My two big, bad calls on the market and economy

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Unsurprisingly, the 30th anniversary of the Crash of ’87 really has nothing new to add to what was written for the 25th anniversary and the 20th and so on before it.

But it is a chance to revisit the anniversary of the first of my two biggest mistakes as a commentator.

On October 20, 1987, it seemed to me that such a massive and immediate loss of money would have to have a dire impact on the economy.

As it turned out, I was wrong. I underestimated the power of the real economy and softening interest rates and ample liquidity (key rates – overnight cash, home loans – were actually easing before the crash) to counteract the loss of paper wealth. There was no recession.

It would be possible to prevaricate, to do a Steve Keen and claim the forecast was right, just the timing was wrong. The eventual “recession we had to have” arrived three years later. But I won’t make that claim. It was a bad call.

And, with the benefit of hindsight, the stock market crashing wasn’t the crazy thing. What was stupid was the mad bull run up to the crash. Again, as it turned out, the market losses were erased remarkably quickly. The cowboys fell, but take a 50-year graph of the All Ordinaries Accumulation Index and October ’87 is a blip.

While nostalgia is running riot on the 30th anniversary, it certainly wasn’t a blip at the time.

Back then, I was running and fronting Business Today on Channel 9. It was quite possibly the world’s first daily business program on a free-to-air commercial network.

In an age of multiple 24-hour international business channels, a half-hour program run on the memory of the smell of an oily rag might seem quaint, but in pre-internet times it was a not inconsiderable service.

Everything in the morning newspaper was out of date – Business Today and a couple of minutes’ business news on ABC radio were the sum total of current economic and business news most people could access.

Together with the weekly Business Sunday program, a small team brought business reporting into the broadcast mainstream, allowed people to see the whites of the markets’ and CEOs’ eyes for the first time.

How to convey Wall Street’s Black Monday on the morning of Australia’s Black Tuesday?

Having spent previous days reporting the tremors leading up to the earthquake, something more dramatic was required. In the pre-dawn, I asked the much-put-upon library to find vision of a grizzly bear in full roar. A suitably fearsome bear was found – but the tape had no audio.

We still managed to start the show with a madly roaring bear. Only my editor and I knew it was actually the sound of a silverback gorilla.

We copped criticism over that opening. Some in the broking community thought it was irresponsible to scare people with such an image.

The ASX managed to disgrace itself by seeking to censor commentary by members and employees. A trader on the floor of the Sydney exchange, a regular source of a good grab, had provided the obvious observation that this was a crash, that he had never seen anything like it. He was subsequently told not to say anything. Oh, the gormless pooh-bahs​.

The bear and the honest reaction of an experienced and honest man on the floor were not irresponsible. What had been was the lack of any censorship in the lead-up to the crash, the unbridled gilding of weeds back in those days, the pure fantasy and boosterism spoken without censure. Continuous disclosure? More like continuous BS.

Business Today and Business Sunday – the latter led by Glenn Dyer – were both programs of alumni of The Australian Financial Review’s Golden Age, the result of a remarkable succession of fine editors who saw the role of business journalism to challenge and hold accountable as well as to inform, not to be a mere cheer squad recording the ambitions of the Big End of Town.

Inevitably we made mistakes – I recall being taken in by ex-Westmex boss Russell Goward, I was not alone – but we also managed to mainly keep ourselves nice with healthy scepticism about the Skases, Elliotts, Connells, Bonds et al, even while Nine was being taken over by one of them. Unlike just about every other organ, we never were invited to one of Skase’s Mirage parties.

It’s more difficult – but certainly not impossible – for companies to peddle BS 30 years later. We do manage to progress. But sometimes the lessons you learn can lead to another mistake – my second Big Bad Call.

There’s the odd Twitter troll who likes to remind me of a piece I wrote for Crikey as the sub-prime crisis was unfolding. At that stage, the American problem appeared no worse than a previous American problem – the savings and loans (S&L) crisis. The problem with having constant Doomsday forecasters is that every now and then a couple of them are right – but it’s generally not for the reason that they proposed.

As the sub-prime crisis blossomed, I remembered the lesson I had learned in 1987: unlike 1929, we live in an age of policy response, both monetary and fiscal. I thought Australia would be fine as it was an American problem, our economy was basically sound, the world was not so dependent on the US economy as it had been in the past, and we had the capacity to deal with disruption.

I believe Dyer was the only journalist in Australia to write otherwise ahead of the implosion. (It’s amazing the number of people who claim to have forecast the global financial crisis (GFC) – a far greater number than did. Plenty piled on the bandwagon afterwards.) I told Dyer he deserved a Walkley Award for it – he didn’t bother to nominate.

Again, you could prevaricate: I wasn’t entirely wrong, Australia was all right.

A brilliant fiscal and monetary response did kick in, helped by China hitting the stimulus button. We didn’t have a recession, unemployment didn’t blow out to double digits. But I did not account for the financial market contagion. While we avoided recession, my call at the time of “it won’t be a disaster” was wrong for the stock market.

Let the record show that it wasn’t the US sub-prime crisis per se that became an international catastrophe. (We call it the GFC – others call it the Great Recession.) What turned an American crisis into an international catastrophe was not knowing who was holding the debt when the fraud hit the fan. That’s what froze markets, caused the contagion, not the actual US liar loans.

As a result, the idea of securitisation still worries me – separating lenders from their inherent risk is a risk.

Now there are people who perhaps think they have learned a lesson from their GFC mistakes and continue to rabidly forecast doom and gloom in light of present excess. Like the proverbial generals, they continue to fight the last war.

The funny thing is, my big, bad call with the GFC, saying “don’t panic”, did little harm.

By the time it hit, it was a bit late for panicking anyway. The market went down, but only those who panicked and sold or were foolishly geared lost money. Those who had a reasonably diversified portfolio and stayed in are now very nicely in front. (http://www.smh.com.au/business/markets/after-all-the-doom-and-gloom-were-due-for-some-good-news-20171006-gyvz6h.html )

The thing about the perma-bears is that their advice would have proved very costly. The purveyors of doom-and-gloom websites and newsletters prey upon fear to sell subscriptions and care not for the damage they may cause.

As the man said, history doesn’t repeat, it echoes. We have problems and challenges, but we also have great strengths and learnings from past mistakes.

As well as nostalgia for the colour and excitement of a time of open-outcry trading floors, for a time of genuine characters in business, when the long lunch was alive and thriving, for a time of greater investment in journalism, for a time when there were quality commercial television programs you could be proud to be part of, the 30th anniversary is a chance to remember how you can make mistakes, and how important it is to keep perspective both on the up and down sides.

The cheer squad that helped create the Crash of ’87 has morphed through technology. Now, every set of eyeballs clicking on a story is counted and the success or failure of stories to attract those eyeballs somewhat guides what is published.

And now nothing sells like fear – anything involving a crash and doom wins eyeballs and therefore headlines. If the headline on this article said “Housing Crash lessons from 1987″, twice as many people would read it.

There is no reward now for being sceptical of dubious claims, of “sell everything” headlines, just as there was no reward in the first nine months of 1987 for being wary of the white-shoe brigade, or for sneering at local dot bombs before that blew.

Keeping perspective on both the doom and boom remains a lonely pursuit – but it’s the only one worth pursuing, even with the occasional bad call.

First published SMH October 19, 2017 http://www.smh.com.au/business/markets/my-two-big-bad-calls-on-the-economy-and-stock-market-20171018-gz3qxx.html

Post script: I repeatedly got a big call right about the GFC. As countless reporters trotted out the cliche about “if America sneezes, Australia catches a cold”, I railed that it was nonsense, that China had become much more important to Australia. The proof was in the crisis – America caught pneumonia and Australia had a mere sniffle.

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