I was referring to short "crashes", not bear markets.
The gist of the Cramer comments was that we could see another crash similar to 1987. In this century, we have never seen as rapid a drop in stock indexes in such a short time, as 1987. I know, I did my research ahead of time, and knew what we saw then was unprecedented. The bear market in 1974 was a long term decline that took place over several months. The crash in 1929 took about 20% off in one day, but this was off from close to the highs that year. And it wasn't preceded the day before by a drop of over 5% like 1987. Most people don't realize that the Dow recovered after the 1929 crash climbing back close to the highs again, before descending into the depths in the 1930-1932 bear market where the Dow declined about 90%. The bear market of those years was driven by rapidly deteriorating economic conditions, multiplied by inappropriate tight fiscal and monetary policies, not to mention high import tariffs.
No, the crash of 1987 was unprecedented. Not in this century has the market dropped so far so fast. And it was clearly due to the unregulated use of derivatives.
But there is one parallel with 1929. In 29 we were dealing with the first wide-spread use of margin, and short selling, both again unregulated. The result was widespread manipulation. When the Dow did drop 20% in one day, it wiped out most of the margin speculators, since margins were so thin. This is how we got the stories of people jumping off roofs. After Roosevelt took over, he brought in Joseph Kennedy, paradoxically, one of the players, and they reformed the system. Thus the SEC was created, and the system of financial reporting, and Reg T margin requirements, and so forth. In short, we put in place a set of regs to prevent the misuse and unstable market conditions we had seen before. This is quite similar to the regs put in place after 1987 to regulate derivative use, except many of those regs were imposed by private trading bodies like the NYSE etc.
It is interesting to see that one of the big drags on the market today is the Long Term Capital situation. Also the lack of proper regulatory systems helped the decline in emerging markets to get out of control. Again in both cases, a new set of derivatives and trading strategies have outrun regulatory systems. I imagine the banks are now carefully reviewing their hedge fund lending policies, and appropriate changes will be forthcoming. And there is a lot of discussion of how to build institutions like the SEC and Federal Reserve systems in emerging markets, as well as the appropriate level of regulation.
If we hadn't had in place the previous regulatory system developed to address earlier problems, we could very well have seen a crash this fall similar to 29/87. But we haven't seen a drop bigger than 10% in one day in the Dow or S&P. We haven't seen consecutive day drops add up to over 20% straight down. And I don't think we will. I think Cramer is wrong when he suggests that this more than remotely possible.
Just my opinion- in short, do your own research.
Paul |
