Michael Lewis on the Crash of 1987 | Big Think
HTML-код
- Опубликовано: 15 сен 2024
- Michael Lewis on the Crash of 1987
New videos DAILY: bigth.ink/youtube
Join Big Think Edge for exclusive videos: bigth.ink/Edge
----------------------------------------------------------------------------------
Michael Lewis compares the 1980s and today.
----------------------------------------------------------------------------------
Michael Lewis:
Michael Lewis is a journalist and the best-selling author of Liar's Poker, The New New Thing, Moneyball: The Art of Winning an Unfair Game, and The Blind Side: Evolution of a Game. He writes for Portfolio and is a columnist for Slate.
----------------------------------------------------------------------------------
TRANSCRIPT:
Question: What lessons should we learn from the crash of ’87?
Lewis: The crash of ‘87 was interesting, really interesting, because it was a crash without consequence or without big consequences. Crashes, essentially, could be ignored in the end. And when you go back and you read the literature at that time, a lot of really smart people were saying, now, we have the depression. John Kenneth Galbraith was saying that this is the crash of ‘29 all over again and now comes the depression. And we just sort of assumed that if there’s a crash, then there’s the depression. And what happened there was a dramatic illustration of the disconnect that occurred between financial markets and the real economy. And the financial markets have this life of their own that maybe was and maybe wasn’t tied to whatever was going on in the real economy. Why that is? Because I think probably [it’s] a deep question. Part of it is just the size of the component of the financial markets that was pure casino is getting bigger and bigger and bigger as opposed to the part of the financial markets that’s engaged in allocating capital for real productive uses, real productive ends. But I think when you take away, what I took away from it at that time, I mean I was in the middle of it. I was actually sitting in the Salomon Brothers’ Equity Block Trading Department watching it happen when it happened. And I wrote about it, you know, I was working with Salomon Brothers. But, I think there are a couple of things that were sort of distinctive about it and worth noting. One is I think it’s the first case where the market collapses in part because tools have been created that the people were using and don’t fully understand, financial tools. And in this case, it’s portfolio insurance which is using… the basic idea is, you use these things that have been created in [IB] called financial futures, SMP futures to hedge yourself, and the way you do it is you sell it as the market goes down. And if you think about it, if you start selling it as the market goes down, you sell more and more as the market goes down. At some point, you’ve completely sold out your equity exposure. So in theory, at some point, you’ve put a cap on your losses by doing this. And a lot of people have bought into this idea. This is how you hedge, you hedge dynamically by selling futures. Well, that works if one person is doing it. If everybody is doing it, then what happens is the market goes down and everybody sells. So the market goes down some more and they sell even more, and a doomsday machine is created. So here was, I think, the first example of a new, effective financial technology having these consequences that hadn’t really been considered before. And after that, the reality of portfolio insurance was kind of doomed. I mean, the firm that created it basically went out of business. And so, but there was a specific lesson about portfolio insurance, but the general one about financial tools, well, that would replay itself over and over and over again in the next 20 years. I think the other thing that came out of that period, but this isn't so much lessons that we as a people learned, because I don’t think we as a people learned anything from it. But what the financial markets learned was that this sort of volatility, this sort of surface calamity is actually not a bad thing. It’s a huge opportunity that the more it moves, the more we can make if we know how to manage the volatility. Because what happened on the Salomon Brothers’ trading floor was quite interesting on that day and it’s slightly technical but I’m going to try to explain it. When the stock market collapses, the bond market goes up because people think we’re going to have a depression, so they going to have to lower the interest rates so bonds go up. The people who traded government bonds on the Salomon trading floor thought stock markets collapsing so let’s make a big bet. They bought…
Read the full transcript at bigthink.com/v...
I vividly remember the Crash of 1987. I was 21, a couple of months into my first job after college as a Bond Trading Assistant at an insurance company in Hartford, CT, asking myself why I hadn't majored in something nice and safe, like accounting.
This guy never fails to blow my mind
What I learned is that my stop loss orders were totally worthless.
Tell me more about the after market pump on april 16
I remember 1987 also. They blamed the crash on runaway computer trading. After 1987 the market installed so called breaker switches to halt all trading until the humans catch up with what their computers are doing.
always great to get Lewis' take on finance...especially Wall Street in the 80's.
I f**king love Michael Lewis 😅 He is a great communicator in every way 👍
JUST BUY THE DIP!
Soo...the most "sophisticated investors" in the world don't understand what they're doing? Ok, so ... they're all fucking fired.
Didn’t he describe insider trading in this video by the quant fund?
Has dude ever heard of, like, _the Competitive Equality Banking Act of 1987_ ("CEBA"; signed by Reagan into law on Aug. 10th), conveniently in place 2 months before the largest one-day percentage drop in US history.
No offense, I mean, apparently
...We don't have "crashes" after everything is *federally insured*. It's controlled ('rigged') demolitions. Hell, by 2015, there was hardly even very significant financial accounting anymore. Question: Why is a major law and strategic public policy of the United States government so unknown?
2020-03-12: DJIA is 23500, down 6500 points from its peak 3 weeks ago
Hey, I’m from the future!
No worries!
Just another Fed Put!
I wonder if today will be the same?
The US G5 said it was going to devalue its currency by 40% to have a weaker dollar and sell the debt to Japan... Politicians didn't think no one was going to sell the new US dollars... Nek minnit. Everyone ran for the exits at once. NO BID.
Michael is mistaken at the end about quantitative buying, as the U.S. government can never declare bankruptcy so it's a risk free arbitrage asset versus the 2008 risk assets.
+scottab140 Municipal governments can declare bankruptcy. Not in in all cases as we are learning with Detroit. So if we simply look at state, local and federal levels of government as corporations the debt obligations can be shifted from one level of government to another. While the U.S. federal government might not declare bankruptcy the liabilities can be shifted to other levels that could. That is assuming that at some point there isn't a new revolution and the current federal system isn't dissolved or replaced with something different. Would the new system assume the debts of the previous system? The United States wouldn't be the first sovereign nation to create a new union and ignore previous debt obligations or negotiate with creditors to pay back a much smaller amount. Assuming you can adjust interest rates through the federal reserve you can largely diminish the long term value of the debt repayments.
Manage the volatility? Jesus, this is a large casino.
What he says is so reminiscent of the VIX trade blowup in Feb 18
Interest rates are as low as they can go now.
right, 3 years later....
you were saying?
Annnd we're about to go negative rates lul
I feel it in my fingers
I feel it my toes.
Was that the Crash of '87?!?
He's got moneyballs.
ZERO warning on the yield curve as well (No inversion). Only time that ever happened outside of WWII.Yield curve at least inverted in 1929. There was some form of a warning.
Ya just watching videos on 1929 i find them a bit misleading. The market was already falling heavily in September a month earlier due to a crash in the UK. So the market was already in 'correction' territory before the big boys pulled the chute.
The financial markets don't learn.
They learn faster & better than any other industry. They learn so fast that often the information is not fully absorbed and the consequences of that knowledge fully considered before it has to be acted upon. The result is exactly as Michael Lewis describes here, financial actors have a tendency to act on an incomplete set of understanding because a key component of being successful is to be first.
there's only one lesson the markets need to understand: if you take so much risk that you blow up the system the Fed will step in and rescue you. That's why the market behaves as it does and is completely divorced from the real economy where if you screw up you go out of business. That was supposed to happen in financial markets too but all that money has infected politics. Main street can't compete. The system is corrupt.
Bond markets had been selling off weeks prior to the decline. Also, how about the Latin America credit crisis of the 80's? oh and the Canadian home crisis? Do people even check for credentials before the publish something?
Can someone explain the trade he just mentioned?
Well, basically if we compare compare 30 year bonds that is issued now or issued say 3 months before should be very similar in price. 3 months really doesn't matter that much if you are holding till maturity. This is that because of that market crash only those bonds that have been issued just now was in huge demand while those who were already 3 months old wasn't. And that crazy short term demand made prices to rocket, making huge difference in virtually same assets. So those guys just shorted overpriced new ones and longed old ones (making net neutral) and they just had wait till market come in to their senses again and both of them cost very similarly. And they now can just close all positions long/short positions easily profiting with virtually no risk at all.
how do you sell short a bond?
Schhhhteeeeveeeee madddddddennnnn
yea and if thing are like that then why bailout ?why they didnt do like you say in 2008.
Huh? Portfolio insurance is most of new investment dollars now...pure casino, with virtually none going to build America.
wow that was interesting!
this guy is completely wrong, there were MANY things going on in the worldwide economy before the 1987 crash, in 1985 and 1986, that showed there were going to be issues in stocks at some point
relax, he is talking about the bond arbitrage of the front month contract and the next/new month bond contracts on the same instrument and the concept of reversion to the mean. Not the detailed mechanics of why the 87 crash happened.
Really Smart stuff. Plain Vanilla Arbitrage now, but thing in 87.
Stop spamming our sub boxes!
All the smart people said? Really/ the ‘smart’ people are the ones who play the fucking market like the ponies.
This is about to happen again bwhahaha.