Is the october crash a taboo ?

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Is the october crash a taboo ?

Post by AndrewNg »

Hi folks,
Take a quick read on the following :

Not sure if it is healthy to read too much financial news as it can lead to analysis paralysis. It seems like there is a pattern where articles shouting about market crash has agenda on encouraging people to buy gold and silver. After a while, i myself gets a bit pessimistic about the stock market after reading news that suggest economy slowing down. On the other hand, QE3 brings a lot of optimism to investor and there is speculation that money is flowing into Singapore private property market.

Putting Dennis question to practice :

1) What if i am wrong, will i still be financially ok ?
This is easy answer but psychologically challenging because hard earned money set aside for opportunity fund is still hard earned money even it we are prepared to lose all of it.

2) Upside is twice of downside ?
Most of my investment is in Reits and some property related stock (about 40% of my opportunity money). On top of 30% discount to NAV and healthy gearing, I entered based on TA where upside is twice of downside. Now overall position is still healthy but upside no longer twice of downside. I will still hold on to see any interesting event unfolding in the future two to three months. Anyone have any viewpoint about property in Singapore ?

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Re: Is the october crash a taboo ?

Post by candy_chia »

Everyone should prepare for the worst scenario, by not utilising all our bullets! Personally, I only invest 25% of my cash in Spore shares, so will not be affected dramatically.

Wall Street Crash of 1929

The Wall Street Crash of 1929, also known as the Great Crash and the Stock Market Crash of 1929, began in late October 1929 and was the most devastating stock market crash in the history of the United States when taking into consideration the full extent and duration of its fallout.

~~ The market had been on a six-year run that saw the Dow Jones Industrial Average increase in value fivefold, peaking at 381.17 on September 3, 1929

~~~ Shortly before the crash, economist Irving Fisher famously proclaimed, "Stock prices have reached what looks like a permanently high plateau."

~~~~ The optimism and financial gains of the great bull market were shaken on "Black Thursday", October 24, 1929, when share prices on the New York Stock Exchange (NYSE) abruptly fell.

The crash signaled the beginning of the 10-year Great Depression that affected all Western industrialized countries and did not end in the United States until the onset of American mobilization for World War II at the end of 1941.

Anyone who bought stocks in mid-1929 and held onto them saw most of his or her adult life pass by before getting back to even.—Richard M. Salsman

List of stock market crashes and bear markets ... et_crashes
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Re: Is the october crash a taboo ?

Post by candy_chia »

Should not throw caution to wind as "Nothing is really new as HISTORY REPEATS ITSELF in one way or another. like Jim Rogers mentioned in his book, A Gift to My Children.
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Warren Buffett's skeptical view on Gold stated in the 2011 Berkshire Annual Report,
"Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices.

In these bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market, and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling.

But bubbles blown large enough INEVITABLY POP."

* Warren Buffett mentioned that Gold belongs to non-productive asset that will NEVER PRODUCE ANYTHING, but that are purchased in the buyer’s HOPE that Someone else - who also knows that the assets will be Forever Unproductive – will Pay More for them in the future.

The World Tomorrow and How Jim Rogers Sees It ... ory#p25213

The Dutch Tulip Mania (or “Tulipomania”)

Could a mere tulip bulb be worth $76,000? It is if people are willing to pay for it. It may sound preposterous, but this is exactly what happened during the Dutch Tulip Mania or Tulipomania of the 1630′s.
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How the Tulip Mania Began

Initially, only true connoisseurs bought tulip bulbs, but the rapidly rising price quickly attracted speculators looking to profit. It didn’t take long before tulip bulbs were traded on local market exchanges, which were similar to modern stock exchanges. By 1634, tulip mania had spread to the Dutch middle classes and soon practically everybody was trading tulip bulbs, looking to make a quick fortune. The majority of tulip bulb buyers had no intention of planting these bulbs – the name of the game was to buy low and sell high, just like in any other financial market.

The entire nation was caught in a sweeping mania and some people even traded in their land, livestock, farms and life savings to acquire a single tulip bulb.

Dutch Tulip Mania Chart

At the peak of the mania, the price of tulip bulbs went up twenty-fold in just one month.To put that into perspective, a person who had invested $1,000 in tulip bulbs would have seen their investment balloon to $20,000.

With gains such as these, it is not hard to understand the mad rush to buy tulip bulbs at any cost. Tulip bulb mania affected the public psyche to an extreme.

One drunk man in a bar started peeling and eating what he thought was an onion, while it was actually the bar owner’s tulip bulb on display. The infuriated bar owner had this man jailed for many months.

All common sense and logic was thrown to the wind

and practically scoffed at – this is exemplified by how many useful items it cost to buy one single tulip bulb:

• four tons of wheat, • eight tons of rye, • one bed, • four oxen, • eight pigs, • 12 sheep, • one suit of clothes, • two casks of wine, • four tons of beer, • two tons of butter, • 1,000 pounds of cheese, • one silver drinking cup.

The modern day value of these items is over $40,000.

By 1636, tulips were trading on the Amsterdam Stock Exchange as well as on exchanges in Rotterdam, Harlem, Levytown, Horne and many others in other nearby European countries.

These exchanges started to offer option contracts, which allowed speculators to trade in the tulip bulb market for a fraction of the price of a real tulip bulb.

Despite how impressive that sounds, a buyer of tulip bulb options would have seen their investment of $1,000 balloon to an incredible $100,000. Unfortunately, leverage is a double-edged sword – if tulip bulb prices moved lower by even a small amount, the option buyer’s investment could have been completely lost.

An even larger adverse move in tulip prices could have caused traders to lose more than their initial investment. Despite these obvious risks, Dutch traders aggresively speculated in tulip bulb options due to the common belief that the tulip market was immune to falling and that it would “always go up”.

How the Tulip Mania Ended

After some time, the Dutch government started to develop regulations to help control the tulip mania. It was at this point that a few informed speculators started to liquidate their tulips bulbs and contracts to lock-in their profits. In addition, more tulip bulbs were added to the supply due to increasingly large tulip bulb harvests. Tulip Mania Image - Tulip BulbSuddenly, tulip bulbs weren’t quite as rare as they were before. Tulip prices began to ease, gently at first, and then started to plummet at a much faster rate than prices rose. Suddenly, the market experienced a widespread panic as traders rapidly began to realize that tulips were not worth the prices people were paying for them.

In less than 6 weeks, tulip prices crashed by over 90%, causing vast fortunes to be lost.

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As tulip bulb prices crashed, wealthy tulip traders became paupers virtually overnight. Many tulip bulb option traders became bankrupt after they lost far more than their initial investments.

The Dutch government avoided intervening in the tulip bulb crash and only advised tulip speculators to form a council to attempt to stabilize prices and bolster public confidence. Every one of these plans failed miserably as tulip prices plummeted even lower than before.

Eventually, Amsterdam’s assembled deputies nullified all of the contracts purchased at the height of the tulip mania and city’s supreme judges declared all tulip speculation to be a form of gambling and refused to honor these contracts. As a result, payments on tulip bulb contracts were no longer enforced by any of Holland’s courts, which caused the tulip bulb market to crash even harder.

The tulip bulb crash threw the Dutch economy into a mild economic depression that lasted for many years.[/quote]
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Re: Is the october crash a taboo ?

Post by randwick »

Black Monday Echoes With Computers Failing to Restore Confidence

By Nina Mehta, Rita Nazareth and Whitney Kisling - Oct 18, 2012

A quarter century after the worst one-day stock crash in history, measures to prevent a repeat are failing to keep investors from losing confidence in the market.

The 23 percent plunge in the Dow Jones Industrial Average (INDU) on Oct. 19, 1987, came amid signs of a slowing economy, the threat of higher taxes and concern among individuals that trading was rigged for insiders. Today’s investors have pulled $440 billion from U.S. equity mutual funds since 2008 and sent trading to the lowest levels in at least four years, retrenching after the worst financial crisis since the Great Depression and the May 2010 stock crash, data compiled by Bloomberg and the Investment Company Institute show.

While Procter & Gamble Co. (PG) and McDonald’s Corp. are up more than 800 percent since 1987, protections adopted after the crash couldn’t stop unharnessed computer trading from erasing almost $900 billion of value in less than 20 minutes on May 6, 2010, based on data compiled by Bloomberg. E.E. “Buzzy” Geduld, 69, who oversaw about 60 equity traders 25 years ago at Herzog, Heine & Geduld Inc. and now runs investment firm Cougar Trading LLC, says crashes happen when investors become convinced they’ve lost control.

“In 1987 everybody tried to go to the exit at the same time, but the exit door wasn’t big enough,” Geduld said in a telephone interview. “You had literally a panic. Fast forward to 2012. The volumes we can handle are gigantic, but the exit door hasn’t changed in size.”

Abandoning Stocks

Individuals are abandoning stocks even after U.S. Federal Reserve Chairman Ben S. Bernanke held interest rates close to zero for a fourth year, valuations for the Dow remain 23 percent below the level at the market peak in October 2007, and exchanges installed safeguards following the so-called flash crash in 2010. U.S. stocks are in the 44th month of a bull market that has restored $9 trillion in share value, data compiled by Bloomberg show.

Average daily volume for U.S. equities was 6 billion shares in the third quarter, the lowest level since at least 2008 and about half the 10.9 billion average in the first three months of 2009. The total has decreased for 12 of the last 13 quarters as investors pulled money from American stock mutual funds for a record fifth year, according to data compiled by Bloomberg and Washington-based ICI.

The retreat from equities has been fueled by memories of 2008, when the Dow slumped 34 percent during the worst economic contraction in seven decades. Europe’s struggle to contain debt turmoil, which pushed daily swings in the Standard & Poor’s 500 Index to twice the five-decade average last year, and mishaps such as Knight Capital Group Inc. (KCG)’s trading malfunction on Aug. 1 also hurt investor confidence.

‘Scares People’

“Today when there’s volatility, it scares people to death,” Timothy Ghriskey, 57, the chief investment officer at Solaris Group LLC, which manages about $2 billion in Bedford Hills, New York, said in a phone interview. “What it has taught me is that there’s no such thing as a free lunch. You can theoretically protect yourself on the downside, but when things come unhinged, nothing’s going to protect you.”

Stocks crashed in 1987 two months after the end of a five- year bull market in which the Dow average tripled. The 30-stock gauge was up 37 percent through the first nine months of the year before losing 9.5 percent in the week ended Oct. 16. The decline came amid concern that 10-year bond rates, then at about 10 percent, would increase and speculation that Congress planned to kill tax benefits for leveraged buyouts.

Black Monday

On Black Monday, Japan’s Nikkei 225 Stock Average (NKY) fell 2.4 percent. By midday, stocks in London were down 10 percent. In New York, 11 of the 30 Dow components didn’t open in the first hour of trading. The Dow went on to fall 508 points, while the S&P 500 tumbled to 224 from 282.

In 1987 panic spread on Wall Street by phone and ticker tape. About $1 trillion in stock-market value was erased in four days, according to a report by a task force led by Treasury Secretary Nicholas Brady in January 1988. It took more than a year to restore it, compared with a week following the retreat on May 6, 2010.

Mike Earlywine, 47, a hedge-fund trader at Ecofin Ltd. whose first job was as a clerk at Salomon Brothers Inc. in New York, witnessed the magnitude of the 1987 plunge on the streets of New York’s financial district.

“We walked out to the exchange and literally people were spilling out,” Earlywine said. “You’re standing there in the street on the sidewalk and people were coming out of the exits and falling over, and guys were literally weeping into guys’ shoulders saying, ‘It’s gone, it’s all gone.’ One guy with tears streaming down his face is trying to comfort the other who’s also got tears on his face.”

Closing Down

The onslaught of selling almost capsized U.S. markets on Oct. 20 and led regulators to eventually adopt coordinated halts across stocks and futures markets to prevent a recurrence, according to David Ruder, chairman of the Securities and Exchange Commission in 1987 and now a professor at Northwestern University’s School of Law in Chicago.

“The most frightening part of that whole week was the thought that the NYSE might have to close because it did not have sufficient demand,” Ruder, a member of the advisory committee formed after the flash crash to make recommendations to the Commodity Futures Trading Commission and SEC, said by phone. “The theory of the circuit breakers was that if there were predetermined stopping points for the market then the market participants would know this wasn’t a panic closing.”

The challenge of handling about 600 million shares a day on Oct. 19 and Oct. 20, more than three times the New York Stock Exchange’s daily average earlier that year, led securities firms to automate trade processing and increase their capacity for volume.

New Rules

The NYSE also imposed stiffer capital requirements for specialists after the 1987 crash and restricted use of a system that delivered trade requests directly to specialists to limit disruption from index arbitrage in volatile markets. Nasdaq Stock Market mandated that its market makers quote on the Small Order Execution System after individual investors couldn’t get through to brokers who didn’t answer phones on Black Monday.

The NYSE and futures operator Chicago Mercantile Exchange approved separate curbs on intraday price moves in 1988. The focus was on mechanisms that would slow or briefly halt their respective market when trading became disruptive, Leo Melamed, the CME’s former chairman, said in a phone interview. They were later made uniform across equity-index futures and securities.

Circuit Breakers

The plunge in May 2010 didn’t trigger those circuit breakers. The Dow average fell 9.2 percent, most of it between 2:30 p.m. and 3 p.m., after aggressive selling of so-called E- mini S&P 500 futures by a mutual fund company caused a flight of liquidity. As equity market makers and other providers of bids and offers withdrew, trades in individual stocks took place at prices including fractions of 1 cent and $99,999.99.

While the flash crash wasn’t caused by high-frequency traders, their habit of buying and selling rapidly led to the sudden removal of liquidity, kicking off a related plunge in stocks, a report by the SEC and CFTC said on Sept. 30, 2010.

Curbs instituted after that crash, which halt stocks when they move 10 percent in five minutes, will be updated in February when the broad-market triggers adopted following the 1987 rout are overhauled. Amid increased automation, exchanges and brokers are also debating the benefits of so-called kill switches that would shut off a firm’s trading if it exceeds a certain level of activity or breaches pre-set parameters.

One Market

Both plunges accelerated as selling pressure in the futures market seeped into stocks. “From an economic viewpoint, what have been traditionally seen as separate markets -- the markets for stocks, stock index futures, and stock options -- are in fact one market,” the Brady Report said. “To a large extent, the problems of mid-October can be traced to the failure of these market segments to act as one.”

As equities tumbled 25 years ago, Wall Street tickers couldn’t keep up and back offices worked into the night for months to cope with record volume on the New York Stock Exchange and Nasdaq.

Within the exchange there was scant information about what was causing the selloff, according to Kenneth Polcari, a managing director in ICAP PLC’s equities unit. Traders at the NYSE could only see scrolling headlines, not full stories, he said in a phone interview.

‘Sell, Sell’

“Customers were calling and entering orders an hour earlier than usual,” said Polcari, who worked at William Latham & Co. in 1987. “You could feel from the minute you picked up the phone that this would be a different kind of day. You could tell it from their voices, you could see it in their orders. Instead of 10,000 shares in GE or Coke or Johnson & Johnson, it was, ’Sell 150,000 -- sell, sell, sell.’”

Some clerical people at Salomon Brothers didn’t go home for days, according to James Leman, who oversaw a trading floor support staff of more than 100 for equities and fixed income in the firm’s One New York Plaza headquarters. People slept on cots in their offices or got hotel rooms so they could process the surge in trade tickets and resolve problems with transactions that had missing information, no time stamps or incorrect terms, he said.

“The records were manual,” said Leman, managing director at consulting firm Westwater Corp. in New York. “We had paper tickets and paper floor reports. There was no PC, no e-mail. We were living on computer runs coming out of a mainframe computer.”

Automated Exchange

The NYSE, predominantly a market run by and for humans in 1987, is now an automated exchange with so-called designated market makers overseeing trading in their assigned stocks. There are four main market makers on the exchange’s trading floor, including Getco LLC, one of the largest automated trading firms, compared to more than 50 specialists at the time of the crash.

Nasdaq has since shifted from a phone-based dealer market to an exchange that matches buy and sell orders electronically. Both NYSE Euronext (NYX) and Nasdaq OMX Group Inc. (NDAQ) are public companies that each own three U.S. securities exchanges and have branched beyond equities into options, futures and technology services. CME Group Inc. (CME) is the world’s largest exchange company by market value.

Regulators should require brokers to be able to handle a certain multiple of trading, perhaps 10 times the normal volume, to limit disruptions that could worsen a panic, according to Geduld of Cougar Trading. They should also mandate that high- frequency firms have sufficient capital to complete transactions during the day if the market closes, he said. Firms need the “capacity and financial wherewithal to withstand a crazy day,” Geduld said.

Flash Crash

More than 19 billion shares traded in the 2010 flash crash on dozens of different venues, including platforms known as dark pools and among brokers matching orders away from exchanges. The number of market makers on the NYSE had fallen to five from 25 since 2000 as the business of providing liquidity became dominated by hundreds of automated traders across markets with less stringent rules about when they must buy and sell.

Both routs proved to be buying opportunities. Within 10 years of the 1987 crash the Dow average had quadrupled and investors were enjoying the biggest bull market ever. After falling 999 points on May 6, 2010, the gauge ended the day down 348. The Dow rose 6.5 percent through the end of the year.

“Twenty-five years later we’re still talking about the impact of technology on the markets and what kinds of solutions could be created to try to soften the movements,” Ken Leibler, president of the American Stock Exchange in 1987, now a consultant, said in a phone interview.

“With high-frequency trading, there are tremendous amounts of trading done, but now it’s done in thousandths of a second,” he said. “The problem is similar today to what it was back then. The solutions are also likely to be ways to halt trading.”

To contact the reporters on this story: Nina Mehta in New York at; Rita Nazareth in New York at; Whitney Kisling in New York at

To contact the editor responsible for this story: Lynn Thomasson at
Be happy, stay healthy & grow your savings wisely.
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Re: Is the october crash a taboo ?

Post by candy_chia »

25 Years Later: Lessons From The Crash Of '87
October 19, 2012

Friday, October 19th, is the 25th anniversary of the stock market crash of 1987. I was a mere three weeks into my new job as research director for a group of market makers at the Chicago Board Options Exchange. It was a dramatic experience. Mrs. OldProf was visiting both to celebrate our anniversary and to look for an apartment in the city. We met friends, hit some shows, and dined at Al Capone's favorite restaurant. Great fun on Friday.

On Monday, things looked a lot different. We decided to put the move from Wisconsin on hold for a little longer, not signing any leases just yet!

Fortunes were made and lost that day, sometimes the result of what seemed like very small decisions a few days earlier. Like everyone else who lived through those days, I have quite a few stories. While those are interesting, I want to focus on the lessons that might be relevant for today's investors.
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Causes of the Crash

In October of 1987, there was an explosive mixture of

~ an overvalued stock market,
~~ rampant and ill-advised program trading, and
~~~ extreme over-confidence on the part of many investors.

A growing trade deficit and falling dollar caused many to believe that higher interest rates were necessary.

The spark seemed to occur on Friday, October 16th, 1987, with the effects rippling around the world over the weekend. Mutual funds had large sell orders on the morning of the 19th, necessary to meet redemptions

I am sure that the paragraph above will sound to some just like a description of current conditions. I wrote it with that in mind. I suspect that you will see more than one article pursuing that theme. It is true that some problems seem to persist for decades, or to re-emerge in different forms. The exact causes of the Crash are still being debated. The combination of my academic curiosity and personal stake inspired me to study the subject very carefully. Here is a brief summary of my conclusions.


The stock market was wildly overvalued, even by the most bullish methods.

To avoid getting bogged down in the question of the best valuation measure, let's pick one and use it both for 1987 and for today. Those who are most concerned about current market valuation are very critical of using 12-month forward earnings and taking account of interest rates -- variously called the "Fed Model" or the equity risk premium. Today's forward earnings on the S&P 500 are about $108, so the earnings yield is about 7.6% compared to a ten-year Treasury note yield of 1.8% or an ERP of 5.6%.

Right before the Crash, the forward earnings were $22.45 for a forward yield of about 7.0%. The difference is that the ten-year yield was 9.42%, so the ERP was not a premium at all, but a negative 2.42%. Even if you aggressively believed that the earnings yield should be the same as the Treasury note, stocks were overvalued by 33%. The decline on the day of the crash was 22%. Inflation was running in the 4.5% range, but was moving significantly higher.

The valuation situation is not similar. If you think the market is overvalued now, it was awesomely overvalued then! (And please don't substitute what you think the CPI or interest rates should be. It is better to evaluate data than opinion).

Trading and Market Rules

In 1987, many big fund managers embraced a concept called "portfolio insurance." Simply stated, the idea was that you should hold a very aggressive allocation in stocks -- more than your normal risk tolerance would suggest. If the market started lower, you would then (and only then) sell short futures on the broad stock market. These short futures would hedge your position. If the market declined further, you would sell more futures. You did not want to hedge in advance, since it would be a drag on your performance.

The result was that the instant decline in stocks triggered the sale of index futures. The futures, which responded more quickly than the cash market, gapped lower. Arbitrageurs attempted to buy futures and sell stocks to profit from the spread. This pushed stocks even lower, causing another leg down in this deadly spiral.

While we still have program trading, the highly-publicized events of the last few years do not rival 1987 either in breadth or magnitude. The portfolio insurance concept has been abandoned. Various circuit breakers limit the possibility of a cascade of futures and stock trading. Electronic markets have improved liquidity.

In 1987, the Nasdaq market was based on telephone calls, and the market makers were not even answering!

Options traders settled up at the end of the day with "outtrades" checked in the morning. In 1987, some traders dropped their cards on the floor and left the building. Some, who had escalated risks to their backers during the day, simply headed for O'Hare, spawning the term "airport play." Now the trades are electronically transmitted throughout the day, so backers and clearing firms always know what is happening.

Economic Situation

Most importantly, we should note that the 1987 crash was not associated with a recession, either before or after. Some have suggested that rhetoric about the weakening dollar was the proximate cause. The easiest way to evaluate this is by looking at a chart of the trade-weighted dollar. Look at the long-term trend as well as the specific time in 1987 and now.

The 1987 crash was not an economic phenomenon. We do not currently face similar risks.

The Real Lessons

1) A better understanding of risk and reward.

Before the crash, the individual investor was a happy seller of naked puts.

The "crash" issue of Barron's had classified ads for trading systems that showed you how to print money. People sold puts based not on how much risk they could afford, but how much money they wanted to make.

Options clearing firms evaluated positions based upon a three-standard deviation move -- a real extreme. This was a big lesson in the fat tails of the stock return distribution. The aftermath was the greatest opportunity in history to sell put premium, something that I pointed out to my new boss. The rules had changed! Even professional traders were on a short leash for put selling.

2) The importance of margin.

Those who had accounts on margin of any sort suffered the greatest cost.
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Positions were ruthlessly liquidated to satisfy the margin call. This included futures positions and option contracts that were trading far from anything resembling fair value.

Taking on EXCESSIVE MARGIN RISK proved to be a big mistake.

And the Most Important?

Simply put, the crash destroyed objective analysis for years.

This most important lesson of the Crash is not commonly understood. For the next few years, any stock system, whether based on fundamentals, technicals, or a computer program, had an acid test:

Did it call the crash?

We saw dozens of pitches. No one even bothered with a method that did not include a successful "crash call." The event was so important, and had such a great impact on results, that you could not make a persuasive case for a system that did not have a "tweak" that would have predicted the crash.

Similarly, analysts who had given warnings were celebrated as heroes. This turned out to be fifteen minutes of fame for some.

This final lesson is probably the most important, and the most difficult to understand.

Excessive emphasis on the "crash call" warped the thinking of portfolio managers and individual investors alike.
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The life-changing events from 25 years ago punished some of the smartest traders and rewarded some of the, ahem, least skilled who happened to have the right position for the wrong reason.

Those who took the wrong lessons from this got to double down in lost opportunity. They followed the wrong gurus and the wrong systems for many years thereafter. They never recovered.

2008 is an echo of 1987. Another generation of investors may be lost.

A Final Word

Can stocks decline from current levels? Of course, and for various reasons. A 2008-style decline came for reasons much different from 1987. We now know more about those risks as well, something that I track every week.

Markets can decline, but it will not be from a scenario like that of 1987 ... _wsb&ifp=0
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Re: Is the october crash a taboo ?

Post by candy_chia »

'Crash Alert' Flag Still Flying

By Bill Bonner, Aug 30 2013

We hoisted our "Crash Alert" flag last week. So far, no crash. The US stock market came back a bit on Wednesday, with a 48 point gain on the Dow. Gold was flat.

The flag is not a prediction. It's merely a warning - like the flag at the beach that warns of a dangerous riptide.


You can still go in the water. But watch out. You could get washed out to sea.

Syria? Tapering? The return of the debt-ceiling debate? Anemic real economic growth? A preponderance of negative earnings guidance? Rising Treasury yields? A panic in the emerging markets?

And here's the Financial Times warning that central bankers may not be willing to protect investors from every danger:

The world is doomed to an endless cycle of bubble, financial crisis and currency collapse. Get used to it. At least, that is what the world's central bankers - who gathered in all their wonky majesty last week for the Federal Reserve Bank of Kansas City's annual conference in Jackson Hole, Wyoming - seem to expect.

Despite the success of unconventional monetary policy and recent big upgrades to financial regulation, we still have no way to tackle imbalances in the global economy.

A New Kind of Financial System?

Dear readers are urged not to pay too much attention to the FT. Its news is solid. But its editorials are mush. Robin Harding continues:

Five years ago, after the collapse of Lehman Brothers, there was appetite and momentum for a new kind of international financial system. That appetite is gone - but we desperately need to get it back.

What "new kind of international financial system" does he propose?

…boosting the IMF's resources and handing more voting power to emerging markets so they can rely on it in time of need…

A reliable backstop is impossible when the international system relies on a national currency - the US dollar - as its reserve asset. Only the Fed makes dollars. In a crisis, there are never enough of them - a shortage that will only get worse as the world economy grows relative to the US - even if the problem for emerging markets right now is too many of them.

The answer is what John Maynard Keynes proposed in the 1930s: an international reserve asset, rules for pricing national currencies against it, and penalties for countries that run a persistent surplus. After the financial crisis there was a flood of proposals along these lines from the UN, from the economist Joseph Stiglitz, and even from the governor of the People's Bank of China. None has gone anywhere.

The plan is to turn the IMF into a kind of super central bank ... with lots of "international reserve assets" that it can hand out to any country that seems to need them. Readers don't need to ask too many questions. We'll just put it into simple words. The world's money system would be based on paper money and managed by global bureaucrats. You see immediately that it is hopeless. A super bank run by super economists?

How long would it take for them to blow up the whole world's financial system?

But don't worry about it. The system will blow up anyway.

No paper-money system has ever survived a full credit cycle. Why not? Because paper money (a form of primitive, credit-backed money) is unlimited ... and undisciplined. That - and not a lack of international monetary reform - is why there are so many bubbles now. When interest rates are falling - often pushed by central banks to artificially low levels and held there for an extremely long time - credit expands and the burden of debt grows. That has been happening for the last three decades. And now, the entire economy depends on something that can't possibly continue. Debt can't grow forever.

As long as rates stay low, the system holds together.


But as the quantity of debt increases, the quality of it decreases. Debtors' balance sheets get weaker and weaker. Eventually, the credit markets change direction. Rates start going up again.

Then the weight of all - that debt comes crashing down like an avalanche. And when it gets started, there is no stopping it.


All you can do is make sure You're NOT in the Way. ... oogle_news
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