Greg Ip

speaker

528 appearances 8 recordings 1 series first heard Jan 2018 last heard Sep 2024

Greg Ip’s voice in public audio — every appearance, attributed to the second.

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WSJ Your Money Briefing · Dow Pullback: Do Past Corrections Predict the Future? · 13 Feb 2018 podcast

They thought it was too nuclear to fail, but fail it did, and that ricocheted into markets in the United States. voice-verified

Only with hindsight did we discover that a lot of that downdraft in the markets was being driven by one very large hedge fund called long-term capital management, which had taken on very highly levered positions in a variety of markets, bonds and stocks, and was being forced to unwind those and essentially triggering fire sales of assets, putting huge stress on the markets. voice-verified

You had things like bond yields going haywire and not at all behaving like we were used to. voice-verified

It was worrisome and scary, but in the end it did not tell us about anything special about what was going on in the economy itself. voice-verified

And indeed, once that was out of the way, with a little bit of help from the Federal Reserve, which arranged a bailout of long-term capital management, the economy turned out to be fine. voice-verified

There are similarities and differences with 1987. voice-verified

And let's start with the similarities. voice-verified

Even though we think of the bear market as being all about Black Monday, the decline in stocks had actually started weeks, if not months, earlier. voice-verified

Interest rates had been rising. voice-verified

The Fed had raised the discount rate quite sharply in September. voice-verified

There was a fight between Germany and the United States about the value of the dollar. voice-verified

And there had been a lot of froth related to leveraged buyouts, which was starting to come undone. voice-verified

And so the market was kind of primed for fundamental reasons to give up some of its gains. voice-verified

gains but what really provided the fuel for the stock market crash was a strategy called portfolio insurance and I won't bore you with the details but the gist of it is that we had very large multi-billion dollar positions built up in the market that once the market started to go down the formulas underlying these strategies required big investors to sell into the falling market and so it accelerated downwards. voice-verified

And I think why that's similar to today, it's something to keep in mind, is that we have similar sort of complex strategies in the markets. voice-verified

They're probably not as big and they're not as dangerous, but they have a similar kind of character. voice-verified

These are strategies which have assumed that the very low level of volatility that we've seen for some years now would continue. voice-verified

They're strategies that assume that bonds and stock prices would move in opposite directions as they have for the last 10 years. voice-verified

They're strategies that have assumed essentially that the world will behave as it has for the last 10 years. voice-verified

And the last few weeks, a lot of those assumptions have proven wrong. voice-verified

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