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Coming off of a third losing year for the stock market and my portfolio put me in a reflective mood. How bad is it really compared to some of the other bear markets and financial crises I've endured?
I thought back to August 1982. I was in a pretty good situation, faced with competing job offers from two banks, but the Chicago heat and humidity had me feeling irritable. And the financial markets also felt dogged, even though their fortunes were about to take a sharp turn for the better after being stuck in what amounted to a 17-year trading range.
Wall Street's mood started to improve that summer after Congress and President Ronald Reagan hammered out tax reductions that later were widely credited with jumpstarting the moribund economy and market. After the Dow Jones Industrial Average closed Aug. 12, 1982 at 776.90, the government's tax cuts had it roaring on Aug. 13 -- at least in a relative sense, when 14-point move was really something. The blue chip average began a tear that lasted more than five years, until the Black Monday collapse of Oct. 19, 1987, when the Dow lost 508 points, or 22.6 percent of its value, in a single session.
And these days, even that so-called crash is only represented by a little dip in a long-term chart of the Dow.
Oil jitters? Been there
Middle East tensions rattled the markets in 1982 just as they're doing now -- except it was much worse 20 years ago. Back then, the Arab oil embargo and misguided U.S. price controls that discouraged domestic oil exploration and production -- an economically devastating combination that sent oil prices skyrocketing in the 1970s -- were still fresh in our minds. And as Iraq faced war (albeit one of its own making with Iran) 2, the per-barrel price of oil shot up to almost $32 from $12 in 1978.
The Organization of Petroleum Exporting Countries tried to stabilize things in the early 1980s by adjusting production levels, but the United States deregulated its oil market at home and a domestic drilling frenzy ensued as newcomers to the petroleum industry listened to predictions of oil prices rising to $100 a barrel.
We all know what happened -- the opposite occurred. Crude oil prices collapsed. Businesses failed. Communities that were dependent on oil prices were hit hard. The real estate market in Texas crashed, and along with it many mortgage bankers. The nation's unemployment rate soared while the nation's savings and loan industry imploded.
We're facing nothing like that crisis now, even as our troops mobilize for a possible Iraqi war. While oil remains a vital part of our economy, it's not the market monster that it was 20 years ago. For consumers, it's been a friendly environment for the most part; save for a brief spike related to the 1991 Gulf War, the real price of oil, once inflation is factored in, fell for almost 20 years. And if we go to war with Iraq again, few people expect that conflict to last long either.
Scandal? Done that
But what of the current crisis in corporate America? Isn't that unprecedented? Not at all. A side effect of most bull markets is some sort of event that wouldn't have happened if not for insatiable greed and egregious mismanagement.
Look at the financial chicanery that led to the demise of Baldwin-United in 1982. The piano maker turned itself into a financial powerhouse through acquisitions that were financed by debt, but the company portrayed them as cash deals. Analysts touted the stock -- sound familiar? -- and its value soared before the truth about its liabilities came out. Class action lawsuits were filed against the company charging that it inflated the stock price by disguising the nature of its acquisitions, and by the end of 1983, Baldwin-United was bankrupt. Among other things, the incident helped make the reputation of short-seller (and past Wall $treet Week with FORTUNE guest) Jim Chanos, who was one of the first to forecast financial difficulties at Baldwin United, and sounded one of the earliest warnings about Enron almost two decades later.
And while stock market analysts are on the hot seat today, 10 years ago it was bond traders losing their swagger and gaining religion. Michael Milken, of course, became infamous for his junk bond manipulations at Drexel Burnham, but he wasn't the only one messing around with fixed income securities.
Salomon Brothers -- which later became part of Citigroup's Salomon Smith Barney unit that was under fire last year for conflicts of interest with its stock analysts -- went through a scandal with U.S. Treasuries almost a dozen years ago. Salomon in August 1991 was almost buried for trying to rig the Treasury's auction system by repeatedly exceeding the legal limit by bidding on more than 35 percent of the total amount of securities to be sold. Salomon's top executives, (including former CEO John Gutfreund) who had known about the illegal bidding were forced to resign and a major shareholder, Berkshire Hathaway investing legend Warren E. Buffett, was put in charge to clean house. It remains the only time that Buffett has directly led one of his company's investments.
Bond traders now are much more circumspect about how they do business, and I'm sure today's stock analysts will take greater care as time goes on.
Yup, things are good
Some areas of the economy, such as housing, are vastly improved from a decade ago for the average person.
Freddie Mac in August 1982 quoted an average 30-year fixed rate mortgage at 16 percent plus 2 points. That year I made my first real estate purchase, financing a condominium with a 3-year adjustable mortgage at 12 1/4 percent with a 5 percent swing -- 15-year fixed mortgages were unheard of until late 1991. These days, mortgage rates are at 40-year lows. A 30-year fixed mortgage averages around 6 percent, and have lost market share to the more popular 15-year loan, which averages around 5 1/2 percent. A 1-year adjustable mortgage is at 4 percent.
That trend of falling interest rates over the last 11 years has put the American dream of home ownership within reach of most people -- 68 percent of U.S. households now own homes, rather than rent.
Finally, we're much better off in terms of economic growth and unemployment than we were 20 years ago.
The Congressional Budget Office in 1982 predicted a 3 to 5 percent growth rate with an implicit price deflator (a measure of inflation) from 7 1/2 percent to 9 1/2 percent. Unemployment rate was expected to remain in the 7 percent to 8 percent range.
And today? While many people have dropped out of the labor pool in 2003, the unemployment rate has risen from a record low average of 4 percent in 2000 to a still-modest average of 5.8 percent in 2002. The consumer price index is expected to average under 3 percent for all of 2002 with economic growth averaging 3 percent annually. If you had made that kind of 20-year prediction back in 1982, you would have been considered wildly optimistic.
So really, it's not so bad these days after all.
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