Watching for the Next Black Monday On Oct. 19, 1987, the stock market fell by almost 23 percent in one day, the biggest drop ever. Today, with the Dow Jones over 14,000, investors say that things are going swimmingly and that this bubble will never burst — or will it?
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Watching for the Next Black Monday

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Watching for the Next Black Monday

Watching for the Next Black Monday

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LUKE BURBANK, host:

Ah, so this is Black Monday now, Matthew? Oh, wow, that's interesting. We've actually tracked the guy down. Mike Santoli step in to my office.

Mr. MIKE SANTOLI (Associate Editor, Barron's Weekly) Yes.

BURBANK: What happened?

Mr. SANTOLI: What happened 20 years ago? Or what happened five minutes ago?

BURBANK: You know what; let's focus on 20 years ago.

Mr. SANTOLI: Yeah.

BURBANL: Let's start there and work our way forward. You, by the way, are an associate editor at Baron's Weekly for those who's just joining us.

Today is the 20th anniversary of Black Monday, which was the, percentage-wise, biggest crash in stock market history. Where were you 20 years ago on Black Monday? Do you remember?

Mr. SANTOLI: I actually was a senior in high school so I was dutifully in class. But, I - the radio was going because my English teacher had a wife who's a stockbroker, and he saw his livelihood, kind of, flashing before his eyes. So, I was, sort of, listening to it play by play.

BURBANK: It was weird because I was an even younger kid living in Seattle, and I remember seeing it on the news. I mean, it was a big story. I mean, 9-year-old kids in Seattle knew about it.

Mr. SANTOLI: That's right. Absolutely.

BURBANK: So looking back, in plain English please, what exactly led to the collapse?

Mr. SANTOLI: Well, the preconditions of the collapse was that, the stock market is up enormously in a very short period of time prior to that. It was up about 40 percent from the beginning of 1987 to early August. It fell pretty sharply then rebounded. So you had a lot of air underneath the market. You had a lot of, kind of, speculative activity driving the market higher, lots of big corporate buyouts, lots of news that basically made people think that, you know, the sky was the limit.

You also had interest rates at the same time that were rising steadily and the stock market was just ignoring that. Normally, that puts a break on the stock market going higher, but Treasury securities which are now less than 5 percent. For 10 years, U.S. Treasuries were pushing 10 percent. They went from 7 to 10. So you had some preconditions(ph) that were deteriorating the entire year - the week.

Dollar was another what should've been a break on this activity, and also, lots of trade tensions. Actually, Iran was a geopolitical issue at the time. People forget about this, but there was another confrontation, some naval ships moving in that direction.

So you had those preconditions to a decline, but none of that explains down 23 percent in one day, which is what happened that time. That requires emotional, panic, hurting behavior among individuals who just want to get out and essentially do have - everybody trying to get out of the burning theater at the same time.

The mechanical issues then kicked in by that I mean the system - the technology backing the stock exchanges and the financial system just didn't hold up. They could not process all the activity which created that much more panic. So it with that, it was downward spiral.

BURBANK: So, it was partly psychological, partly financial, partly technological.

Mr. SANTOLI: Yes.

BURBANK: Let's move forward to right now…

Mr. SANTOLI: Yeah.

BURBANK: …where stocks are have been on a sort of a bull run since 2003, any chance we're building up another bubble?

Mr. SANTOLI: You know, if we are, it's in the future. It's - we're not quite there yet.

BURBANK: Oh, the future, who has to worry about that? I mean…

Mr. SANTOLI: Yeah, well, it's interesting because, you know, a lot of the returns from the stock market over time come when the market just, sort of, overshoots to the upside. And typically, when people have missed that on the move - rush in, it can create something approaching a bubble. We are not there yet. Stocks are not nearly as expensive as they were in '87 based on the corporate earnings that underlie then. Interest rates are low.

Now, we do have some parallels, as we all know, the dollar has been weakening against every other currency. Back then, we had trade, sort of, a trade war of rhetoric with Japan, today its China. We are in the second to the last year of two-time Republican presidency, if that seems to matter. So these things definitely echo to some degree, but the system doesn't seem, at this point, as vulnerable.

We've been able to process greater and greater volumes. We are much less dependent on individuals on the floor of the stock exchange writing tickets -process trades. And in addition to that, we have put in these measures that would actually close the market or slow or decline if we start to build on it.

BURBANK: Well, while I was reading various financial publications today, they were all saying it doesn't look like there'll be a crash and they also always said, no one ever knows - no one ever sees a crash coming. So that wasn't very encouraging.

Mr. SANTOLI: So that's exactly it. The crash is essentially unpredictable. It wouldn't happen if you could see it building up in over time

BURBANK: Yeah.

Mr. SANTOLI: It would not happen that way. Essentially, it is an emotional panic.

BURBANK: Well, Mike Santoli, associate editor at Barron's Weekly, thank you so much (unintelligible).

Mr. SANTOLI: My pleasure.

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