A Little History Of Extreme Market Movements

I'm not old enough to have managed money during the 1987 crash, the 1989 minicrash, the 1997 contagion crash, the 1998 Russian crash and the Nasdaq 2000 crash, but I have studied all of those moments extensively. I've of course been at the helm of managing money during the 9/11 crash, the Great Crash of 2007-2009 and the PIIGS crash (Portugal, Italy, Ireland, Greece and Spain) of 2011 and now the Chinese crash this year. There are crash rules. The first is that you recognize if the crash is systemic, and therefore long lasting, cyclical, and therefore self-correcting, and collateral, therefore healthy because of its derivative nature. This one's the latter. It is not systemic, because it does not impact our system. There is no credit crisis here. There are no bank failures. There will be oil and gas failures, but they are limited to Texas, North Dakota, Oklahoma and Louisiana. That's always been the issue with the oil and gas boom; it is localized. Too localized when it was going on. Just perfect as it collapses. There's roughly $300 billion in debt at risk with oil and gas. But there's lots of money that wants in and the idea that oil, which now looks like a straight shot to $30, should cause a very big number of producers, many of which come in at about $50 a share to restructure debt in bankruptcy. Hey, have to call it like it is. The Saudis aren't relenting and the Iranians have said that they will pump at all cost. That's a recipe for almost total annihilation of the independent oil and gas business in this country. Still, that's not systemic risk. On the bright side, I LOVE the fact it cost me a heck of a lot less to fill up my truck these days...and I believe we will see the savings at the pump translate into increased consumer spending over the next quarter. Second, you have to recognize that there are always lots of mutual funds out of position and it is their backlash that makes the move harder to game. This market is only as strong as its weakest link. In 1987 it was the funds that had taken portfolio insurance. They caused a tremendous decline over that 7 day period b/c they were heavily invested and when things got really ugly they had to sell out of stocks and that was a domino effect. That's some what was is happening now. Oddly, that crash had nothing to do whatsoever with the real economy, so it was hard to pin down, but it did enough damage technically to stocks that it was hard to recover from. The three collateral crashes are more analogous, but it's difficult to be clinical about it because so few people understand this one. We have the second-largest economy (China) giving up more than 60% of its stock market's rise in declines by the end of this selloff, and given that somehow we have become joined at the hip, you have to believe that the 30% decline I am expecting there could translate into about a 15% decline here from these levels if we remain in lockstep. I find this hard to believe, given how little we actually have to do with their economy, how we have almost nothing to do with their stock market -- we didn't go up much from August 2014 to June of this year, the approximate time of the roughly tripling of the Shanghai index, so we shouldn't be down as much as we are already, but that's neither here nor there, for certain. But let's say we have a worldwide recession, which is what this market is really about. How much exposure does our stock market have? Using the Dow, 27 out of 30 stocks have some exposure to the overseas markets, but with the exception of tech they don't have much at all. Further, much of the exposure is to Europe, where the euro is stronger than it was when the bulk of our companies reported. So, I keep coming back to the idea that this market is a buy on a 12-15% decline from here as it was in the crashes of every single one of the crashes I mentioned above. Which means what? I think it means that you have to commit some cash into this downturn at some point soon. I think it has to be a percentage of your cash, whatever that cash might be when we open for trading. I wish I could be more negative, but the 2000 Nasdaq and the 2007-2009 were systemic. Sure, this could be a 1987 decline, but then again, that was before we had some protections in place that make it unlikely -- mostly buybacks -- and well before we had anywhere near the decline in rates that we have experienced. Just something to keep in front of you, by the way, the U.S. stock market has downside protections in place, if the market drops precipitously, there are breakers in place that automatically stop people from trading and dumping stock...it's called the chill/calm button; this prevents the market from crashing in a way that we've seen in previous times (i.e.Nasdaq 2000). The positive thing to take away from all of this is that at some point stocks will be cheap and provide such a value that people will start to buy and grab ahold of some great deals; think about it as the housing market, people wanna buy great houses and properties when they are priced low and on sale, just like stocks are today!