Paging Gordon Gekko And Bud Fox…

There has been no shortage of commentators, including this one, who have drawn parallels between the internet bubble at the turn of the century and today’s financial markets. Then, as now, we had a quantum leap forward in investor access (thanks to the advent of web-based trading) and an accommodative Federal Reserve (hoping to avoid a Y2K crisis). This morning, a series of headlines caused me to draw parallels to an earlier period of frothy stock markets – the late 1980’s

Fans of the movie Wall Street will recognize the significance of these headlines immediately:

Source: Bloomberg

In that movie, the phrase “Blue Horseshoe Loves Anacott Steel” was a code devised by Gordon Gekko (played by Michael Douglas) for use by Bud Fox (Charlie Sheen) to signal insider trading.[i] Popular movies often reflect the zeitgeist of the time, and the combination of Wall Street riches and insider trading were very much in the news then.[ii]Corporate raiders like Ivan Boesky and their enablers like Michael Milken were household names, especially when they met their downfall at the hands of prosecutors like Rudy Giuliani. 

I started in the business full time in 1987. I had done internships at the now-departed firms of L.F. Rothschild and Salomon Brothers but joined the famed Salomon training class in January 1987. It was such raging bull market that the firm had begun running two classes a year. That allowed me to defer my start date and to instead spend the summer traveling through Asia and Australia. My classmates and I had no way of knowing that we were witnessing the end of an era. 

Salomon Brothers was first and foremost a bond trading powerhouse, and it was fascinating to see the different moods between the bond and equity floors. The stock traders were ascendant, riding a giant bull market and a wave of innovation in derivatives[iii]. Meanwhile, after an astounding run of success, bond traders began to realize that they were enmeshed in a terrible bear market. After about 5 years of moving in relative lockstep, stock prices continued to advance while bond prices reversed course and began to fall sharply. We knew there was a major disconnect, but equity market momentum is a tough thing to fight – then as now. I finished my training in late summer, just as the cracks began to show in earnest. Some major pension funds recognized the cracks and made significant changes to their asset allocations. They sold highly valued stocks and used the proceeds to buy bonds whose yields had risen substantially. It was a great trade for those funds and put a lid on stocks’ advance. 

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