid-level and that went double in three years.


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## Freeballinginawetsuit (3 March 2007)

theasxgorilla said:
			
		

> So you weren't investing in the markets at that stage then??
> 
> Sorry, couldn't resist





Careful, could be a Benny Boy, their hard to pick


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## It's Snake Pliskin (3 March 2007)

nizar said:
			
		

> Exactly.
> When i read the thread topic i was going to say the same thing.
> 
> In the 12 months before October 1987 the XAO appreciated 88%. In the 12 months until now the XAO appreciated about 20%. BIG DIFFERENCE.
> ...




PE's were higher then too I believe.


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## Dr Doom (3 March 2007)

nizar said:
			
		

> Exactly.
> When i read the thread topic i was going to say the same thing.
> 
> In the 12 months before October 1987 the XAO appreciated 88%. In the 12 months until now the XAO appreciated about 20%. BIG DIFFERENCE.
> ...




Nizar, correct me if I'm wrong, but the amount in dollars to gain the next 1% in todays market is a lot more than the same dollar amount to move 1% in the 1987 market. So comparing in percentage terms is a bit misleading. I would assume you would have to adjust for inflation as well?. Does that sound right?

As for a full blown crash, in both of the famous crashes eg 1929 & 1987, the initial corrections only preceded the actual crash by some weeks.

Why is it different this time - because no amount of market controls will be able to control the amplification effect of derivatives being unwound or exited. Unfortunately, these derivatives are so entwined & massive that a domino effect will most likely occur spreading to every financial nook & cranny.
I hope I'm wrong, but be prepared anyway 

Perhaps the topic should be "The probability of a 1929 style crash'?


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## bean (3 March 2007)

I have entered values, I have daily data on the DOW back to 1895.
If Monday does not rally, the CRASH protection team better be out Tuesday as some figures I entered for a small down day Monday and if Tuesday is going to be down it will be giving similar readings to 1987


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## 2020hindsight (3 March 2007)

money tree said:
			
		

> also, when the PPT puts curbs in, it becomes illegal to short a stock on a downtick.



serious!?! sheesh.
This one has no doubt been posted elsewhere already ....
http://www.abc.net.au/news/newsitems/200703/s1862045.htm


> Dow Jones continues to slide
> The US stock market has suffered another big fall, with investors still skittish about the strength of that nation's economy.  The Dow Jones industrial average is down by more than 100 points, as a tumultuous week on world financial markets draws to a close.
> 
> The Dow began the day in positive territory, but was soon diving on renewed concerns about the state of the US economy.  A key consumer sentiment index came in much weaker than expected and this only contributed to the general nervousness.
> ...


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## 2020hindsight (3 March 2007)

toothfairy said:
			
		

> When the 1987 crash happened I was in Hong Kong losing my pants as a novice punter. But your article reminded me of the two events that happened in HK at that time that make me think the Americans have pinched the ideas from HK:
> 1) the then HK stock exchange boss Ronald Li anounced that the HK stock market should stop trading for a couple of days for people to cool down. It did stop trading for a few days but fell just as much afterward. He lost his job. And the Americans now call it Circuit Breaker, pioneered by Mr. Li.
> 2) the Hong Kong Goverment subsequently bought a huge amount of cheap shares because with their surplus finance they could afford it. I think that did work, they stabilised the market and made profit by selling back the shares a few years down the track. The Americans now call it PPT.
> So these are not original ideas.
> Cheers.



Toothfairy - I recall watching him (Li) being interviewed on TV during Asian downturn and HK stock market problems.  As I recall he took great offence at the suggestion he had tipped off "mates " etc. - He was threatening to sue any news reporter who even questioned him on a matter even approaching his integrity ( I think I have it right, you may recall better) - only to be caught out by the ICAC lol. Not sure if he was charged etc 

I always thought that some of those Asian stock markets were built on such unstable sand - companies being listed who had no expertise whatsoever in their alleged area of specialty - (maybe others can comment).  Seems that Shanghai  is a bit more honest at least, even if a bit wobbly. (and  current day Asian markets maybe?)


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## Kimosabi (3 March 2007)

This graph helps adds a bit of perspective


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## noirua (3 March 2007)

Knowing the past is thought to be a guide to the future:  http://www.caslon.com.au/boomprofile3.htm#introduction


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## >Apocalypto< (3 March 2007)

nizar said:
			
		

> Exactly.
> When i read the thread topic i was going to say the same thing.
> 
> In the 12 months before October 1987 the XAO appreciated 88%. In the 12 months until now the XAO appreciated about 20%. BIG DIFFERENCE.
> ...




It sells news papers Nizar


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## Judd (3 March 2007)

Why the fixation with 1987?  From what I have read elsewhere, 1987 pales in comparison with 1972 to 1974.  The bum really dropped out with a number of indicies down 80% from their peak and the effect, in terms of shares, was considered worse than 1929.


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## money tree (3 March 2007)

87 was covered by the media in great depth. It was an "event" lasting one day with massive impact. It sticks in peoples minds. Unfortunately, people only consider this risk and not the risk a long term bear market presents. Also, it is the most recent selloff in the broad market, so there are plenty of people who experienced it still around. 

1929 is the king of bears in my book.


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## Judd (3 March 2007)

money tree said:
			
		

> 1929 is the king of bears in my book.




Yeah but the dividend yield, for those companies still paying them and there were quite a few I understand, would have been magnificent!


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