Next week is the 20th anniversary of the 1987 crash - Aussie Stock Forums

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  1. #1
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    Jul 2006

    Default Next week is the 20th anniversary of the 1987 crash

    Two days that shook the world
    Stephen McMahon
    October 13, 2007 12:00am

    IT WAS late morning on Tuesday, October 20, 1987. Top Melbourne stockbroker Bruce Teele was in a private jet high above the emptiness of the outback returning from a visit to Perth.

    It was a smooth flight and he was encased in his comfortable executive class seat. But in his head everything was whirling.

    Only hours earlier his plans were upended by a phone call from JBWere colleague Terry Campbell telling him Wall Street had gone into meltdown.

    Two questions kept spinning through his mind: How could the Dow Jones have dropped 22.5 per cent in a single day? And what was going to happen next?

    Across the other side of the world, US Federal Reserve chairman Alan Greenspan was pondering those same questions as he worked the phones trying to calm the panicking titans of Wall Street after the Dow Jones' 508 point crash.

    That dive wiped 516 points off the Australian stock market.

    A plunge of this proportion today would wipe more than 3000 points off the Dow and hack 1500 points off the Australian benchmark S&P/ASX 200 index. Wall Street's fall on October 19, 1987, was even bigger than the Black Friday 1929 plunge that sparked the Great Depression.

    Next week is the 20th anniversary of the '87 crash, but it is still seared into the former JBWere boss's brain.

    Teele says the one thing he and the other passengers on the jet knew for certain was that the entrepreneurial era that had been driven by greed and supported by cheap cash was over.

    On the other side of the world panic and fear were washing across global stock markets as they opened in the aftermath of Wall Street's collapse.

    The New York Times' front page asked:"Does 1987 Equal 1929?"

    As it turned out, the answer was "No". Some investors were badly caught out and forced to sell houses, businesses, boats, anything to pay back debts, but the consequent damage was nowhere near as bad as in 1929.

    Teele says the doom and gloom eventually gave way to a more pragmatic outlook and provided investors with a series of valuable lessons about managing greed.

    "It was a period of rampant inflation and the fiscal management at the time was reckless, with money freely available and people were being sucked into the market by all the get-rich-quick stories," Teele recalls.

    The high-flying Australian entrepreneurial cowboy culture, empitomised by Alan Bond, Christopher Skase and Robert Holmes a Court, was also a major factor in what is now regarded as the classic bubble syndrome.

    "But cowboys only get away with it if people ride in their posse. Once you build up a culture that this is the way to make money lots of people want to join in," Teele says.

    After the first panicked selling on Wall Street, the Australian stock market plummeted 25 per cent.

    But retrospectively, the tell-tale signs were there for all to see ahead of the crash.

    In the previous week, overvalued stocks had been reassessed after tax changes in the US Congress limited the number of likely takeover targets on the stock market, the US dollar was trending down and expectations had increased the Fed would lift interest rates.

    The week before the '87 crash had seen Wall Street stocks drop 9 per cent in its largest weekly decline for more than 20 years.

    The scene was perfectly set for the bloodbath.

    Economists who have studied the 1987 crash say the uncertainty caused by an absence of concrete information and herd behaviour were also major contributors.

    Even the uber-cool former Fed chairman Alan Greenspan admits that after 36 hours going from phone to phone in a hotel room in Dallas trying to calm frayed nerves he "felt like a seven-armed paperhanger".

    In his recent book, The Age of Turbulence Greenspan recounts that early the next morning White House Chief of Staff Howard Baker called and said just one word, "Help!" Baker organised for the Fed chairman to return to Washington on a military jet.

    It was a one sentence statement from the Fed before trading opened in New York on October 20 that is credited with easing the credit squeeze and getting the markets back on the road to recovery.

    "The Federal Reserve, consistent with its responsibilities as the Nation's central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system," said the Fed.

    The underlying message to the banking system was: Make sure companies don't run out of money and whatever you need just ask and you will get it.

    Greenspan says, however, the corner was only turned a few days later when Goldman Sachs, after an initial reluctance, was persuaded to complete a $US700 million payment to a key bank.

    "Had Goldman withheld such a large sum, it would have set off a cascade of defaults across the market," Greenspan says in his book.

    The Australian stock market took a much bigger pounding and was slower to recover.

    By the end of 1987, Australian shares had collapsed 50 per cent from their pre-crash high, while US markets were down 35 per cent.

    AMP Capital Investors chief economist Shane Oliver said it took the US stock market just over two years to rise above its pre-crash highs.

    "But Australian shares did not rise above their August 1987 high until February 1994," he says.

    The stock market correction this year sparked by the meltdown of the sub-prime mortgage sector in the US sent the Australian market down 11.7 per cent.

    But the market rebounded and went past its previous record high within five weeks. Despite the two-month long correction, the benchmark S&P/ASX 200 index is up 28 per cent this year.

    The major difference, according to market watchers, is that 1987 was a classic boom but today's boom is more part of a global super cycle being driven by China.

    Despite numerous academic studies of the 1987 crash we still don't know much more about what caused it than we did when it happened.

    But in the four major financial crisis since 1987 - the 1997 Asian crisis, the dot-com crash of April 2000, failure of the Long Term Capital hedge fund in 1998 and the recent sub-prime mortgages collapse - global markets have managed to avoid full-fledged panic.

    Nobody knows where or when the next financial crisis will appear, but investors and financial institutions now seem better able to manage the fallout and, most importantly, stop the panic spreading out of control.
    DYOR, I am not a financial advisor

  2. #2

    Default Re: Next week is the 20th anniversary of the 1987 crash

    Colour drains in Wall St watershed
    Terry McCrann
    October 13, 2007 12:00am

    It started with a quiver that became a wobble, then ... crash! 20 years ago the stock market collapsed, taking some of our most colourful characters with it.

    A PERSISTENTLY ringing telephone penetrated my groggy consciousness.

    It was a real one - these were the days before mobile phones. For that matter, it was a Telecom phone.

    Optus, Helen Coonan, Sol Trujillo and all the joys of telco-competition were still in the long distant future.

    Along with computers, the internet, broadband, share prices from Wall St scrolling on your TV screen in real time through the night.

    It was about six o'clock on a Tuesday morning, October 20, 1987. Twenty years ago today come next Saturday.

    The voice on the phone was Eric Beecher's. The then editor of the Melbourne Herald. "Have you been following what's been happening on Wall St."

    "No, Eric, I've been trying to sleep."

    "It's dropped over 500 points."

    OK, I thought to myself, editors don't understand the share market. He's missing a decimal point there.

    Wall St can't drop 500 points. That would mean all the shares in America collectively would have wiped out nearly a quarter of their entire value. In a single day. Gone.

    That's impossible. I thought. I'd better look at it, Eric, I said.

    And so the day that changed the world began for me.

    Everybody in Australia in and around the share market knew what was to come, as sure as the sun comes rolling out of the blue Pacific each morning. Today it would be the colour red. Blood red.

    The crash and its aftermath would sweep away most spectacularly all the 'entrepreneurs' - quotation marks - to distinguish the paper shufflers from the traditional entrepreneur that builds real wealth.

    In the 1980s, these 'entrepreneurs' spanned the spectrum. Both in skill and what might be termed the 'dodgy quotient'.

    Interestingly two of the biggest and most prominent, who were duelling for control of Australia's then biggest and today even bigger company BHP, the late Robert Holmes a Court and the still John Elliott, had exactly opposite reactions to the crash. Both immediately and subsequently.

    Holmes a Court knew immediately that the jig was up. That the days of borrowing billions from banks to buy pieces of paper would come to a stop. Speaking to him that day, he made it very clear that he would move to liquidate all his assets, real property as well as bits of paper.

    But where do you find a buyer in a time of crashing asset values? In the greatest and most exquisite irony of that period, among your most bitter enemies. WA Inc.

    Holmes a Court had never been part of the (Brian) Burke-(Alan) Bond Catholic Labor mafia. Yet Burke's government would buy all his Perth properties.

    And Bond his company Bell Group. Not of course to help him, but to plunder the billion dollars plus of cash that was inside the Bell Resources offshoot.

    In contrast while Holmes a Court was selling, Elliott was buying. Even ostentatiously. In a replay of a famous event from the 1929 crash, Elliott sent his brokers on to the floor of the stock exchange to buy these suddenly 'cheap' shares.

    He would follow through in even more spectacular fashion by buying the company he liked so much, Remington shaver fashion. His Elders, now Foster's Group.

    He'd always envied the 'entrepreneurs' like Holmes a Court and Bond who 'owned' their companies. Now was his chance.

    Looking back from 2007, in a way he was right. The shares were cheap. Except nobody knew what would follow through the 1990s that would make them so in the long run.

    In the short-run context of the times he was dead wrong. 'Entrepreneurs' and their over-geared companies could not survive. Holmes a Court was exactly right.

    They would all go, in differing ways and at different periods. Some like Chris Skase literally, to Majorca.

    The two great pillars of the 1980s - as both fable and reality - were Holmes a Court and Treasurer Paul Keating. His financial deregulation pumped in the financial equivalent of steroids which made them masters of their domain, at least until the crash.

    It also, of course, laid the foundation for the great growth and prosperity that would flow to Australia in the 1990s and today. But that's another story. While no man better grasped the opportunity and wielded it with elegant independence and style than Holmes a Court.
    DYOR, I am not a financial advisor

  3. #3

  4. #4

    Default Re: Next week is the 20th anniversary of the 1987 crash

    Let's just stick to some facts:

    Overall, the Australian market rose by 420 per cent from the bear market low of July 1982 to the pre-crash high of September 1987.

    However, he says, the latest bull market from March 2003 has seen a rise of closer to around 150 per cent.
    A long way to go fellas.

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