How Big Will The Current Bubble Grow?
Inside today’s Daily Journal…
Essay: An Economic House Of Cards
Yin-yang of capex and free cash flow
Consumers are levering up
Leaving gold and Bitcoin for tech
Chart Of The Day… Caterpillar (CAT)
Poll results – the price of oil
Today’s Mailbag
Editor’s note: On Saturday, June 20, Briar Rochelle Stansberry was born in New York City. Mother and baby are doing great. And your editor is over the moon.
Last week, Alan Greenspan died.
Greenspan became chairman of the Federal Reserve on August 11, 1987. Two months later, on Monday, October 19, 1987, the stock market fell 22.6% in a single trading session. That one-day loss remains, in percentage terms, the largest single-day decline in the history of the Dow Jones Industrial Average. Larger than anything in 1929. Larger than anything in 2008. Larger than the worst day of 2020, during the COVID bust. It was, by a considerable margin, the worst day the American stock market ever had.
Greenspan was on a plane to Dallas when it happened. By the time he landed, a significant portion of the American investing public had been ruined on paper. He flew back to Washington that night. Over the next 12 hours, in a series of phone calls with Gerald Corrigan, the president of the Federal Reserve Bank of New York, Greenspan decided he would bail out the market.
At 8:41 a.m. on Tuesday, October 20 – before the market opened – the Federal Reserve issued a single sentence. It is one of the most consequential sentences in the history of American finance:
The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.
In the plain English Greenspan refused to use, he said: whatever investors need, we will print.
The market rallied. By the end of the year, stocks ended 2% higher than where they started the year. A new verb entered the language of Wall Street. Stocks were now, and would forever be, “Greenspanned.”
The lesson of 1987 was the Fed’s “put.” From that day forward there was a put option under the American stock market. It is written by the Federal Reserve. It was free. It was automatic. And it began an incredibly long period of asset inflation that continues to this day. Investors realized they cannot lose – as long as they buy the dip and hold.
Everything that followed over the last 40 years – the leveraged buyout boom, the junk-bond mania, the growth of derivatives into a hundred-trillion-dollar shadow-banking system, the dot-com bubble, the housing bubble, every successive episode of euphoric risk-taking that the next 40 years would produce – was built on that one sentence issued at 8:41 a.m. on October 20, 1987. None of it would have happened in a world where the central bank was not standing behind every asset price with a printing press.
And then, in 1998, there was an even bigger expansion of the Fed’s guarantee. It was used, for the first time ever, to bail out a private investment fund.
