What Crash? Greenspan’s ‘Black Monday’ Blooper

Here’s a brief story you can use to amaze your friends and add a light touch to today’s anniversary of the October 19th market crash in 1987.

According to Washington Post ace journalist Bob Woodward’s book Maestro, on Black Monday then Federal Reserve chief Alan Greenspan was traveling to Dallas on Fed business.

The market was dropping when Greenspan boarded his flight, which did not have any phones on it, so upon deplaning hours later he “immediately inquired about the market.” According to Woodward, Greenspan interpreted the response, “down five oh eight” to mean the market had recovered from its early losses, losing only about five points.

Woodward details the conversation as follows, based on interviews with one or more of the “three primary knowledgeable sources” he used in writing this section of the book. Note his careful use of quotation marks, indicating some of Greenspan’s statements were played back to Woodward verbatim, while some of the conversation’s substance was simply recalled for him.

"It was down five oh eight,” replied Jim Stull, a senior Vice President at the Dallas Fed who had come to meet him. “Wow! What a terrific rally.” Greenspan said. The market was down only 5.08 points. Whew!

And so it happened that before donning his first Fed Superman cape, The Chairman needed to adjust his decimal point.

Woodward is, of course, an investigative journalist and author known for his astounding inside sources, from the Watergate “Deep Throat” that helped bring down the Nixon administration to the stunning details somehow extracted from deep within the Bush Iraq War councils.

Nevertheless, to satisfy my own curiosity I ran several searches on Google web and Google news to see whether I could find any disputes, retractions or corrections related to Woodward’s account of this Black Monday blooper. I found none.

Readers who want to see Woodward’s (and Greenspan’s) own words for themselves can follow the Amazon link below, click ‘search inside this book’ and search for the words: come to meet. Then place your cursor over the search results for page 36.

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References and Links

Maestro: Greenspan's Fed and the American Boom, Bob Woodward, p36, 236. (Simon & Schuster: 2000).

Seeking Alpha, “Stocks That Raise Dividends Outperform,” September 23, 2009.

Disclosure: Long a number of stocks with rising dividends.

Comments

[Albertarocks:]

Why do I have the eeriest sense that the same conversation is going to play out one more time - different actors? The missing ingredient that causes me a headache is that I can't see a catalyst that would set it off. Nonetheless, such a magnificent rally with no pullback to speak of is probably just setting the table for something nobody is expecting. In any scenario I can think of, gold seems to make me feel better for some strange reason. Anybody else concerned, or is it just me?

Oct 19 08:25 PM

[untrusting ...:]

The catalyst that would set off the next crash are the reverse of the ones that are causing the run-up:
1) dollar falling like a rock - catalyst: foreign countries get sick of competing with their appreciating currencies and start intervening to force a rise in the dollar.
2) ultra low interest rates - catalyst: clearly the Fed will do nothing for quite awhile, unless they are forced to. They might be forced to if the bond market goes on strike and forces interest rates up or refuses to buy more US debt.
3) massive Fed liquidity - catalyst:not much can stop the Fed from printing more money or QE., thus the asset inflation in stocks, gold, commodities, etc. But if consumer price inflation really starts to take off, which it just might via higher import prices, then Fed will have to deal with liquidity and interest rates. Also if Oil happens to get ramped up much more and say gasoline goes over say $3/gallon then the US consumer might cut back even more and become the catalyst to restart fear in the markets.
4) Trading domination - since a few prop desks (GS, JPM, etc) and the HFT's are dominating trading (50-70% of volume) and are steadily ramping the market up, at some point it becomes a lot more profitable for them to sell and take large short postions. When they do that obviously the market will crash again and probably pretty quickly at that.

Of course there are outlier events that could also start another crash such as another 9/11 type event, or something like a taxpayer revolt, or something like a nuclear event between Pakistan/India, or any other "black swan type deal", like maybe a hugh overnight devaluation in the dollar.

Thus since neither fundamentals nor any other economic or market metrics make any diffence in this type of market, it seems that one of the market drivers (as above) that is causing the run-up will have to reverse. They will, but the question is when?


On Oct 19 08:25 PM Albertarocks wrote:

> Why do I have the eeriest sense that the same conversation is going
> to play out one more time - different actors? The missing ingredient
> that causes me a headache is that I can't see a catalyst that would
> set it off. Nonetheless, such a magnificent rally with no pullback
> to speak of is probably just setting the table for something nobody
> is expecting. In any scenario I can think of, gold seems to make
> me feel better for some strange reason. Anybody else concerned, or
> is it just me?

Oct 19 10:49 PM

[Albertarocks:]

On Oct 19 10:49 PM untrusting investor wrote:

> The catalyst that would set off the next crash are the reverse of
> the ones that are causing the run-up:
> 1) dollar falling like a rock ..........<

Yeah, I agree with you on all counts. Those are the catalysts that one would normally think would set this thing off. But since it appears the FED just isn't going to act in any way that makes sense at all, I'm kind of fearing your other scenarios (shown below). That's kind of what I'm getting at. Since it appears to me that the FED is just going to let the dollar fall to zero and the markets rise to infinity, I'm waiting for some sort of hellish shoe to fall. I could see another horrific event occur that would coincidentally serve as a wonderful distraction from this hellish mess.

> Of course there are outlier events that could also start another
> crash such as another 9/11 type event, or something like a taxpayer
> revolt, or something like a nuclear event between Pakistan/India,
> or any other "black swan type deal", like maybe a hugh overnight
> devaluation in the dollar.<

> Thus since neither fundamentals nor any other economic or market
> metrics make any difference in this type of market, it seems that one
> of the market drivers (as above) that is causing the run-up will
> have to reverse. They will, but the question is when?

You're absolutely right. When? Great question! Just stay near the exits my friend.

Oct 20 01:30 AM

[DavyJ:]

Greenspan records the same conversation on page 105 of his book "The Age of Turbulence"

Oct 20 01:08 PM

[Low Sweat I...:]

Thank you for your comments and discussion.

I read Mandelbrot’s (pre-Black Swan) theories that the probability of gigantic market dislocation is much higher than commonly supposed because that probability is best described by the obscure mathematics of ‘fractals’ (used in super-advanced geometry), while most of life is viewed through ‘normally distributed’ bell curves. (URL for Scientific American’s Lehman-related article below.)

So buyer beware, capital is always at risk.

But I hadn’t read Greenspan’s 2007 book, with his own telling of ‘down five oh eight.’ Thanks for the heads-up.

www.scientificamerican...

Oct 20 02:29 PM

[Albertarocks:]

On Oct 20 02:29 PM Low Sweat Investing wrote:

> I read Mandelbrot’s (pre-Black Swan) theories that the probability of gigantic market dislocation is much higher than commonly supposed because that probability is best described by the obscure mathematics of ‘fractals’ (used in super-advanced geometry), while most of life is viewed through ‘normally distributed’ bell curves.<

What??? What is a good lookin' dog like you with awesome sunglasses doing reading Mandelbrot? That's very hefty stuff. Good for you though, because Elliott Wave theory and Mandelbrot go hand in hand, and although it's not an exact science, there is definitely something to it.

>So buyer beware, capital is always at risk.<

Excellent advice at all times. CRITICAL advise at this point in time.

Oct 20 02:40 PM

[Swashbuckler:]

A terrific insider account of the October 19th 1987 stock market crash is Tim Metz' book "Black Monday".

Oct 20 06:06 PM