October 19, 2022

stock market

Never let a good crisis go to waste

Since the onset of COVID-19 in early 2020, the stock and bond markets have experienced record-breaking volatility that have been both gut-wrenching and at times inexplicable.  35 years ago today, a day known globally as Black Monday, the largest single day stock crash in history took place – the 23% drop in the Dow index, equivalent to a 7,000 point drop today, triggered massive declines in stock values around the world, wiping out an estimated $1.7 Trillion.

While I knew absolutely nothing about the stock market at the time, I remember this day well. To the chagrin of my parents, I had recently abandoned my pursuit of becoming a doctor – causing a shock to my parents from which they’ve yet to recover. I was somewhat lost in seeking an alternate career path. The day after the crash, my college professor canceled his planned lecture to hold a roundtable discussion on what had happened.  I was unfamiliar with even the basic principles of the stock market and struggled to follow along.  However, I was fascinated and thirsting to learn more.  The next semester, I enrolled entirely in economics classes, and when the semester ended, I was employed on Wall Street.

Despite my degrees and years of work in the industry, I’m still hard pressed to provide a simple explanation of what triggered Black Monday. What left a lasting impression, is that the efficient-market theory occasionally takes a beating, while smart,strong regulatory rules and interventions are necessary to save the day, even in a free-market system.

Also, on this day in 1973, the Arab oil embargo began when Arab OPEC members decided to use oil as a political weapon.  They targeted the U.S. and other nations that supported Israel in the Yom Kippur War, driving up the price of oil fourfold, and causing to that point, the most significant global recession since the Great Depression.  In the early 1970’s, as American oil production peaked and demand soared, the US turned to the Middle East for the vast majority of its imports, significantly exacerbating the embargo’s effects.

The embargo caused devastating and immediate global impact and realigned geopolitics among many other long-term implications. The 55-mph national speed limit was imposed and sitting for hours in gas lines with rationing based on license plate numbers affected American’s everyday lives. Even Christmas lights that winter were discouraged or banned. Fortunately, the embargo ushered in the creation of CAFÉ fuel standards and later the Department of Energy. The Strategic Petroleum Reserve was established that President Biden is currently tapping as part of his drive to reduce gas prices.

Creeping stagflation became a stubbornly entrenched and pervasive feature of the decade’s economic underpinnings in a manner that many of us in the older generation will never forget. This stagflation experience was so debilitating and left such a lasting legacy that it remains top of mind for today’s policy makers, who are furiously attempting to avert another bout.  Unlike 1970’s stagflation precipitated by an oil supply shock, the current environment compounds the difficulty of a COVID induced supply shock with an energy crisis resulting from the Russian invasion of Ukraine.

However, among the long-lasting implications that continue to influence us to this day, were increased domestic oil and energy exploration and innovation, research and development of alternative energy and a movement towards energy conservation.

In the aftermath of the embargo, demand shifted dramatically from large gas guzzlers to compact cars imported from Japan, impairing our auto industry.  Our family 400cc V8 Chrysler Cordoba gave way to a 4-cylinder Nova. Much later, when the American auto industry barely survived another near-death experience with a government lifeline, it slowly and sometimes reluctantly learned the lessons of the day and now collectively lead the world toward the EV future.

Catastrophic events always present lessons from which to learn and that we ignore or forget at our own peril. In the words of Winston Churchill, “never let a good crisis go to waste.” Crises can lead to long term positive change in policies, behaviors and outcomes.  However, they can only be capitalized on if it there is a common recognition and acknowledgement of the challenge at hand, that then mobilizes society as a united force to avert catastrophe.

With the magnitude of today’s challenges, anything less may haunt us forever.

Scott Wu

S. Wu Signature