110 THE BiG DROP
Orange County, California, and other dealers went out of busi-
ness. There was a bond market massacre.
The same thing happened in 1987. A lot of people recall the
crash of October 1987 when the stock market dropped 22% in
a single day. In today’s market, that would be the equivalent of
over 3,000 Dow points. Imagine the market dropping not 300
points, which would get everyone’s attention, but 3,000 points.
That’s what happened in October 1987. But before that, in
March of 1987, there was a bond market crash. The bond mar-
ket crash preceded the stock market crash by about six months.
These things can get nasty and I could say it’s been a long
time since the last one. That’s why the Fed is talking so much
about it. You have to go all the way back to May 2013 when
the Fed was still printing money and buying bonds (long-term
asset purchases as they call it) when Ben Bernanke first started
talking about maybe beginning the taper.
They didn’t do anything. They didn’t cut purchases and they
didn’t raise rates — they just talked about it — and still the mar-
ket threw a taper tantrum fit. We had the actual taper through
the course of 2014. Now the taper is over, QE3 is officially over,
so this thing has been really advertised for two years.
The reason rates were at zero in the first place is because
the Fed was trying to pump up assets. They wanted banks and
other borrowers to go out, borrow cheap money, buy houses
and stocks, bid up the price of assets, and create the wealth
effect. Hopefully, that would make people feel richer, they
would spend more money, and the economy would get on a
self-sustaining path.
That didn’t happen. The asset prices did go up, but the
wealth effect did not kick in and the economy is still very
weak. The Fed did not get the kind of 3.5–4% growth they
were really hoping for when they started all this. I think if the
Fed had it to do it over, they never would have gone down this
path or at least not stayed on it this long.