We are reposting this piece.  History rhymes.  The U.S. was in the midst of conflict with Iran during the 1987 crash as we are today.

The Fed tried to stem the selling today and who knows what would have happened if they didn’t step up.

Originally Posted on April 21, 2018

President Reagan certainly understood the nature of markets.

That is they do whatever they are going to do, sometimes without a fundamental rhyme or reason.   Very different from the current occupant of the White House who seems to think every uptick in the S&P is all about him, and he is not afraid to take credit for the upside and tweet about it.

Before going to President Reagan’s  comments about the October 19, 1987 stock market crash,  we first review some data, which lends light on the 1987 crash.

The S&P500 had just completed a massive run from September 1985 before peaking on August 25, 1987, moving up almost 87 percent in less than two years.   That qualifies as a bubble in our view.

Yuuuge Decline In Interest Rates

Much of the move was attributed to a sharp drop in interest rates.

The 10-year Treasury yield fell almost 350 bps in less than a year before making a local bottom in September 1986.   Interest rates then began to move sharply higher, utterly roundtripping almost the entire move by the day of the crash.

The 10-year yield had risen 300 bps year-to-date on October 16th, closing back above 10 percent, increasing almost 150 bps just since the S&P peaked on August 25th.

The S&P500 was already down 16.33 percent from its high before crashing on October 19th.  Markets rarely fall out of the sky and usually signal something big is coming by a sharp rise in volatility.    Think of a Richter scale before a volcano blows.

This is why we take the early February volatility shock seriously and a signal of regime change, and give a much higher probability for a potential major price reversal than most in the market are anticipating.

Finally,  the S&P500 fell 23.43 percent from the October 16th Friday close to the intraday low on Tuesday before a mysterious buyer stepped into to the Major Market Index futures contract at 12:38 p.m, setting the stage for one of the most powerful rallies in history.

We believe the 1987 stock market crash was an accident waiting to happen due mainly to a toxic cocktail of a severely overbought market and rising interest rates.  All that was needed was a buyers strike coupled with some catalysts or reasons to bail and take profits.   The same reasons may or may not have mattered if not for such a toxic cocktail.

Given the nature of the New Economy, we seriously doubt the government will allow such a similar short-term crash, say, 15-25 percent,  to occur again.   We now have no doubt  the Fed will step up and announce they will do whatever it takes and become the buyer of last resort to keep the market from melting down in one or two days.

Why?   Because it would be the end of the world and they surely know it.

The thought of the Fed directly purchasing stocks as the Bank of Japan now does contradicts everything  Larry Kudlow’s dictum, “free market capitalism is the best path to prosperity” stands for.

Privatizing profits and socializing major Wall Street losses  are now forever institutionalized especially given the structure of our asset driven global economy.  The “Powell put” may now have a little lower strike price than many traders would like but it is absolutely still in place.  No doubt about it.

Oy veh!   Sorry deflationistas.

Iran Again

By the way, the U.S. was also in the midst of a conflict with Iran in October 1987.

An Iranian missile struck an American-owned tanker in Kuwaiti waters today, causing a huge explosion and setting the tanker ablaze, the Pentagon said.  – NY Times,  October 16, 1987

President Reagan’s Comments

Now to President Reagan.

Asked after the close if the stock market crash was his fault, the President delivers the ultimate money quote, in our book:

The President:  Is it my fault? For what, taking cookies to my wife?  – President Reagan,  October 19, 1987

Profound.   We can learn from the Gipper to refrain from trying to explain or attribute daily stock market moves to certain factors.   Any one of the catalysts we deem moved the market in a certain direction on a given day could have moved it 180 degrees the other way with a different set of technical conditions.

Reagan truly understood  market noise.

Full Transcript Of October 19, 1987 Informal Exchange With The Press

Here is the full transcript with reporters that day, October 19, 1987.

Stock Market Decline

Q. Mr. President, are we headed for another great crash?

Q. What about the stock market?

Q. Are we headed for another great crash?

Q. Stock market.

The President. Oh, the stock market. Well, I only have one thing to say: I think everyone is a little puzzled, and I don’t know what meaning it might have because all the business indices are up. There is nothing wrong with the economy, though.

Q. Panic.

The President. What?

Q. Panic, how—

The President. Maybe some people seeing a chance to grab a profit, I don’t know. But I do know this: More people are working than ever before in history. Our productivity is up. So is our manufacturing product up. There is no runaway inflation, as there has been in the past. So, as I say, I don’t think anyone should panic because all the economic indicators are solid.

U.S. Reprisal Against Iran

Q. Sir, about the Gulf—some people seem to think that the U.S. response was very, very, very minimal.

The President. Well, since so many of you keep calling it an oil derrick of some kind or platform, no. It was a command and control tower with radar and the ability to track shipping through the Gulf. And, so, we thought that it was an appropriate and proportionate response to their missile attack on a freighter, which wounded some of our people.

Q. What do you think the market’s going to do tomorrow? What about tomorrow?

Q. What’s the message to Khomeini?

Q. Are we now in a war with Iran?

The President. No, we’re not going to have a war with Iran. They’re not that stupid.

Stock Market Decline

Q. What about the market? Tomorrow will it go down again?

The President. I don’t know. You tell me.

Q. Is the market your fault?

Q. Is it your fault? she says.

The President. Is it my fault? For what, taking cookies to my wife?

Q. Reaganomics.

The President. I just told you. Good Lord, we reduced the deficit over last year by $70 billion. And all the other things I’ve told you about the economy are as solid as I told you. So, no, I have no more knowledge of why it took place than you have.

Q. What’s the message to Khomeini?

Q. Well, what would you tell the small investors?

The President. What?

Q. What would you tell the little old lady who lost money today?

Q. The little old ladies who lost their shirts.

The President. I don’t know of anyone. Are you talking about a specific case?

Q. I lost mine.

Q. Me.

Q. This one.

The President. Wait a minute! How about how many people must have sold out in order to get a profit because they bought it back before it was ever this high? I’ve got to go to the hospital.

Q. Give our best to Mrs. Reagan.

The President. Thank you, Andrea [Andrea Mitchell, NBC News]. That, I will do. She’ll be coming home soon.

Q. What’s your message to Khomeini?

Q. Invest in our stock market.

The President. If I really gave it to you, you wouldn’t be able to print it.

Note: The exchange began at 5:04 p.m. at the South Portico of the White House upon the President’s departure for Bethesda Naval Hospital,