Silver is gaining ground to get back above $17.30. Gold is battling $1290 and poised to retake $1300 on this 30th anniversary of Black Monday…
The intra-day “bull flag” formed in silver:
Here’s a closer look at silver with good volume:
Which makes us wonder if this short-term bottom is in?
Here’s gold on the 3 minute chart:
And the dollar, which is struggling to maintain 93:
It is the anniversary of Black Monday:
And it appears it is indeed risk off:
And something is indeed spooking the markets. Though not exactly the President, the MSM narrative is wearing thin:
.@foxandfriends “Russia sent millions to Clinton Foundation”
— Donald J. Trump (@realDonaldTrump) October 19, 2017
Here’s Bloomberg featuring this (in)famous day 30 years ago highlighting statements of many famous investors of the time:
PETER BORISH, head of research at Tudor Investment Corp. and Paul Tudor Jones’s No. 2:
We were tracking exponential moves in the equity market. The main one was the equity move in the 1920s, and the market in 1987 looked almost identical. The week before Black Monday, the technical and fundamentals aligned, and so we thought Monday would be the day.
ALLAN ROGERS, head of government bond trading at Bankers Trust Co.:
In the first half of 1987, the bond and stock markets diverged for seven months. Bonds went straight down, equities straight up. These sorts of divergences always get my attention. In August and September, I persuaded management to cover all of our hedged short positions in sovereign fixed income, and we built up a long position in notes and bonds.
MICHAEL LEWIS, bond salesman at Salomon Brothers:
A week or two before Black Monday, Salomon announced job cuts. They chopped a few departments, including the municipal and money-market groups. It felt ill-considered and rushed. Nobody completely understood why. [Ed. note: Lewis is a Bloomberg View columnist.]
Nippon Tel, the Japanese telephone company, was going to do an IPO in mid-August. I thought that would pull money from other segments of the equity market. In early October there was another IPO, which I think was a very large British company. These IPOs were a big deal to me, because the main thing I pay attention to is changes in global money flow.
NASSIM NICHOLAS TALEB, FX options trader at First Boston who later wrote The Black Swan, a book about the impact of unpredictable events:
Currency options were very inexpensive during that period for some reason, especially OTM [out-of-the-money] options, so I had accumulated a few of these. I had accumulated a lot of OTM options in Treasuries and eurodollars, for no other reason than that they were cheaper than I had seen in a long time. [Ed. note: Eurodollars are U.S. dollars deposited in commercial banks outside the United States and futures tied to the interest rates paid on them are among the most-traded contracts in the world.]
ERIC ROSENFELD, vice president in the U.S. fixed-income arbitrage group at Salomon Brothers:
On Friday night, Oct. 16, the Dow was down 4 percent on the day and 10 percent on the week. I remember going to dinner with my wife, and the couple next to us were a young guy and gal out on a date. He was telling her how he was going to make a killing, because he’d put all of his money into the market on the close. And I’m thinking to myself, “I’m not so sure she should want to date this guy …”
That Monday morning was probably the greatest demonstration of trading skill that I have ever seen in my life. Even though we had this model saying Monday was the day, Paul was willing to add to the position.
We were in One New York Plaza still, and everything seemed off from the time I arrived. I wasn’t exactly working. I was based in London at the time, and they’d asked me to come to New York to give a talk at the Salomon Brothers training program. I had free run of the place, so I was almost like a reporter who was wandering around the firm watching and talking to people.
On Monday morning, I took advantage of a very brief rally to sell the equities that I had bought on Friday.
JIM LEITNER, Bankers Trust FX trader:
During the day, the noise level in the trading room got quite ferocious. The chairman of the bank, who at one point had been a trader, walked onto the trading floor and stood behind my chair, which was a first.
I remember walking from the 41st floor down to the 40th floor. The 41st floor was this cathedral of bonds, and then you walked down to 40 and were in this cramped, low-ceiled, dark place that was the equity department, with a lot of guys who were named Vinny and Tommy and Donny. They’d been around forever, and they had Brylcreem in their hair and big guts and they smoked too much and they were lovable. And they were all going through this visceral animal experience. People were screaming and going absolutely crazy in ways I’d never seen before. It was the first time in my career at Salomon Brothers where I was actually interested in standing beside the equity department and watching these people do their job.
EDWARD THORP, managing partner at Princeton Newport Partners:
We didn’t use Black-Scholes for option prices; we had our own model. And we didn’t model prices using a lognormal distribution—instead we had found a distribution that better fit the historical stock price data. We were trading off of those models. So even though I was surprised by the drop, I wasn’t nearly as shocked as most.
JIM CHANOS, founder and CIO of Kynikos Associates:
I had scheduled a marketing trip to Texas and flew from New York to Dallas on Monday morning. When the plane landed I called my brother, who was a stockbroker in Wisconsin. He mentioned a conflict with Iran in the Persian Gulf involving some oil platforms. “That’s making this whole thing worse,” he said.
We hadn’t been able to sell our long Treasury position or make markets because of the fire drill. So we came back up and I think by the end of the day, 3 o’clock or whatever, we finally sold our long bond position. That fire drill saved us a fortune.
In the afternoon, I went out and I bought a bunch of Japanese bonds, which were still yielding 6 percent. And I said, “If the world is really going to hell in a handbasket, interest rates will collapse and at some point I’ll be able to sell those bonds at a higher price.”
LEWIS: It was right around then that I was selling my book, which would become Liar’s Poker, and I was absolutely aware that this was literary material. I remember grabbing scraps of paper and writing down notes, so I had it if I needed it.
I remember talking to Mike Halem, the proprietary equity trader. I was urging him to do these basis trades. It was tough to do futures vs. stocks, because you couldn’t execute the trades simultaneously. So I was telling him to do futures vs. the most liquid stocks and not worry about the fact that he wasn’t doing exact arbitrage. I was talking to him about futures vs. IBM or futures vs. GE, and forget about anything else.
By the time I left the office in Newport Beach, Calif., for lunch with my wife, the market was off 7 percent. I remember noting that was about half the decline of the two largest previous ones—Oct. 28 and 29, 1929, which signaled the start of the Great Depression. I then got a call at the restaurant that the market was down 18 percent. My wife thought maybe I should go back to the office, but I stayed and finished my lunch. There was nothing I could do.
There was one big pension fund that had 10 pieces of $100 million sales that came in the last hour and that just kept pressure on the market, so it closed at the bottom.
I think that Paul’s greatest skill was realizing that people were going to drive to the place of most liquidity, and that was going to be fixed income.
I decided to get very long fixed income on the close on Black Monday, as I knew the Fed would react.
We were concerned about a lot of the counterparties and their liquidity, so the best place to be was in fixed-income futures, because if worse came to worst, we could always take delivery of the bonds.
I was so scared that I got $10,000 out of the bank, took it home, and stored it in the rafters. When I moved out, I forgot that I’d stashed the money. I think it’s still there.
I was feeling guilty about our success. I thought we were going into the Great Depression.
I had 1929 on my mind. Paul and I were concerned about our friends and people who were struggling that day.
That night, [Salomon Brothers Vice Chairman] John Meriwether and I had dinner at Il Mulino in Little Italy with Vinny Mattone, the head of repo at Bear Stearns. For us, a key element to these longer-term convergence trades is making sure that you can hold the trade until convergence. Our worry was that clients were getting so skittish that they would pull their repo lines. The outlook from Vinny was dismal. It reinforced that we had to rethink the portfolio.
I started calling my friends to see if they were OK. I couldn’t leave the apartment, because Hong Kong might call, so I was calling anyone to chat. My cousin called and said the police were outside. It turned out a guy had committed suicide at 72nd Street and First Avenue, so it hit close to home.
I went home and thought about what had happened. There was a huge difference between S&P futures, which were trading at 185 to 190, and the corresponding price of the S&P index, which was at 220. This difference was previously unheard of. Arbitrageurs usually kept it in line.
I had bought 100 bps out-of-the-money call options for a tick [1/32nd of a point] a month prior for a thrill. They had a few weeks to expiry. As the bond market exploded higher, my options started moving into the money. I ran over to the Treasury desk to sell some Treasuries to hedge my position, and in the time it took me to run over to the desk the market had rallied another point. That’s how fast the Treasury market was moving.
I had a huge delta in eurodollars. I remember vividly offering eurodollars at a price and selling them for much higher—it was like in Trading Places. We spent the day liquidating our positions and selling above our offers all morning. Currencies went wild and the USD collapsed.
I could use the Treasury basis—the relationship between cash and futures—to figure out where futures should be trading and, by extension, where options on futures should be priced. So I started trading futures options vs. cash, which the locals on the exchange couldn’t do. The spread was huge, and it was quite profitable.
Finally, Howard Baker [President Ronald Reagan’s chief of staff] called and said he’d just seen the president. And this is a direct quote, he said, “I’ve just been to see the president, and the president understands that you have to do what you have to do to protect your people. However, the president of the United States would very much prefer if the New York Stock Exchange could see its way clear to remain open.”
I think there was something that came out of either the Fed or Treasury that the New York Stock Exchange was not closing. And at that point, I think someone called somebody. My guess is it would have been one of the monetary people that would have done it; they would have known where to go. And the MMI started rallying, carrying everything along with it.
“What will you buy 100 at?” a trader from Drexel [Burnham Lambert] asked. “285,” I said. And the Drexel trader said, “You own them.” I swallowed hard; it trades 287, 288. A few minutes later he asks, “Will you buy another 50 at 285?” And I said, “Yes.”
On Tuesday, we were all watching, and it looked like the decline would continue—and then someone bought the MMI, the small index in Chicago, and that started to stabilize the whole market.
These trades with me were really whisper trades—in other words, he sold them to me knowing that I was the only buyer. He didn’t want to hold an auction because there would have been a mass panic. I ended up buying 150 contracts at 285.
The early part of Black Monday was probably due to portfolio insurance, but the second part of the day was due to fear.
Oct. 19, 1987 remains the biggest one-day stock market drop in history.
The need for dynamic trading from portfolio insurers exceeded the liquidity. The standby capital that usually comes in during these times was slow to come in. In that sense, circuit breakers do help. It allows the standby capital to assemble.
It makes everybody uncomfortable when something dramatic happens with prices, and no drama in the world could explain such movement. It makes the market seem absurd. And so that was the feeling. To me it was like, Corporate America is not worth whatever percent less today than yesterday.
People think that if stocks went down 20 percent in a day, it must be the end of the world. That is, they impute intelligence to the market—and that’s a mistake.
Black Monday’s 33 percent decline in S&P 500 futures taught newly baptized regulators what old-school commodity traders had known for a hundred years: Limits on trading of stock futures were obligatory. They learned the hard way that markets, left to their own devices, can and will break down into panic and chaos.
It was the first time we gave a lot of thought to counterparty risk. Had the Hong Kong Futures Exchange [which was closed for nearly a week and subsequently bailed out by the Chinese government] gone belly-up and those futures contracts not been honored, I probably would have been fired.
Afterward, Paul seconded me to the New York Fed to help with the Brady commission. To Paul’s credit, he put a lot of resources into getting data and computers. We’d be in there on weekends with screwdrivers taking out floppy drives and putting in hard drives. We hired summer interns to type data into spreadsheets, which only had 3,000 rows at the time. We provided all of our data to the Brady commission; Goldman didn’t have it, J.P. Morgan didn’t have it. The chapter on the market break mostly came from Tudor.
There wasn’t this global perspective that you see today with correlations being so high, and I think that’s what saved the marketplace that day. It wasn’t the circuit breakers that saved the day; it was that the markets were siloed. If that were to happen today, who knows what would happen.
If you look at Greenspan’s behavior during the Long-Term Capital Management crisis 10 years later, he moved quickly to provide liquidity to the system. So like every good trader, he learned from his prior mistakes. He thought, “We’re going to get out there, we’re going to get in front of it, and we’re going to provide liquidity to the system.”
If the Fed hadn’t stepped in on Tuesday morning, we would have a lot cleaner financial system today, but it would have been a complete bloodbath then.