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1987 Market Crash: Why it Matters Now
Pinnacle Digest writes: The 1987 market crash is a day those who were invested or working within the markets will never forget. Known as Black Monday, it came about the way most one day crashes do, when everybody attempts to hit the exit door at once. The Dow lost 22% on that fateful day, but the days leading up to it were horrific indeed and reminiscent of some bad weeks of 2008. It began on the Wednesday when the Dow lost 95 points (then a record), Thursday it dropped another 58 points and Friday, yet another record was set, as the Dow dropped 108 points. Over the weekend leading up to the 22% drop, it seemed every investor came up with the same idea: Sell while my portfolio is still worth something.
Peter Schiff recalls the circumstances that nearly sent the stock market into cardiac arrest and points at a sky rocketing trade deficit over which President Reagan oversaw.
Schiff explains that in some ways the Crash was a technical phenomenon. As of August of 1987, stocks had surged 75% from January 1986, and 40% from January 1987. After such an upswing, it was inevitable that investors were on edge and prepared to take profits at any time. Schiff believes there is much more to the story and believes the Crash of 1987 to be a warning siren to us all.
From 1982 to 1986, the U.S. trade deficit had expanded 475% from $24 billion to $138 billion. Most economists blamed the trend on the dollar gains in the early 1980's, which had apparently made U.S. products uncompetitive.
Eerily similar to our current monetary policy, Schiff recalls that it was assumed a weakened dollar would solve the problem. In 1985 the leading western democracies and Japan announced the Plaza Accords to systematically push down the dollar against the Japanese yen and the Deutsche mark. This failed and despite the plunging dollar, the deficit expanded that year by another 10% to $152 billion.
It was not just trade deficits, but Federal deficits as well that rose 199% from 1980 ($74 billion) to 1986 ($221 billion). Although the deficit came down to $150 billion in 1987, many were frustrated that it remained stubbornly high by historic standards. Does this sound familiar?
Schiff recalls that as early as August of 1987, concern over the twin deficits, which together accounted for 6.4% of the nation's $4.76 trillion GDP became critical.
When looking back at those events from the current perspective, it almost seems comical. Government deficits now approach $1.5 trillion annually and annual trade deficits exceed $500 billion. Schiff reminds investors that today's twin deficits now add up to more than 13% of current GDP (twice the level of 1987).
Schiff’s main message is this; when America's creditors wake up, particularly those foreign governments now shouldering the lion's share of the burden, concerns over our twin deficits will return with a vengeance.
Schiff believes at this point, interest rates will surge and the dollar will fall. If this were 1987 it might not be such a big deal, but today the U.S. economy is not nearly as well equipped (as in 1987) to withstand the stresses. The proverbial can has been kicked too far down the dusty debt road. With that said, Schiff believes Bernanke and the Federal Reserve would never allow another one day drop as significant as what was witnessed on Black Monday. He believes that the next Black Monday is more likely to occur in the currency and/or bond markets, with safe haven flows moving into gold not treasuries.
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