Black Monday, Dow Jones Industrial Average 1987 crash, David Rosenberg

Gluskin
Sheff

• Friday, October 19, marks the 31st anniversary of Black
  Monday, when the Dow Jones
  industrial average suffered a record 22% crash.
• David Rosenberg, now the chief economist at Gluskin
  Sheff, was just starting out on Wall Street as the stock market
  crashed. “I had never in my life seen such pandemonium either
  professionally or personally,” he recalled.
• An important lesson from that day that economists got
  but traders missed, Rosenberg said, was that market crashes
  don’t cause recessions — it’s the other way around.

David
Rosenberg had the worst Wall Street new-hire onboarding you
could ask for.

Rosenberg, now the chief economist at Gluskin Sheff, started out
as a junior
economist at the Bank of Nova Scotia 30 years ago, on Monday,
October 19, 1987, when the Dow plunged by a record 22%.

Business Insider spoke with Rosenberg about his recollections and
lessons from that day.

This interview was edited for length and clarity.

Akin Oyedele: How did you get your first job?

David Rosenberg: In the prior three years after
university, I was working in Ottawa at the Canada Mortgage and
Housing Corporation, which was like Canada’s equivalent of Fannie
Mae, as a housing economist. That was a very exciting period.
Those were the years that you had big banks globally: The
breakdown of the barriers between insurance companies, banks, and
brokerage houses, right in the infancy stages of the pretty
significant deregulation taking place in the financial sector.

I had a real yearning to come to Bay Street [in Toronto]. To be
honest, I didn’t know my ass from my elbow. I applied to a lot of
the big banks and got a job at the Bank of Nova Scotia for a
junior economist position — a junior position with less pay in a
more expensive city. I almost turned it down. And then my father,
who was the best mentor of my life, said to me, “Sometimes you
have to take a step back to take two steps forward.”

Oyedele: On your first day in this new
challenge, all hell breaks loose.

Rosenberg: It was my first day on a trading
floor. I had never in my life seen such pandemonium either
professionally or personally. I remember looking up at one of the
chandeliers on one of the trading floors and I said to myself, “I
hope that trader doesn’t fall down from the ceiling.”

I was 26 years old about to turn 27 and I was following the chief
economist around. They were going to all the senior levels of the
bank, showing that what we actually had on our hands was a severe
liquidity event but not a fundamental economic event. Now, of
course my boss, the assistant chief economist, and the chief
economist didn’t have profit-and-loss statements. But boy did
they have ice in their veins, and they ended up being 100% right.

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I met the legends of Canadian banking including the CEO, the
president, and all the heads of all the lines of business on my
very first day. I didn’t say a whole heck of a lot. I stood
against the wall contemplating changing my underwear every 30
minutes.

Oyedele: What were your biggest lessons from
that day?

Rosenberg: It was a phenomenal learning lesson.
I learned that there is a fundamental difference between a
correction, no matter how steep, and a bear market. You don’t
just measure
a bear market in terms of peak or trough but also in terms of
duration. It’s not just magnitude — it’s also duration.

What I also learned was that you can have a bear market without
there being a recession. And that’s what everybody had wrong.
Everybody thought the stock market collapse was going to lead to
a recession. It’s recessions that cause bear markets, not the
other way around. That’s why most investment banks like to have
an economist on hand.

Everybody thought we were going to have a recession after the
collapse of 1987, but that didn’t happen. The Fed cut rates in
early ’88, and all of a sudden the economy really caught a
massive tailwind. What was interesting — and this is the dynamic
of human nature — was that the same people that thought we were
going to have a recession after the stock market collapsed were
the same people forecasting a business expansion that would never
die: the famous Reagan cycle.

That long Reagan expansion that everybody thought was going to
live on forever died in its 92nd month.

We are celebrating this month [October 2017] the 100th
anniversary of this economic cycle. We’ve already bypassed the
long Reagan cycle by eight months. In fact, if we make it to May
[2018] — which we probably will — this will go down as the
second-longest expansion in recorded history.

But the Fed is raising rates alongside the complication of
unwinding its balance sheet. I’ve never seen a Fed tightening
cycle with the economy accelerating. They’ve always ended with
the economy either in recession or sharply decelerating.

I remember Reagan also cut taxes in 1981 as he took the top
marginal rate from 70% to 50%. And we had a six-quarter recession
that nobody saw happening beginning July 1981, just as the tax
cuts were being formulated. The reason was the Volcker Fed did
not accommodate that tax cut. It raised rates, and we fell into a
recession even with the fiscal relief. A very valuable learning
lesson was that in the battle between fiscal and monetary policy,
monetary policy always wins when it comes to determining the
contours of the business cycle.

I think we’re much further into the economic cycle now than we
were then. I’m thinking this is more probably like 1989 than it
is 1987 from a business-cycle standpoint.

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