The Black Tuesday I'll never forget

On Friday 20 October, it was 30 years to the day that Australia was looking at the worst day ever for shares and it was day one of the 1987 Stock Market Crash, which inevitably led to the recession of 1991.

Our crash was October 19. For the Yanks, it was Black Monday. For us, it was Black Tuesday and it’s a Tuesday I’ll never forget. Panic reigned on the local stock market and ABC TV decided to lengthen their Richard Carleton- Max Walsh program, nicknamed the Car Wash Report. We were so scared that the program was extended by an hour, if I recall correctly, and gee, the ABC was great in those days!

I’d been making a radio documentary with the pioneer of FM radio news, “the mighty whitey” David White. David was a former 2SM Good Guy, turned news junkie and knew news for FM radio had to suit the format.

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Radio was great back then

His three-hour radio doco was called “Are We Living on Borrowed Time?” and he had interviews from really smart people, broken up by great songs, such as Money by Pink Floyd and Simply Red’s Money Too Tight to Mention and so on. Gee, FM radio was great then!

Where was I back then?

I was teaching economics at the University of New South Wales at the time and had a Wednesday column in the Daily Telegraph, which followed me putting together an HSC Supplement for the newspaper in previous years, where I wrote the economics stuff.

The world was crashing around us

The fear and loathing from that time meant I worked at Triple M as a casual contributor for about four weeks before they offered me a contract to do business, financial and political commentary for the network. That was a crash I had to have.

Let me give you a summary

In case you’re not up with the ’87 crash, let me give you some disastrous data from the time to help understand how scared people were. It was a bit like the fear around the GFC crash of 2007-09 when my usually negative journalist mates were right to ask the question: “Is another Great Depression coming?”

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Look at these facts from this scary time

• On the day before, Monday October 19, Wall Street crashed 23%.

• On Tuesday, we saw a 25% slump, which in one day said Australian companies are now worth three-quarters of what they were on Monday!

• The day was the beginning of the end for swashbuckling entrepreneurs such as Alan Bond, Christopher Skase but even great businessmen such as Westfield’s Frank Lowy and News Ltd.’s Rupert Murdoch’s saw their personal fortunes ravaged.

• If the first day of the ’87 Crash was repeated today, the Dow Jones Index, now around 23,156, would slump to 18,156, which would be a 5000-point shocker!

Why did the collapse happen?

I could go on but the more relevant issue is: what caused this slump in stocks that led to a worldwide recession, where unemployment here in Australia went over 10%? And a follow up question has to be: are we heading in the same direction now? And could it happen soon?

Looking at the causes, computerised trading, which had just been introduced, was blamed for exacerbating the losses. And that’s right, given the size of the sell off on day one.

They’re still not 100% sure!

But the former BT Financial Group chief economist, Chris Caton, has argued in the past that “commentators are still arguing over what triggered the US share market collapse. “The US share market was clearly overvalued, you could see that if you looked at the price earnings ratio,” he said.

“If that was true in the US, it was even more true in Australia. We’d had an extraordinary run up in the price earnings ratio in Australia in say the 12 months before that. The market was overvalued.” (abc.net.au) Many experts argue that the US market is overvalued and even our underperforming stock market to many appears to have “stretched values” as they often comment. When share prices look like the company valuations are stretched, you can see stock market’s sell off. These can be pullbacks — up to 10% — or corrections — 10% plus or a bear market/crash — 20% plus down!

There was an unusual US President in Ronald Reagan, who was in the saddle from 1981 to 1989. He had encouraged the animal spirits of entrepreneurs and big companies and an economic and stock market boom happened but the market crash was related.

A deregulated financial system brought surprises

The business and finance world was experimenting with deregulation of the financial system and central banks were learning on the job and it explains why home loan interest rates in Australia went to 17% in 1989, ahead of “the recession we had to have” as Treasurer Paul Keating once called it. For his ‘sins’ he was PM from 1991 to 1996, which wasn’t a bad reward, all things considered.

Will there be a crash now?

Are their similarities with 1987 and now, which might make me think a crash is close?

I think the answer is ‘no’ for the following reasons;

• Interest rates are historically low, unlike 1987.

• Central banks have lent the world a lot of money and this could trip us up but I can’t see that happening for a year or so.

• Donald Trump could be compared to Ronald Reagan but Donald is at the start, while Ronnie was near his end play. If Trump gets his tax plan passed by Congress, then this economic and market boom in the USA can go on for a few years but we have to watch how far these share prices get stretched.

• The economic picture is improving worldwide and emerging economies are hungry for growth, with many planning on big infrastructure spending, which will help sustain the rising bull market for stocks.

Stock market is forerunner to real economy

Stock markets run ahead of economies — they anticipate economic growth and rising profits to justify higher share prices but when a curve ball comes along like the dodgy loans in the USA that sparked the GFC crash, which eventually took stocks down 50%, it creates panic.

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Our stock market has not passed its old pre-GFC crash level of 6828.70 on the S&P/ASX 200 Index and while history says our market should pass its old all-time high before eventually crashing, this history can’t be relied on 100%.

The Peter Switzer view

On balance, I think 2018 will be good for stocks but I could get a little nervous when we pop champagne corks on 2019, if the year before ends up looking like 1987 or 2007. The seven-thing is a little worrying, as the Asian Financial Crisis was 1997, but I can’t be influenced by numerology, whatever its merits!

One last thing

There’s an old rock saying that if you remember the swinging 1960s, you weren’t there, which I guess is a reference to the drug-taking culture of the time that has created memory issues for some older Australians. In contrast, if you remember the ’87 Crash, you were there and the lessons it taught you should have made you a better investor than you were before the event.

Peter Switzer is the founder of the Switzer Super Report, a newsletter and website for self-managed super funds. www.switzersuperreport.com.au