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Premonitions From The Early 90S

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I have recently been reading Market Wizards by Jack Schwager, which is a collection of interviews with super traders. The interviews appear to have been conducted in the early 90s and a lot of times the conversation turns to discussion of the 80s and the cause of the 87 crash and early 90s recession. What is interesting is how so many of the comments are valid today or forecast what was going to happen. The idea that the lessons of the 80s were not learned is not new to this forum, but I thought this does bring those issues into an interesting light.

Jim Rogers:

Given the magnitude of the deficit problem, is there anything that can be done at this point?

The basic problem in the world today is that America is consuming more than it is saving. You need to do everything you can to encourage saving and investment: Eliminate taxation of savings, the capital gains tax, and dual taxation of dividends; bring back the more attractive incentives for IRAs, Keoghs, and 401Ks. At the same time, you need to do everything you can to discourage consumption. Change our tax structure to utilize a value added tax, which taxes consumption rather than saving and investing. Cut government spending dramatically—and there are lots of ways of doing it without hurting the economy too badly. We would have problems, but the problems would not be nearly as bad as when they are forced on us. If we don't bite the bullet, then we are going to have a 1930s-type collapse.

If the politicians don't act, do we eventually face a choice between very high inflation or a deep recession?

It is going to be an extreme. What I suspect will happen—and I am just speculating, I don't have to make this decision yet—is that somewhere along the line a recession will develop. Initially, the politicians will say, "We've got to bite the bullet and suffer through this. This is good for us; it will help clean out our system." People are going to buy that for a while. Then it is going to start to hurt. Then it is really going to start to hurt. At that point, the politicians are going to give up, and they are going to start to inflate their way out of it. But the only way to inflate your way out at that point is to really print money!

In that scenario, we start off with a recession and end up with very high inflation.

Right, but we could have wild inflation first and then deflation. Another very real possibility is that we will eventually have exchange controls. Fortunately, I don't have to make my investment decisions for two or three years forward right now.

Marty Schwarz

You liquidated your long position very well on October 19. Did you think about actually going short?

I thought about it, but I said to myself, "Now is not the time to worry about making money; it is the time to worry about keeping what you have made." Whenever there is a really rough period, I try to play defense, defense, defense. I believe in protecting what you have.

The day of the crash, I got out of most of my positions and protected my family. Then at 1:30 P.M., with the Dow down 275 points, I went to my safe deposit box and took my gold out. Half an hour later, I went to another bank and started writing checks to get my cash out. I started buying Treasury bills and preparing for the worst. I had never seen anything like what was going on.

You were seriously worried about the banks going under?

Why not? The stories I heard, subsequently, from people on the operations side of the business would have stopped the hearts of the public if they had known what was going on. The banks weren't meeting any of the calls at the brokerage firms. On Tuesday morning, we were within hours of the whole thing totally collapsing. So my caution was well advised.

I think my fear of a depression is related to my father graduating college in 1929. If you talk to people who got out of college at that time, it is as though a ten-year period is missing from their lives. There was just nothing substantial going on in this country. That always stuck with me, because I feared it so much. I think that is one of the reasons why I don't try to increase my earnings geometrically. On the day of the crash, when I looked at my son in his crib, I thought, I don't want him ever to ask me, "Dad, why didn't you do everything you could have done?"

Paul Tudor Jones

Do you believe that October 1987 was an early warning signal of more negative times ahead?

I think the financial community, particularly Wall Street, was dealt a life-threatening blow on October 19, but they are in shock and don't realize it. I remember the time I got run over by a boat, and my backside was chewed up by the propeller. My first thought was, "Dammit, I just ruined my Sunday afternoon because I have to get stitched up." Because I was in shock, I didn't even realize how badly cut up I was until I saw the faces of my friends.

Everything gets destroyed a hundred times faster than it is built up. It takes one day to tear down something that might have taken ten years to build. If the economy starts to go with the kind of leverage that is in it, it will deteriorate so fast that people's heads will spin. I hate to believe it, but in my gut that is what I think is going to happen.

I know from studying history that credit eventually kills all great societies. We have essentially taken out our American Express card and said we are going to have a great time. Reagan made sure that the economy would be great during his term in office by borrowing our way into prosperity. We borrowed against the future, and soon we will have to pay.

Are you blaming the current situation on Reaganomics?

I think Reagan made us feel good as a country—and that is wonderful— but, in terms of economics, he was the biggest disaster that ever struck. I think he basically hoodwinked us by promising to cut the deficit, and then went on the biggest spending binge in the history of this country. I don't think a Democrat could have gotten away with it, because everyone would have been very vigilant about a $150-180 billion deficit.

Do you see any way in which we can solve our current problems before we go into a deep recession, or even depression?

That is what scares me so much. I don't see any blueprint out of our current dilemma. Maybe there are macroeconomic forces at work that are part of a larger super cycle that we don't have any control over. Perhaps we are simply responding to the same type of cycles that most advanced civilizations fell prey to, whether it was the Romans, sixteenth-century Spain, eighteenth-century France, or nineteenth-century Britain. I think that we are going to be in for a period of pain. We are going to relearn what financial discipline is all about.

I dunno if anyone has any comments, but I found it interesting and thought I’d like to share

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  • 429 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
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      • Even
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