- Thursday, October 19, 2017 marks the 30th anniversary of Black Monday, when the Dow Jones Industrial Average suffered a record 22% crash.
- David Rosenberg, 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 chief economist at Gluskin Sheff, started out as a junior economist at the Bank of Nova Scotia on Monday, October 19, 1987, when the Dow plunged by a record 22%.
Business Insider spoke to 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 arse 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.
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 cannot 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 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 — 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 have 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 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.