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Let the Good Times Stop: Part 2 of Our Series on U.S. Downturns

By Alison Southwick and Robert Brokamp, CFP(R) - Oct 14, 2017 at 5:28PM

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Many Fool fans were alive for the oil crisis of the 1970s, or at least Black Monday in 1987. But do you really know what caused them?

October may not be the cruelest month for investors -- based on the averages, that's September. But when Wall Street stumbles at this point of the year, it stumbles extra hard. And that's why Alison Southwick and Robert Brokamp picked October for a four-part series on the history of market crashes in the United States.

In this podcast, guest and former Fool Morgan Housel leads the discussion as they reflect on two major economic tumbles: the long downturn of the 1970s, and 1987's Black Monday. They talk about their causes, how Washington responded, and what today's investors should learn from them.

A full transcript follows the video.

This video was recorded on Oct. 10, 2017.

Alison Southwick: This is Motley Fool Answers. I'm Alison Southwick and I'm joined, as always, by Robert Brokamp, personal-finance expert here at The Motley Fool. Hello, Robert!

Robert Brokamp: Hello, Alison!

Southwick: Get your polyester on, because it's time for Part 2 of our "History of Market Crashes." In today's episode, Morgan is taking us on two stops in time: first to the '70s, to stand in line for gas, and then on to the '80s, for Black Monday. We'll also answer your questions about whether your kid's IRA will impact their financial aid. All that and more on this week's episode of Motley Fool Answers.

It's time for "Answers Answers," and today's question comes from George. George writes, "Robert made the brief statement that assets the child owns is the most unfavorable with regard to financial aid for college. Is that also true for IRAs and other retirement account options? 529s seem very limiting, especially if the child can work for a family business."

Brokamp: Well, George, there's several parts to that question, so let me back into it. So a kid can have an IRA, but only if they have earned income, and they have to be able to document that income. So if they work for the county or if they work for, as George points out, a family business, it could be lawn mowing and babysitting, but you've got to keep good records and file taxes. But as long as they have earned income, they can contribute to an IRA. That's great.

However, as George points out, in most financial aid formulas, money in the kid's name counts more against aid than money that is in the parent's name, so he's asking whether that impacts the aid. The bottom line is assets in retirement accounts don't count for the most part, and I'll get into the "most part" here later.

You generally don't have to worry about money in retirement accounts. What you do have to worry about with a kid's retirement account is if he or she takes the money out, it counts as income for financial aid the following year, so they won't count the balance in the IRA this year, but if you take money out to pay for college and do the financial aid application the following year, you have to put it down as income.

Now, as I've looked more and more into financial aid -- I have two kids in high school -- I've come to realize that every school does things slightly differently. My advice would be to go to the schools you think your kids might go to. Most schools have some sort of calculator on their website in which you enter your information and it gives you an idea of how much aid you're eligible for.

If you're thinking of putting $3,000 in your kid's IRA, go to the calculator, figure out the aid without the IRA, and then redo it again with the IRA and see if anything changes. I'm guessing it probably won't, but then do it again, but assuming you took that money out to pay for college, and see how the aid is affected.

And do that for everything. If you're thinking of buying a house, because most schools don't count home equity, but some do. Grandparents can own 529s. The balances they have in those 529s for the kid don't count for most aid calculations, but if you take the money out, it counts the following year. It gets kind of complicated, so really your best bet is to go to the schools you're interested in and figure out how they treat various assets and various sources of income.

Southwick: Today we're going to tackle two market declines: the energy crisis of the '70s and Black Monday in the '80s, and our tour guide in this journey through tough economic times is Morgan Housel. He's a partner at the Collaborative Fund. Hi, Morgan!

Morgan Housel: Hi, guys!

Southwick: Thanks for coming back! Again.

Housel: Thanks for inviting me back.

Southwick: We always are happy to have you back.

Brokamp: Always a pleasure.

Southwick: So last week we talked about the Great Depression, and now we're taking a big jump to the '70s. We're all wearing polyester and sweating, or freezing, because there is no in between in polyester. We're also waiting in line to fill up our Buick LeSabres. Despite disco, the '70s don't sound like a whole lot of fun. I mean, people made pets out of rocks. That's just sad!

Housel: And Bro still drives a Buick LeSabre. Interesting fact.

Brokamp: That's not true, but I do still have my pet rocks. Thank you very much.

Southwick: All right, Morgan, take me back to the '70s. This is going to get really geopolitical-heavy, right?

Housel: Yeah. And when talking about the market in the '70s, I think you have to take it back a little bit further and start right at the end of World War II in 1945. Two really important things happened in 1945 that kind of paved the way for what happened in the '70s, and they're sort of interconnected.

One was at the end of World War II. It was indisputable among every economist, every policymaker, that at the end of World War II, once all the wartime spending contracted, the economy was going to go right back into the Great Depression. And World War II is what pulled us out of the Great Depression in the '30s, and it was assumed by everybody that as soon as that ended, boom, right back into it.

And this really freaked out policymakers, especially because you had 13 million U.S. troops that were being demobilized, were going to come home with no job, into Great Depression II. So this was a really big deal for Truman and for all the policymakers at the time.

And then to add on top of that, because of World War II the federal government had a massive amount of debt that they built up to pay for World War II, far more than we've had since. Far more than we have today. So this was a really big deal. "How are we going to deal with this? Maybe this is going to be worse than the Great Depression, because now we have all this debt."

So they did two things. One is the Federal Reserve, which was much more politicized back then than it is now, they said, "No worries. We'll keep interest rates at 0%. You're the federal government. You have all this debt. If interest rates shoot up, you won't be able to pay for it, so we'll keep interest rates at 0%. Guys, don't worry about it. We got you." That was one thing.

The other thing that they did at the federal government level for all the troops coming home, they really made an effort to say, "We've got to make sure that these people have jobs and that they turn into consumers. What can we do for them?" There was a lot that went on with the GI Bill and other works programs. But two other things that they did -- they loosened the restrictions on getting a mortgage and consumer credit to turn people into consumers so they could start buying stuff.

Both those things worked. Both those things worked really well. The federal government kept control of its debt in the 1950s and 1960s, and the debt that was accumulated from World War II got pared down over time. It wasn't that big of a deal. And also, particularly in the '50s and '60s, the U.S. economy was great, because consumers were buying homes. They were buying refrigerators. And because Japan and Germany, at the time, were literally in rubble, the U.S. kind of had a monopoly on the world economy, more or less.

So the '50s and '60s were this huge boom time where everything went right in the U.S. economy.

Southwick: It sounds like the lesson is there's no problem that you can't spend your way out of.

Housel: That's actually a good point to make, because that amount of spending worked really well in the '50s and '60s for various reasons. One, as I mentioned before, is because a lot of the developed world, particularly Japan and Europe, were just trying to rebuild themselves. It worked that we could spend all this money, because we had a monopoly on global manufacturing. Even though we're spending all this money, we had the capacity to build it. We also built up manufacturing so much during the war to build tanks and airplanes and whatnot that we had all this manufacturing capacity to build cars, and refrigerators, and washing machines.

So it really wasn't that much of a problem with interest rates low and having that much debt. It just kind of worked. And I think that set up a sense of complacency among policymakers, at the Fed, and at the president level, at the Treasury level, and among consumers that, A, you know, monetary policy and fiscal policy for the government didn't matter that much. We've got this down. We haven't really had any big consequences from it for a long time. So you just get complacent from it.

And U.S. consumers, too, I think, really got complacent with the lifestyle that they were living, that the U.S. would kind of own the world economy, that interest rates were going to stay low, that there was always going to be a good-paying job right down the street. And so those two senses of complacency kind of cracked in the late '60s and early '70s.

A lot of it started when spending for Vietnam came along, and then wartime spending had to jump back up again. But interest rates were still low, and because the rest of the world economy was kind of coming back online from World War II, a lot of that spending and debt that was being taken out for Vietnam started to trigger inflation, which the U.S. really hadn't experienced at all since the 1920s, so it had been half a century at this point since you dealt with inflation, which set up a lot of complacency. It's just a long way of saying inflation really started picking up in the early 1970s, and that has all kinds of impacts on all kinds of investments in the stock market.

Southwick: Yeah, this is, when we were talking about planning for this series, this is the longest span between episodes in time, right?

Housel: Yeah.

Southwick: So we had the Great Depression, and then fast-forward 30 years later. That is the sound of nothing fast-forwarded. It sounds like it worked for a really long time until it didn't. When are we going to start talking about energy, because I thought this was about energy?

Housel: Yeah, that's one of the big things.

Southwick: Because we bought big cars? That's it.

Housel: That's a really great point. As oil prices started rising in the 1970s, it had a huge impact on the U.S. economy, more so than it would today or it did in 2008, the last time that oil prices spiked. Energy efficiency in the 1970s was awful. Your average car was getting 7 miles per gallon, and semi-trucks were getting 3 miles per gallon. It was just so inefficient.

And when oil was cheap in the '50s and '60s, when the U.S. just owned the world economically, it wasn't that big of a deal because oil was cheap and it didn't matter. But as you get into the '70s and oil prices started rising and then oil prices doubled and then tripled, it had a far bigger impact on the economy than it would today, just because oil as a share of most people's spending was much higher back then than it is today. Even when oil prices doubled in 2008, the share of most people's income that went to gas was still a fraction of what it was in the 1970s, so it just had a much bigger impact on the economy back then.

And also, because we had been, at this point, 30 or even 40 years since the economy was in really bad shape during the 1930s and the Great Depression, you get not only complacency but just a sense of shock among consumers who have never seen a really bad economy. And I think it causes a lot of retrenchment both for companies that say, "Whoa, maybe we shouldn't hire as many people because we don't know what's going to happen next," and among consumers who start forming a mentality that, "I don't know if my job is going to be here next month, so we should slash our spending this month."

And, you know, then you have high inflation coming in from the energy markets, which was a lot of geopolitical instability in the Middle East, Egypt, and Iran. Then you mix that with a lingering recession in the United States, and it all came to a head in the mid-1970s, with both recessions and a pretty bad market crash.

Brokamp: Just to put some numbers on it, when you look at the '70s as a decade, U.S. large-cap stocks averaged 6% a year. That's significantly below the 10% you always hear about. But on top of that, inflation was 7.5% a year, so even though your portfolio was growing on a nominal basis, you were losing purchasing power each and every year.

Housel: And that was not only true for the stock market, but especially true for Treasury bonds, which back then and today are seen as the safest asset, or even a riskless asset. If you invest in Treasury bonds, there's no risk involved in that. But during this period from like the late 1950s to the early 1980s, let's say, Treasury bonds lost so much money to inflation that if you invested in Treasury bonds in the late '50s, by the early 1980s you had lost half your money in real terms, adjusted for inflation. And that's, I think, really easy for investors to overlook, because they often don't subtract inflation from their investments at the end of the year to really get a sense of how much wealth did I actually gain this year? It had a huge impact on investing during this period.

And then the other thing is that as this feeds into the stock market, stocks compete with other assets for returns. It's just a big competition among stocks and bonds and real estate of what asset class is offering the best returns, and that's where investors are going to put their money. So as interest rates start rising, they become more attractive relative to stocks. And because of that, when you have a period where, now that interest rates are rising in the '70s, so that you can buy government bonds that yield 7%, 8%, 10%, now stocks look way less attractive because you can earn a 10% return in bonds.

So stock prices needed to fall, and fall a lot, just to make up the parity by comparison with bonds. And so that's what really dragged stock prices down in the 1970s, was the fact that bonds got way more attractive because interest rates were rising.

Southwick: It was a slow drag, right? There wasn't a major market crash. We're going to talk about Black Monday here, later. Or was there a major market crash?

Housel: Not the one-day crashes that happened in 1929 or in 1987, but 1974 was a really bad year for stocks. You had some bad years, but no overnight crashes like the other periods. But it was bad year after bad year. And in the 1970s there were a couple of really good years. It was a period of pinballing back and forth. You had years where the market would be down 40% one year and then up 30% the next year and then down 20% the next year. The 1970s was a pretty chaotic time all around, and then on top of those returns or lack thereof you had...

Southwick: Disco...

Housel: ...not only high but rising inflation.

Brokamp: Disco!

Housel: I mean, come on.

Brokamp: Which is awesome, by the way.

Housel: Can you imagine seeing your portfolio and then going home to disco? I don't know how people did it.

Southwick: Just one day at a time.

Housel: Just a time to shrug through.

Brokamp: I think one of the important historical aspects of this, or the consequence, was that people basically gave up on stocks. They started moving into gold and real estate, and saying basically that stocks were for suckers. Famously, in 1979, [BusinessWeek] had an issue and the cover was "The Death of Equities," saying no one invests in stocks anymore. Of course, that point would have been the best time to invest in stocks, but people had given up. And why would you invest in a risky asset when you can go to the bank and get a CD that was yielding 12% to 13%?

Housel: Right.

Southwick: Wow! That's crazy.

Housel: But the CD that was yielding 12% was during a time when inflation was 10% to 11%. It was a pretty crazy time all around, and even though I obviously wasn't an investor or even a person back then, when you read about the period and read what people were writing at the time, it wasn't just pessimism at the moment, but a sense of long-term pessimism, where it was like, I think the U.S. as the world's leading economy was over. Very similar to what you saw in 2008-2009, where people really saw it as a paradigm shift back to something else.

Interesting, too, this is around the period where both Japan and Germany had effectively rebuilt themselves from World War II and their economies started not just growing but surging, and particularly Japan. Starting in the late '70s and early '80s, Japan was looking like it was going to become the world's dominant economy by leaps and bounds. In economic growth, and technology and innovation, it was really running laps around the U.S. at that point, which added to the sense of pessimism in the United States that we were falling behind.

Brokamp: Robert Shiller has used the term "animal spirits," so you look at the '70s in terms of the zeitgeist of the time. You had Watergate. You had the Vietnam War. You had OPEC and the oil crisis, which made us feel like we were a little powerless against these other countries. I was around for the 1970s. I was born in 1969, and what I remember was the long gas lines, and I remember that my first car was a 1977 Lincoln Continental, and it got 6 miles to the gallon.

Housel: Six miles to the gallon.

Brokamp: Six miles to the gallon.

Housel: That's great. Someone made the joke that you should start measuring that in gallons per mile.

Brokamp: If you read what New York City was like in the '70s, crime was such an issue...

Housel: Oh, it was such a big issue.

Brokamp: ...back then. It was pretty scary. The blackouts that happened in the '70s. It just felt different.

Housel: I had a friend who had a 1970-something Ford pickup truck. A real old pickup truck. He said that when he was driving up a hill, if he floored it he could see the gas gauge move. He was probably exaggerating, but I would believe that story.

Southwick: So it was kind of a slow-burning economic mess. How did we come out of it?

Housel: I think there are a few times when talking about these events where you can point to one person and say that person pulled it out -- I think in this event you can point to Paul Volcker, who was the Fed chairman in the early 1980s.

Southwick: A maker of rules.

Housel: Right.

Southwick: I've heard of his rules.

Housel: That's right. He kind of came back in the last couple of years with the Volcker Rule. But he did something in the early '80s that I think very few people in the history of the Fed would do, which, he was fearless about jacking up interest rates as high as they needed to go and brought interest rates up to close to 20%, which made this economic recession and pain that much worse. A lot of businesses went out of business that had to refinance their debt, but now interest rates were 20%, so there was no way you could refinance it. Really caused a lot of pain in the economy, but it broke the back of inflation, which is what needed to happen.

And Paul Volcker, during the time -- it's funny, in hindsight, I think a lot of people think Volcker is a hero. I think he's almost universally seen as a hero today. In the '80s he was probably the least popular person in America, so much so that I think he was the first Fed chairman that had Secret Service detail because people at the Fed built an effigy of him and burned it on the steps of the Fed.

Southwick: His own employees did that?

Housel: Not his own employees, but somebody. But he was truly one of the least popular people in America at the time, because it was viewed -- and I think rightly viewed -- that his actions were driving the economy into the ground. And it's true that they were, but they were also, at the same time, killing what needed to be killed. It's almost like with chemotherapy. It's going to destroy your body, and it's awful. And from the outside it's like, "God, chemotherapy is the worst thing ever." But at the same time, it's killing the worst disease. That was what Volcker was doing in the '80s.

So it took several years of doing it, but finally in the early '80s -- about '83 or '84 -- is when inflation and interest rates started falling again. And then you had the opposite effect of rising interest rates are bad for stocks. And then, all of a sudden, '83-'84, interest rates were plunging, which was great for stocks.

Brokamp: And bonds.

Housel: And then it's Reagan, "Morning in America," and bonds, too. Inflation's falling. You get a new president who has a lot of optimism. Then you start, in the 1980s, a booming rally.

Southwick: That's right. It's the '80s! We're going on our next stop in this tour.

Housel: Miles per gallon is up to 8 miles a gallon now. We've improved a little bit.

Brokamp: Progress.

Southwick: We're not even talking cars. We're taking our yachts everywhere. The '70s were a bummer, so we're going to go someplace a heck of a lot more fun, and that's the '80s. Everyone is doing cocaine, like I mentioned. They're yachting to their jobs on Wall Street. Greed is good. Shoulder pads are huge.

Housel: Did you say everyone was doing cocaine in the '80s?

Southwick: Yeah, that's what I know about the '80s.

Housel: Let's just move on.

Brokamp: You were alive in the '80s. Were you doing cocaine? Maybe we shouldn't talk about this on the internet.

Southwick: No!

Brokamp: OK.

Southwick: I was a toddler. But no, if you watch the old movies and the old TV shows, everything is all big and glitzy. And anyway, it was this huge party that was never going to end, probably because of the cocaine, so here we go. We're coming up into October 1987.

Housel: Stocks have done incredibly well for the past five years at this point. Four or five years. Stock prices had about tripled at this point. The unemployment rate had come way down. Reagan is very popular as a president because of, I think, the economic performance at the time. Again, back to what Bro was saying about "animal spirits." I like tracking what is the average mood is at the time. And in the '50s and '60s, it was great. The '70s was really bad.

The '80s went to great again. People were really optimistic about the economy. What was happening in the United States and the stock market. This was during the peak when Japan was really looking like it was going to lead the world. I think there was some anxiety about that, but the U.S. in terms of innovation and growth was distinctly No. 2 at this point, even though it was a much larger economy. But overall there was quite a bit of optimism. The stock market had done really well right up to October 1987.

Southwick: All right. Are we ready? Are we ready for October 1987? Which, of course, is exactly 30 years ago ...

Brokamp: That's right ...

Southwick: ... when this podcast is airing.

Housel: Yeah, that's right.

Southwick: So it's sweater weather in New York City, and what happens?

Housel: I think one of the really interesting parts about this is it was Alan Greenspan's third day on the job.

Southwick: Wow!

Housel: Alan Greenspan is in charge of the U.S. economy and everything that ties into it at this point. And his background before he joined the Fed was, he was basically an academic. He was an economic consultant, but not that much experience in high levels of politics, where you have to deal with all the different dynamics of politics. So I imagine being thrust into the Fed chairman job, at that point, when you don't have a heavy background in politics, and then 72 hours into the job the stock market fell more than 20% in one day.

Southwick: Why? Why did it do that?

Housel: Do you know what's interesting about the crash of 1987? This is true for the crash of 1929, too. Thirty years later, people are still debating why it happened, and there's not a lot of consensus about why it happened. Maybe this, too, gets back to the "animal spirits" of sometimes the stories that we tell ourselves change really quickly.

If there was one technical aspect that happened in '87, there was a thing in the 1980s that was really popular called portfolio insurance, which was a product that's not around anymore. It was a terrible idea. But it was effectively an insurance policy that if you owned stocks you had an insurance policy against it, and if the stocks fell by a certain amount, you had an insurance policy that would sell a basket of stocks and repay. It was a really complicated arrangement that tried to de-risk investing as a lot of investment products do.

But the practical reality of it was that if stocks started falling a little bit, these stock insurance policies would sell stocks to make up for those losses, and then it just snowballed on itself. Losses triggered selling, which triggered more losses, which triggered more selling. It happened really quick. And this is at the very early bleeding edge of when people were using computers to invest, both to execute trades and to see what was going on in the world.

I mean, computers in 1987 were absolutely archaic compared to today, but before that and for all of history, the stock market was entirely face-to-face. You had traders on the floor that would literally yell at each other to trade orders, and this was the first time that it was computers that were starting to make some of the decisions.

And from what I understand -- and again, there's not a lot of consensus about this, but because it was so early, the computers that were set up doing this had no idea what they were doing and just weren't -- they didn't communicate with each other very well, were prone to all kinds of glitches. The architecture of it wasn't really thought out very well, and it just kind of fed on itself in one day, to where selling begat more selling, and the next thing you know it feeds on itself. And that just creates fear among human investors, not the computers that were selling, that causes them to sell. And it just spreads from there.

And the pervasive view after this happened, the day of the crash of '87, go back and read the newspapers. Everything had the same headline, was, "This is the crash of 1929, and we're going back into the Great Depression." That was the view that everyone had back then. And it makes a lot of sense, because that was effectively how the crash of 1929 started. You had a big run-up in the '20s, and also overnight, everything then comes to an end.

Southwick: But that didn't happen, right?

Housel: The really amazing thing about the crash of 1987 is that I think eight months later, the market was back at an all-time high. Like if you look at a long-term chart of the stock market, you can barely see '87.

Brokamp: Right.

Housel: It's like a dot that barely happened.

Brokamp: The stock market actually made money for the whole year.

Housel: In that year and in 1988, as well.

Southwick: Is it maybe just a matter of great branding? Like being able to say "Black Monday!" Like if hadn't been named Black Monday, would we have forgotten about it?

Housel: It gave journalists something to talk about. But that's really the amazing thing, is that in hindsight it was nothing. It didn't really do anything to the economy. It didn't really do much to the stock market within eight months. Like when we talk about the Great Depression, we talk about the human suffering. The unemployment. When people talk about the crash of '87, it's mostly just for entertainment, honestly, because not much came from it. But if anything, it's just a show of the disconnect that often happens between what companies and businesses are doing and what stock prices do as they react to the architecture of the stock market that is independent from the businesses that people are investing in.

Southwick: In the summer of 1988, I was a sophomore in college and I worked for my high school English teacher's husband, who was a broker for Merrill Lynch. I was just doing errands, and cold-calling for seminars and stuff like that. But I remember the event of 1987, and it stuck with me, No. 1, that stocks were too risky. And I remember saying to him, "Isn't this just all a bunch of gambling?" And I got a good lecture about why investing isn't gambling.

But when I look back on that day, most people did not have computers to check stock prices. There was no CNBC. You didn't know the price of your stock unless you called up your broker or you waited until the newspaper the next day. I think people back then felt a little bit more out of control, because they didn't know what was going on. They might have seen on the news that the Dow dropped, but they didn't necessarily know what their individual stocks did, and they couldn't just get on their computer and sell if they wanted to. They had to wait until they could get their broker on the phone to make the transaction.

So I think when you think of investing back then, people felt a little bit more like they didn't have as much control over what was going on and felt like a little bit more of a victim of these big drops in their portfolios.

Housel: I often wonder, though. I agree with that, but I think there is a devil's advocate to make. People have so much information today that maybe they have too much.

Brokamp: I think that's possible, yes.

Southwick: And it's so much easier to buy and sell.

Housel: The fact that you can just be at the gym and then get a push alert on your phone that says the Dow is down 100 points. That's not healthy...

Southwick: Then pick a different app and say, "Sell, sell, sell."

Housel: When you buy an iPhone, there aren't that many apps that come preinstalled, but one of them, that's right on the home screen for everyone, is a stock app.

Brokamp: Is a stock app, yes.

Housel: Which is cool. I like that. But I think that mentality or just what that brings to a lot of people, is unhealthy. It's something people didn't have 30 years ago, constantly being tied into it, especially because so much of what is, quote-unquote, "news" today is just commentary, and that's even charitable. It's just opinion. And especially around crashes -- the crash of 2009 and whatnot -- there's a big thing in the pundit world where people wanted to be, particularly around 2009, everyone wanted to be the guy to go on CNBC and say that the world's coming to an end. This hasn't even begun yet. We're going to go back to the Great Depression. That person got famous. So I think the amount of commentary we have today is probably unhealthy compared to what it was back then.

Brokamp: I think I spent half my days back then answering calls from clients giving stock quotes. And you'd get some people who'd call back every day and you knew the 10 stocks that they owned, so you'd just run them down.

Southwick: But how would you do it? Did you have a computer?

Housel: He just made it up.

Brokamp: They had what they called a Quotron.

Southwick: He's just like, "I don't know..."

Brokamp: Of course, I had some dice. I'd roll them. I had my 20-sided D&D dice.

Southwick: So you caused Black Monday.

Brokamp: Exactly. I had something called the Quotron.

Southwick: The Quotron. I love it. It didn't have a number after that? The Quotron 3000?

Housel: The Quotron 4000.

Brokamp: Maybe it did. And you just put it in and then you got a number again.

Southwick: All right. I feel like you have already given us a takeaway lesson. Do you have a final thought?

Housel: No disco. No polyester. That's the main takeaways from this.

Brokamp: Polyester, no; disco, yes.

Southwick: I think you're the only bull on disco.

Brokamp: Maybe I'm going to start singing some Abba songs.

Housel: I think a takeaway from the '70s is the extent to which interest rates and inflation drive stock market valuations. And if people ask why the stock market has done so well in the past eight or nine years, it's because interest rates have been low and stayed low, and that's made stocks really attractive compared to bonds, which is the main competition for investors' money.

Just a couple of days ago, Warren Buffett was on CNBC, and he said if he could have just one piece of information that was going to tell him what stock prices were going to do over the next 10 years, it's what interest rates are going to do over the next 10 years. If you know what interest rates are going to do in the future, you have a pretty good idea of what the stock market's going to do. It's really either the anchor or the fuel that's going to move what stock prices are doing.

And that goes again, too, for the next 10 years. What is going to break the stock market rally and cause the markets to plunge? There are several things, but almost certainly it would be if interest rates start rising. So that's the big takeaway from the 1970s.

Southwick: And the '80s?

Housel: From the '80s I think it's two things. It's again, as I mentioned, the disconnect between the architecture of the stock market and the functioning of businesses that you're investing in. It could be two completely different things, and sometimes those things get 10 miles apart, like they did in October 1987, where there was no connection between what profits businesses were earning and the 20% crash in one day.

And I think just keeping that in mind and always focusing on the business you're investing in versus the day-to-day actions of the stock market, even when it's enormous, is incredibly difficult for people to do, but it's one of the most imperative skills as an investor.

Southwick: So now that we've relived some of the lowlights of the 1970s and 1980s, Morgan, you get to stick around, and we're going to relive some of the highlights and some of the newsworthy events.

Housel: I'm ready.

Southwick: All right, let's see who wins this round.

So for this series, after we talk about the market crash, we get to talk about the rest of the decades and the time periods around this and have some trivia, where I know all the answers and you guys don't. We have the categories of art and literature, geography, science and tech, history, sports and leisure, and entertainment -- your typical Trivial Pursuit categories. Some of these questions you will absolutely get, and some of them I don't expect you will, but that's why it's called a game.

Brokamp: Of course.

Southwick: Maybe you'll surprise me. Surprise me. All right, so, Morgan, you get to go first.

Housel: Let's do history.

Southwick: As you remember, since these are all historical questions, history in particular I'm just basing on the Time magazine "People of the Year." It's kind of a cop-out, but I don't care.

Brokamp: It works.

Southwick: If you were a U.S. president or a Communist in the '70s or '80s, you were pretty much a shoo-in for being named a "Person of the Year" by Time magazine. However, things got weird again in both 1982 and 1988. What was named "Machine of the Year" in 1982 and what was named "Planet of the Year" in 1988?

Housel: I imagine it's "computer" and "Jupiter"?

Southwick: Oh!

Housel: Saturn?

Southwick: It's Earth!

Housel: Really?

Southwick: Do you know why? Because it's endangered.

Housel: Oh, OK.

Southwick: Oh, so close. It was the computer, yes, and the endangered planet Earth was Planet of the Year.

Brokamp: Wow!

Southwick: Earth, you're my planet of the year every year. Let's be honest.

Housel: That was when acid rain was a big term.

Southwick: Oh, remember acid rain? We were terrified of acid rain.

Brokamp: Yes.

Housel: And especially as a kid.

Southwick: That was good branding.

Housel: When you'd ask your teacher what acid rain was and they'd say, "Oh, rain that's going to burn your skin." I was terrified as a kid.

Southwick: Yeah! Oh, such effective communication, but I love it. All right, Bro. Your turn.

Brokamp: Let's go with entertainment.

Southwick: Entertainment. Oh, you're going to totally get this one.

Brokamp: We'll see.

Southwick: Liam Neeson unsuccessfully auditioned for the role of what movie character after the movie's director, Rob Reiner scoffed, "You're only 6-foot-4"?

Brokamp: The Princess Bride.

Southwick: Yes! But what was the character?

Brokamp: Andre the Giant.

Southwick: What was the character in the movie that he auditioned for? The role that Liam Neeson auditioned for?

Brokamp: Fezzick?

Southwick: Yes.

Housel: They and Andre go together.

Southwick: So of course, the role actually went to 7-foot-4-inch Andre the Giant. According to IMDb, other auditions that didn't pan out were Arnold Schwarzenegger and Kareem Abdul-Jabbar as Fezzick; Danny DeVito as Vizzini; Uma Thurman, Courteney Cox, and Meg Ryan as Buttercup; and Christopher Reeve as Westley.

Housel: What if Danny DeVito was Fezzick? That would have been funny.

Brokamp: That would have been funny. Those were all good choices.

Southwick: What's crazy is that this much beloved fairy tale is returning to theaters for its 30th anniversary on Oct. 15 and 18.

Brokamp: Nice.

Southwick: Isn't that crazy? It's the first movie I ever saw in a theater.

Rick Engdahl: Field trip.

Southwick: Yeah, we totally did that. All right, Bro. You got that one. Morgan, your turn.

Housel: Science and tech.

Southwick: Science and tech. The personal computer, microwaves, cable TVs, VCRs, Walkmans, mobile phones, gaming systems. So many other technologies started invading our lives in the '70s and '80s. You could even say they were space-invadering our lives. But I would rather ask you to guess the name of this office staple that was invented by accident and hit the shelves in 1980. It also dominates every brainstorming session at The Motley Fool.

Housel: Post-it Notes.

Southwick: Yes! The original Post-it Notes came out in 1980, which is crazy, because I thought Post-it Notes had been around since the '60s. They feel like a very '50s, '60s thing. Anyway, the original note's yellow color was chosen by accident, and it was because the lab next door to the Post-it team only had yellow scraps of paper to use.

Brokamp: There you go.

Southwick: That one goes to Morgan.

Housel: The number of cool things that are invented by accident. It's like a big reason for pessimism. Like, should we even try? Should we even try to do stuff? Like all the cool things are just going to be mistakes anyway.

Brokamp: Just try some accidents and see what happens.

Southwick: All right, Bro, your turn.

Brokamp: Golly! I'll go with art and literature, I guess.

Southwick: Art and literature. As we already talked on the show, picture it. New York in the '80s. Grime, graffiti, and gallery openings. One artist experienced it all when he catapulted from the street in literal homelessness to an overnight sensation in the art world before dying of a heroin overdose in 1988 at the age of 27.

Brokamp: I have no idea. Mapplethorpe. I have no idea.

Southwick: No? Do you know, Rick?

Engdahl: Warhol?

Southwick: Nope.

Housel: But you were all young. You were all young.

Southwick: Close. John-Michel Basquiat.

Brokamp: What?

Southwick: Yeah! In May of 2017, his 1982 painting of a skull brought in $110 million at Sotheby's.

Brokamp: Oh, gee.

Southwick: It became the sixth most expensive work ever sold at auction. Only 10 other works have broken the $100 million mark. It was purchased by a Japanese billionaire. Basquiat's vibrant painting -- here you go, that's what it looks like -- set the record...

Brokamp: Podcast listeners.

Southwick: Well, how would you describe it? It looks like a skull. Graffiti. It looks like a graffiti skull.

Brokamp: It looks like something that no one in their right mind would pay $100 million for.

Southwick: Well, it set many records, not only for the most ever paid for a work by an American artist, but it was the most paid for a work by an African-American artist, and it was the first work created since 1980 to make over $100 million.

Brokamp: Golly.

Housel: Impressive.

Southwick: Morgan, your turn.

Housel: Geography.

Southwick: In May of 1980, a 5.1 magnitude earthquake triggered this geological event that killed 57 people and caused $1.1 billion in damage in the United States.

Housel: In 1980?

Southwick: May of 1980. This hits close to your home.

Housel: In Northridge? San Francisco.

Southwick: Closer to your home where you're from.

Housel: I don't know.

Brokamp: Mount St. Helens?

Southwick: Yeah!

Housel: Oh, OK.

Southwick: Yes, Mount St. Helens erupted, which is terrifying.

Housel: San Francisco is way closer to my home than St. Helens.

Southwick: I thought you were from Seattle.

Housel: No, I lived in Seattle for a while. I grew up in Lake Tahoe.

Southwick: Oh, I didn't know that. Oh, you grew up in a place that's nice. Lake Tahoe is gorgeous.

Housel: Yes, but it's kind of boring to live there.

Brokamp: Unless you ski. Do you ski?

Housel: I did.

Brokamp: You skied. I know you skied.

Southwick: You just sound so playful there. You skied! I know you did!

Brokamp: You were like a competitive skier. You didn't just ski.

Housel: I lived the life, yeah.

Brokamp: You didn't go to a normal high school, right?

Housel: Yeah.

Southwick: Did you go to ski school, just like an '80s movie?

Brokamp: Better Off Dead was based on your life, isn't it?

Southwick: So Mount St. Helens, of course, was this mountain in part of the Ring of Fire in our tectonic plates in this world. It blew up, and a ton of people died. And the pictures are insane. It looks like snow. Like, there's so much ash that fell on people. And they also said that it darkened the sky so much that the street lights came on all the way in Spokane, which, unless you really know your geography, you're not going to be impressed.

Housel: That's a way away.

Southwick: I'm more terrified of the earthquake that's coming where basically all of the West Coast is going to drop into the ocean.

Housel: It's just going to fall into the sea, right?

Southwick: Yes!

Housel: You're going to have acid rain in the Ring of Fire.

Southwick: It's terrifying!

Housel: Yeah. Yeah.

Engdahl: That was one of the things we were afraid of in the '80s.

Southwick: Acid rain.

Engdahl: No! The earthquake that's going to drop California into the ocean.

Brokamp: Yes, I remember that.

Southwick: No, I just got scared about it ...

Engdahl: That was a Superman plot.

Southwick: The New Yorker article is what made me terrified of it.

Housel: Then Kathryn Schulz wrote about it...

Southwick: It's so terrifying.

Engdahl: Except we'll already be dead from the supervolcano in Yellowstone.

Housel: In the Seattle area, there's only an earthquake every 200 to 500 years, but when it happens it's astronomically powerful. But since it happens so infrequently, we're not prepared for it at all.

Southwick: Almost sounds like some sort of market crash here or there, right?

Housel: To come full circle here.

Southwick: Yeah. All right, the last category is sports and leisure. Are you ready? Are you ready, Bro? While it was designed to attract women, everyone got the fever for this arcade game in 1982. The name comes from the Japanese onomatopoeia for eating -- paku paku!

Housel: Oh, that's easy. Come on!

Brokamp: Pac-Man?

Southwick: Yes!

Brokamp: There we go.

Southwick: It was originally supposed to be called Puck-Man in the United States because he resembled a hockey puck, but someone very smart realized the vandalism potential for a game called Puck-Man.

Brokamp: I don't get it. Can you explain that to me?

Southwick: Nope! I will not. All right. That's it for the game. I think Bro won, but I'm not positive, because we all know how bad I am at keeping score.

Housel: He always wins.

Southwick: Morgan, thank you again for joining us.

Housel: Thanks for having me.

Southwick: Where can our listeners find you in the world?

Housel: On Twitter. My screen name is MorganHousel, one word. Or you can go to

Southwick: And what are you writing about lately?

Housel: All kinds of stuff. Whatever hits my mind.

Brokamp: Stuff and things.

Housel: I mean, it's all under the idea of business, investing, and psychology, but I try to take it in as many different directions as I can.

Southwick: Just to keep from going insane.

Housel: So I write about the stuff.

Southwick: Yeah, you write about good stuff.

Housel: It's really around one topic. You can write three articles and then you've got nothing else to say. You've got to mix it up a little bit.

Southwick: So there you go. Head to the Collaborative Fund blog...

Housel: Just some stuff...

Southwick: ...where Morgan mixes it up a little bit. Sorry. Thanks, Morgan, for joining us. That's the show. Thanks again to Morgan for joining us. If you want more Morgan, head over to the Collaborative Fund's website at That's where Morgan writes. You can read all his columns and get his latest thoughts on investing, economics, behavioral finance. It's delightful!

The show is edited feverishly by Rick Engdahl. Our email is Drop us a line. We'd love to hear from you. For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody!

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