Motley Fool Hidden Gems Investing - A First-Class Catastrophe

Episode Date: September 22, 2017

FedEx delivers. CarMax revs up. Finish Line finishes strong. Bed Bath & Beyond takes a bath. And General Mills brings back a classic breakfast cereal. Plus, investigative journalist Diana Henriques talks about her new book, A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History. Thanks to Harry's for supporting The Motley Fool. Get your Free Trial Set - go to Harrys.com/Fool .     Learn more about your ad choices. Visit megaphone.fm/adchoices

Thanks to Harry's for supporting this episode of Motley Fool Money. Get your free trial set, including a razor handle, five-blade cartridge, and shave gel. Go to harrys.com slash fool. Everybody needs money. That's why they call it money. From Fool Global Headquarters, this is Motley Fool Money. Chris Hill. It's The Motley Fool Money Radio Show. I'm Chris Hill, and joining me in studio this week from Million Dollar Portfolio, Jason Moser. From Motley Fool Pro and Options, Jeff

Fischer. And from Total Income, Ron Gross. Good to see you, as always, gentlemen. Ron Gross. Hey, Chris. We've got the latest headlines from Wall Street. Best-selling author Diana Henriquez is our guest. And as always, we'll give you an inside look at the stocks on our radar. But we begin with one of the bellwethers of the U.S. economy. FedEx shares hit a new all-time high this week after first quarter revenue came in north of $15 billion. Jeff Fischer, you looked at the results. What stood out to you? So, Chris, FedEx is up despite having a really tough year. They acquired TNT Express

last year for $4-5 billion, a lot of money, and then were soon hit by a massive hacking scandal, you could say, that really affected business, hit the results. I would rather say fiasco. Yes, criminal activity is what we should call it. It is. That hit results across the board. What's happening, though, is investors are looking past that, and they're believing management when they say that their goal of increasing margins and operating income by $1.2 to $1.5 billion by 2020, they're going to hit those numbers anyway. And so, the stock is up 18% this year. What stood out is they're executing on their plan to become more efficient and

delivered to more of the world, despite this hack that they're working through. Jason, just like we've talked about with companies like Apple, where Apple's all about the iPhone, but you look at their services segment and the growth there, the freight segment at FedEx is not their biggest segment, but in terms of growth, they're kind of crushing it. Yeah, big opportunity there for sure, especially as we go into more of a logistics-driven world. It's about getting things from point A to point B as quickly and efficiently as possible. And on the one hand, FedEx and its ilk like UPS, they have owned this space for a long time and they've done really well. There is more competition coming in from companies

like Amazon, who are looking to own more of that last-mile experience. I think it's really interesting with a company like FedEx, though, they're going to raise prices. And really, they can get away with doing that. It's very difficult to combat that, because the service that they provide is so necessary. They have such a big infrastructure already established and such a great network there. It's just a phenomenal business when you look at the nuts and bolts of it. A lot of pricing power there. You have to like that from the investor's perspective. It's true, Jason. Especially right now, where they say that what's happening out there is reflecting solid consumer spending. The economy is healthy in the U.S. and they're

seeing a rebound in industrial activity in the U.S. as well. Internationally, capital spending is supporting higher GDP growth across the board. So, FedEx is a great company to follow just to see how the economy in general is doing. So, they're doing well. What's amazing still is that they're working to restore their customer volumes still from that malware attack, and the whole first quarter of the conference call was all about the cyber attack. So, just to be clear, even with all of these challenges and all of these bumps in the road, no pun intended, the stock's still hitting an all-time high. Imagine if if they didn't have these issues.

True. And it's been a market outperformer since it came public in the 70s. And the past five years and the past 10 years, it's consistent outperformers. What will be a really true test is when we see fuel prices really go up meaningfully. We're still in the phase of very low fuel prices. And while that's a challenge, they deal with it. That's just part of the business. We haven't seen them have to deal with it for a while. So, when that does happen, it's going to be very interesting to see how the market treats the stock. Retail news this week that may not have been surprising, but was still a little

bit jarring. Toys R Us filed for Chapter 11 bankruptcy protection. CEO Dave Brandon says the stores will still be open through the holidays. They just got too much debt, Jason. Feels like they're taking a little bit of our childhood away from us. That's what I'm saying. This kind of hit me on a gut level. It's a bit sentimental, I guess. I mean, listen, there are a lot of takeaways from this one. But Ultimately, in the end, when you have a company that is devoting a lot of financial resources to a questionable strategy, and they just keep on growing that debt, it is really, really difficult to overcome that in the face of a market that is changing very quickly. Not only

the e-commerce, not only this proliferation of e-commerce, but really, we think about how toys have just become something different today. The definition of a toy is much different today than it was when we were growing up. There's a much smaller window there for kids before they start graduating to those devices. I mean, you're right, Toys R Us is not going away. Wall Street banks are out there providing some lending there. And I think a lot of that is based on at least the perceived value of some real estate out there. It's what we call the Arrested Development Thesis, right? There's always money in the banana stand. The problem is, you better be good at valuing that real estate, or they will come back and bite you.

We've seen that happen with Sears already. So, as Ron always asks with JCPenney, does Does the world really need Toys R Us? I'm thinking right now, probably not. It's interesting you say that. A few years ago, the one nearest to my home closed. And I thought it was really because the strip center was turning over and being deconstructed, for lack of a better word. And people didn't miss a beat. In the day of Amazon, where you could just order eight things and return seven of them free of charge, you don't need that big box toy retailer. Digital content, social media, all of those substitutes out there competing for those kids' attention.

I mean, it's just a much different landscape today. A trip down memory lane, Circuit City, Linens and Things, A&P, Blockbuster, Radio Shack. You're old. Borders. Did I say Sports Authority? Sabaro Pizza. All these retailers that have gone bankrupt in the past five, ten years. And it just points to these companies are operating on such thin margins.

you have high expenses, you're so dependent on steady traffic. And then, if you start to take on debt, it's just one misstep and you're in trouble. Although, give Toys R Us credit for making it this far, because you go back to the late 1990s and a little company called eToys, which had this blockbuster IPO. And at that point in time, there were plenty of people on Wall Street saying, oh, Toys R Us is doomed. And it was just a matter of a few years. And they were right. They were right eventually, But it was just a matter of a few years before e-toys was the one going down.

And in fact, Toys R Us bought them for the inventory. You would tie this back to a couple of public companies. And we get a lot of questions regarding Hasbro and Mattel and how this affects those companies. It's interesting to see when this announcement was made, Hasbro stock actually traded up. But Toys R Us is not really essential to either one of those businesses. Now, Mattel comes out on the short end of the stick as they have more on the receivables line than Hasbro does. But ultimately, with Walmart, with Target, with Amazon, there are a lot of different ways to fill in that void that Toys R Us may very well leave.

That's true, although this will be one to watch for the next 12 months or so, because I think, certainly, when Sports Authority went down about 15 months ago, there were plenty of people saying, boy, this bodes well for Dick's Sporting Goods, this bodes well for Nike and Under Armour, because they're building out their own e-commerce lines, and all three of those have struggled since then. Yeah, they definitely have. In the near term, they have suffered greatly. Speaking of athletic retail, Finish Line had a bit of a comeback this week. Shares of Finish Line up 10% on Friday after second quarter results came in better than expected, which leads to this question, Ron. How low

were the expectations? Step away from the stock price, because it's not indicative of anything here. This is a bad report. I do not care that the stock up. Yes, better than expected, but things are not going well at finish line. Same-store sales down 4.5%, revenue down 3% overall. Guidance is miserable. They're being forced to be promotional. They're using words like challenging retail environment, which I feel like I've heard time and time and time again. This is a company that is struggling. Now, we can blame it on Nike if we want, but that's almost a whole other discussion. Nike is struggling and it's translating into tough times for folks like Foot Locker and Finish Line.

Finish Line actually purchases 70% of their total merchandise from Nike. So, if Nike fails to be innovative, Foot Locker, almost by definition, is going to struggle as well. This company is having a difficult time in a very difficult environment. So, what do you think, if anything, turns it around for Finish Line? If you don't want to hear the CEO coming out and using phrases like, challenging retail environment. What would you like to hear? Well, they are rumored to be an acquisition candidate right now, because the stock has been beaten down. It's down almost 50% this year. Sports Direct, a U.K. sports retailer, owns a chunk of the stock. Finish Line actually

recently instituted a poison pill, a shareholder rights agreement, to try to fend off hostile acquisition takeovers. So, it forces potential suitors to come to the table to discuss potential. But the only thing, I think, possibly part of the strength in the stock this week was, A, better than expectations, even though its results were poor, and the potential that maybe that acquisition is actually going to happen. Back in your hedge fund days, did you ever encounter a poison pill? All the time. Really? Yeah, all the time. Shareholders were afraid of

Ron Gross, and so they're like, let's get a poison pill in here? Yeah, or we would be activist investors against companies that had 15%, that's a typical number, 15% poison pills, so you can buy up to 14.9%. Did they try to put it in your drink, or put it in your food? It's the Gordon Gekko of the Motley Fool. Second quarter profits for CarMax rose nearly 17%, and shares of CarMax on the rise as well, Jeff. Yeah, CarMax up 15% year-to-date, a little better than the S&P 500. Chris, they did really well despite the hurricanes in Florida and Houston affecting business, closing some locations there.

And what's happening, though, comes right around, back around to what we've talked about so far this entire show. It's all about online. It's fascinating to see that that is their focus. they said results are stronger because of their work on search optimization online and their work on their online website as a whole, driving traffic, driving sales. And then the first few questions in the conference call were not about hurricanes, like I expected, but about how they're photographing their cars and presenting them online and what else they're adding to their online presentations to drive more volume. So it's really the direction our world is going,

even for giant, heavy items like an automobile. So, when you talk about how some of their locations, particularly in the Houston area, were closed as a result of the hurricanes, are they moving to a world where they're having fewer locations and more centralized, huge parking lots or something, where they're essentially storing their cars and driving more of the business online? Interesting question. I could see them going that way down the road. Right now, they're closing underperforming stores, but they're still opening new locations, so they're still in growth mode. But really, online is changing everything, Chris.

This week, the healthy breakfast cereal crowd got dealt a serious setback. Details coming up. Stay right here, you're listening to Motley Fool Money. As always, people on the program may have interest in the stocks they talk about, and Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Welcome back to Motley Fool Money. Chris Hill here in studio with Jeff Fischer, Jason Moser, and Ron Gross. Shareholders of Bed Bath & Beyond needed a hot bath and a long nap after third quarter results sent the stock down more than 22% this week. Amazing, Jason, that we are still talking about a company worth $5.5 billion.

Well, I mean, that's in the face of a challenging retail environment, right, Ron? That's what they said. Listen, these guys are the worst. If you go back to 2013, look at this. They funded $6 billion in share repurchases. They've levered their balance sheet to $1 billion in net debt. And since then, the stock has fallen from highs around $80 to what we see today around $20. So, all along the way, they're just burning shareholder capital, and it seems they have no regard for it. The stock is trading at now around six times trailing earnings. if it's trading at that level for a reason. They talk about the call, all these initiatives

in order to bring things back around, like margin enhancement initiatives and inventory optimization, supply chain initiatives. Just a good reminder that talk is cheap, and these guys were really slow to adopt to a changing retail space. I just don't think they necessarily offer that great of a value proposition anymore, particularly when you have, obviously, Amazon. There is Wayfair out there. We've always been a bit skeptical of their strategy of basically marketing via coupon. You just expect the discount before you even go into the store. Probably some upside to the stock from today's level, but I just feel like there are easier ways to make money, so I would steer clear. Let me turn to the value guy in the

room. Ron, you look at the stock, where it is, and certainly after a drop like that, anytime there's a drop, I don't care what the company is, anytime there's a 20% drop, you know there are investors looking at it and thinking, well, maybe it's on sale. Perhaps, as we even discussed earlier, retail, specialty retail, is littered with the corpses of bankrupt companies, and you've got to be really careful. They don't own real estate. They don't have a competitive advantage to speak of. They do have somewhat of a brand name, but that's not enough in today's day and age, so I would stay away. Another tough week for packaged food giant General Mills. First quarter profits came

in lower than expected as sales of yogurt in the United States continue to decline. I was unaware of that. Yeah, as I was saying, 22% decline in yogurt sales for General Mills, 7% decline in cereal. Packaged food companies in general are really struggling, whether it's Kraft or Kellogg or Campbell's Soup. It turns out that people want fresh food, which who would have thunk? But it shows up in the numbers here. Revenue down 3.5%. They were worse than expected.

And you get like a double whammy here. The worse that you do, the more the retailers shrink shelf space that you can put your goods on. And so, that creates this spiral of, you know, things are bad, we get less shelf space. Things get worse, we get less shelf space. So, it continues to compound the problem. One big red flag, just in general, if you ever hear a company say, we expect the first half to be weak, but we think things are going to pick up in the second half, I would say 80% or more of the time, that does not happen. It's a way of kicking the can down the road. That's the case here as well.

Well, and of course, General Mills, a big part of their business is breakfast cereal. And we've seen how breakfast cereal sales have declined year over year for a while now in the U.S. In 2016, General Mills changed up one of its most popular cereals, Trix. They changed the formula and started selling all-natural Trix. The bright artificial colors were replaced with coloring from radishes, purple carrots, and turmeric. And I guess, Jason, that people hated that, because this week, General Mills announced the return of what they are calling classic tricks. Well, I can empathize with that sentiment there. I mean, as a cereal aficionado and as one who probably buys tricks one out of every five or six boxes of cereal in our house,

when I got that first box of funky colors, it just didn't look right. I mean, it tasted the same, but even my kids were like, what in the world is this? So, listen, I'm all for eating healthy. I'm all for having all sorts of options out there. But with those options, I want my Classic Tricks. I can't wait for six months from now when Classic Tricks is outselling the all-natural one. Oh, it will be. They'll dump the other one for sure.

All right. We've got just a couple of minutes left. For those listeners who have inquired, and we have gotten some email this week, I'm happy to report our man behind the glass, Steve Broido. Successful surgery on the tonsillectomy there. So, we don't know what level of pain Steve is in, but we know that the surgery was successful. Yeah, well soon, Steve. So, let's just go around the table in the couple of minutes we have left. Ron Gross,

in terms of the stocks on our radar this week, what are you looking at? I knew we'd be talking about retail and saying some negative things, so I thought I'd talk about one bright spot, which is TJX Companies, ticker symbol TJX, parent company of TJ Maxx Marshalls and HomeGoods, still doing a good job in a tough retail environment. They continue to increase their dividend, they've done it for 21 years, they kind of have a nice competitive advantage in what they do, which is offer designer clothing a 20-60% discount off retail prices. So, I like it both from a dividend and a stock appreciation perspective.

Jason Moser, what are you looking at? I'm going to walk out of here today with a Jeff Fischer stamp of approval. I'm going to recommend four stocks here on my radar. MasterCard, Visa, PayPal, and Square, tickers M-A-V-P-Y-P-L and S-Q. Are we allowed to do that? This is the war on cash basket. And I just think it is a great way to participate in one of the biggest long-term trends out there in electronic payments. Great risk profile with some sort of big established state names, some riskier names in the space for some growth

there. I own all four personally. I'll keep adding to them over time. I think they're all four very, very relevant names to keep an eye on. Jeff Fischer? Nice, Jason. Let's add one more to that. Alibaba, ticker B-A-B-A, is the China-based commerce giant that also has Alipay, which is one of the biggest electronic payment processors in China. The company is also getting into web services, cloud services, just like Amazon. They came public just exactly about three years ago, September three years ago. The stock is up about 80% since then, after a long time of going nowhere. So, we've been in wait-and-see mode to see how the business

does. It's starting to get traction now. Alright, guys, thanks for being here. Up next, best-selling author Diana Henriquez takes us back to 1987, as we revisit the worst day in Wall Street's history. Stay right here, this is Motley Fool Money. Alright, before we get to my conversation with Diana Henriquez, I want to say thanks to Harry's for supporting this week's episode of Motley Fool Money. I love Harry's products. I've been a customer of Harry's for years. It is flat-out the smoothest shave I have ever had. Harry's is so confident you're going to love their blades, they're giving

you their trial set for free. All you have to do is cover the $3 in shipping. Have you noticed that when you go to a grocery store or a drugstore and you're looking to buy razor blades, a lot of times they are essentially under lock and key? That's how expensive the other brands are. The stores are worried about shoplifting. So they make it so that you actually have to go get someone from the store to give you, it's basically like you're asking permission to buy expensive razor blades. But Harry's offers a great shave at a good price and they make it easy by shipping it right to your door. So whatever you're doing right now with your shaving, stop messing around. You got one face, treat it right. Get started shaving with

a free trial set that includes a razor handle, five-blade cartridge, and shave gel. That's a $13 value for free. All you do is cover the shipping. Go to harrys.com slash fool. That's harrys.com slash fool. Welcome back to Motley Fool Money. I'm Chris Hill. The biggest single-day drop in Wall Street history came on October 19th, 1987, when the market fell more than 22%. percent. The story of how we got to that point and what transpired is brilliantly captured in the brand new book, A First Class Catastrophe, The Road to Black Monday, The Worst Day in Wall Street History. Bestselling author Diana Henriquez joins me now. Good to talk to you again. Wonderful to talk to you, Chris.

I want to start with something I heard you say recently that surprised me. When I think about market catastrophes, in my head, the list goes like this. The Great Depression, Black Monday, 1987, the Great Recession of 2008-2009. And you had mentioned recently that you, from time to time, run into young reporters even who kind of blip over Black Monday. And I'm curious if that is what got you interested in going back, the idea that this horrific day is in some ways misunderstood. You're absolutely right. I mean, I was mystified that people would so instantly assume if I was saying,

I'm working on a book about the worst day in Wall Street history, they would assume I was talking either about 1929 or I was talking about 2008. And when I would say, oh, you know, 1987, Black Monday, 1987, blank look, I would say it was twice as bad as any single day in 1929, you know, astonished look. And there just seemed to be, Chris, such a bottomless vat of ignorance about this critical day that my initial commitment was, well, let's fix that. I mean, let's go back, let's tell the story of this incredible dramatic moment, how we got there, what it said about the tectonic changes in the way the market works. Let's fix that. And then when I got into researching it, I found there was a lot more that you could do with that crash. Now, what I didn't know anything about is something that is actually the very start of your book, and I found it riveting.

It is the silver crisis of 1980. So for those like me who have no idea, what happened with silver in 1980 and how did that start to pave the way for the 1987 crash? Well, it was a – I remember it because it was a period of time when it became impossible because of skyrocketing silver prices to give any of my friends sterling silver flatware as wedding gifts. It literally was priced right out of my budget. um the hunt brothers and a group of associated traders in texas big guys in the oil business uh developed a vast appetite for silver they were convinced that with the high inflation that had plagued the country throughout the 70s that only hard assets were worth owning and everybody was looking at gold, but they thought silver would be an alternative play. So they started using both the cash market for silver and the silver futures market to start building up an enormous horde

of claims on silver, real silver and paper silver. And as they bought, they borrowed money to finance their position. They borrowed from Wall Street brokerage firms, and they borrowed from banks, and some of the brokerage firms borrowed from banks to provide credit to the Hunt brothers. So they're trading in the silver market. The brokerage firms, obviously, are the foundation of the stock market. The banks, of course, hold the whole system together. Well, then, after a giddy ride up that had, you know, photography film manufacturers on the brink of bankruptcy

and newlyweds belting down their silver teapots for the cash that they could bring and burglars breaking in to steal the flatware while they could, the price cracks, and it starts to plummet. And before you know it, the amount of silver that the Hunt brothers own is not worth enough to cover their debts. And that's where the story opens, where they are on the brink of defaulting on their obligations to a host of major banks and major brokerage firms.

And the reason that that day, the following day when this news hit the stock market and it gyrated through a wild, crazy cycle that came to be called Silver Thursday, the reason that's so important to my story is that was really the first time that I was able to determine where a crisis that began in one marketplace, one traditionally isolated marketplace with its own set of regulators spread like a plague through the other marketplaces before the regulators could do anything about it this was a time chris when the chairman of the federal reserve the majestic paul volcker barely even knew the name of the official who regulated the silver markets you know just it

would never occur to him. He needed to know his fellow regulator. The markets were silos. They each had their own regulators. They all thought they had their own investors, their own rules, and were really unrelated to one another so that if a problem broke out in the silver market, why should Wall Street care? Why should the banking industry care? But when you hit silver Thursday, it becomes blindingly and really almost heart-stoppingly clear why you should care. And the punchline of that opening is that when they were all hauled before a congressional investigative committee to explain what they'd done and why they'd done it and how it turned out, the key question was, were you coordinated enough? Did you work together well enough to get us through this unusually messy crisis?

And the conclusion was, well, maybe not, but, you know, if this ever happens again, we'll do better next time. Well, then the rest of the book, The Road to Black Monday, shows it happening over and over and over again as the barriers between these silo markets start to crumble and a crisis in the S&L can pop into the stock market or a crisis at a bank can spread over into the commodity markets. And by the time you reach Black Monday, you realize, although the regulators do not, you realize that we're all in the same boat now. And we get through it, as you know, Chris, by the skin of our teeth. I mean, we just barely almost don't keep the boat from capsizing. You were a business reporter in 1987. When you started back down this road, when you started researching this book, what did you think you were going to find and what did you actually find? Well, the thing that surprised me most that I found was not just my starting point, which was, gee, I remember it being far worse than other people do.

So my starting point was, gee, 1987 is a lot worse than we remember. But what I discovered, Chris, was it actually was a lot worse than even we knew at the time. Once I was able to tap into the extraordinary archives maintained by the former chairman of the SEC at the time and the dusty old archives of the Chicago Mercantile Exchange and the Chicago Board of Trade in Chicago at piecing it together behind the scenes, I discovered that as bad as I realized it was at the time, it was far, far worse behind the scenes. Regulators were juggling hand grenades for weeks. The options market almost fell to its knees because a major clearing firm was hit by an old-fashioned run. The only reason it survived was its parent bank

defied its regulators in Washington and kept pumping cash into it to the great relief of other regulators in Washington and kept it afloat, else the options market would have fallen. The futures market, the Chicago Mercantile Exchange, its linchpin, is facing the day after Black Monday $400 million short of the cash it needs to open its doors. It arranges an emergency loan by telephone with three minutes to spare before it would have had to announce that it couldn't open. Charles Schwab then, and now an iconic name on Main Street, was facing ruinous losses run up by an options trader trading on margin in Hong Kong.

And for more than a week, U.S. regulators did not know whether Charles Schwab was going to be able to survive. And we're terrified that if it didn't, Main Street would absolutely go crazy. So although your heart was at your, there was a lump in your throat the whole week, two weeks, three weeks later, as a financial reporter, now approaching it as kind of an amateur historian and digging back into the archives, I realized that if we had really known at the time how bad it was. It would have just been panic stations. In general, did you find that the people that you interviewed for this book were enthusiastic? And by that, I mean, did they, like you, feel that 1987, that Black Monday was

far worse than the average person thinks, and therefore they were pretty excited to tell their version of events and their little piece of the story? Almost to a man, and there's an important exception that I'll add to this in a second. In fact, two things struck me as I started to interview the first responders who lived through Black Monday. Number one, as you said, was it was the most unforgettable day of their career. Every one of them told me that, that they remember it vividly every single detail, and it was the most unforgettable time that they ever had. The second thing that struck me was how many of them immediately saw that Black Monday was the precursor, the starting point for the road that led to 2008. They saw the connections between that

crisis and the 2008 crisis before I ever raised it. That got volunteered so many times. It really pushed me in the direction of looking for that matrix of meaning, looking for ways that 1987 was still so relevant to us as we look at the backside of 2008. The one exception that I wanted to commend was the Berkeley professors who developed a hedging strategy called portfolio insurance. It was widely blamed for the crash. Unfairly, it was a factor, but it was not the cause of the crash. It was not the only thing that caused the crash. But at the time in 87, they just took a mortal beating in the press. I mean, they just were everybody's favorite punching bag. And when I first approached them, I did so with some trepidation. They would have had

very good reason to have nothing to do with a member of the financial media or anyone trying to reconstruct these days. And to my gratitude and astonishment, they were, to the contrary, very eager to help me understand the story from their point of view. And I think that's one of the most remarkable things this book adds to our understanding of 1987. It provides an insight from the quants, from the academic side of the picture, that has really been totally missing from a more regulatory or financial approach to the story. Coming up more with Diana Henriquez, stay right here. You're listening to Motley Fool Money. Monday morning

And I've really got the blues Welcome back to Motley Fool Money. Chris Hill talking with best-selling author Diana Henriquez. Her new book is A First-Class Catastrophe, The Road to Black Monday, The Worst Day in Wall Street History. I almost hesitate to ask this next question, But if the people that you interviewed were quick to volunteer that we did not learn lessons from Black Monday and that paved the way for 2008, how do we stand in 2017 with regards to lessons that we hopefully have learned from the Great Recession in 2008, 2009?

The people that you talk to for this book, are we getting any better at learning? No. I'm afraid the short answer is no. One of the most baffling things about our market amnesia is that after 1987, one of the most prominent recommendations of the Brady Commission that wrote one of the most readable and accessible reports on the 87 crash was that we now had a single unified marketplace and we needed a single unified regulator who had the 360-degree vision of the marketplace

and the authority to respond to a wildfire wherever it broke out. Fast forward to 2008, 20 years later, and in the aftermath of that crisis, former Treasury Secretary John Snow and SEC Chairman Chris Cox, Republicans both, go before Congress and say, you know, we have this terrible problem. Nobody has a 360-degree vision of the marketplace and the authority to respond and react to a problem wherever it breaks out. Almost the same words, Chris.

I looked at congressional testimony from 87, And you could find complete phrases that were repeated after 2008. And yet we still have a balkanized regulatory system that still operates as if all of our markets were individual silos. They are poorly coordinated. They are poorly matched to the marketplace that we have. Just look at the basic comparisons. In 87, you had Titan investors using untested derivatives in similar computer-driven strategies that nearly overwhelmed this balkanized regulatory system. In 2008, you had Titan investors using untested derivatives and similar computer-driven strategies that overwhelmed their regulators. I mean, it was so similar that you just want to tear your hair out.

Now, it's true. I know you're going to say this, but what about Dodd-Frank? What about the law that was adopted after 2008? and what was scariest to me was that so many of these old-timers pointed to that law and said it's part of the problem it's not a solution now there are many things that dodd-frank does it does a million things there are some things that does that we can set aside and say we'll argue about that later but one of the things it does is it severely ties the hands of regulators in the process of responding in a crisis to rescuing a failing firm. This demonization of bailouts that's become part of the political conversation is firmly embedded in that legislation. And

its goal is to make sure that no wicked firm ever gets bailed out by taxpayers again. The problem with that is regulators need more flexibility, more room to improvise, More ad hoc room to maneuver, not less, because that's all that got us through in 87. It's all that got us through in 08. So if you really study what happened on Black Monday and in the aftermath and examine how we got through, you clearly understand that you can't write a rigid rule book for the next financial meltdown. You've got to give regulators room to maneuver. And unfortunately, we haven't.

What should average investors do to protect themselves? Because another crash is coming at some point. Yeah. And they don't send you a save-the-date card, do they? No, they never do. I've spoken to them time and time again about that, that you've just got to do that. You know, I'm not an investment advisor, Chris, and you know that. But it just seems to me that what I would do as an individual investor

in another meltdown on the scale of Black Monday would be to remember, because I'd read this book and understood all the changes that we've experienced, would be to remember that we, you and I, are the mice on the elephant dance floor here. They're going to be stampeding. They're going to be pounding around. We just need to stay calm, stand pat, and get to the sidelines and wait until the dust settles because in both 87 and in all of our subsequent crises, it's been an institutional panic.

It's been the big guys running around with their hair on fire, and you just do not want to get in front of that train. You want to stay calm, stand pat, let the dust settle, and see what smart decisions you make after that. And I hope one of them would be to pick up the phone and call your representatives in Congress and say, will you finally, finally do something about this? The book is A First Class Catastrophe, The Road to Black Monday,

The Worst Day in Wall Street History. It is a fantastic read. Diana Henriquez, thank you so much. Thank you, Chris. That's going to do it for this week's show. Our engineer is Rick Engdahl. Our producer is Mac Greer. I'm Chris Hill. Thanks for listening. We'll see you next week.