October 20, 2017

On the 30th anniversary of the 1987 market crash, leading financial risk expert Richard Bookstaber identifies the biggest risks in today’s markets.

WEALTHTRACK Episode #1418; Originally Broadcast on October 20, 2017

Listen to the audio only version here:

In a 2007 WEALTHTRACK appearance Bookstaber alerted us about the twin risks of high leverage and complex financial instruments. How right he was. Watch the June 29, 2007 episode:

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  • Author,
Consuelo Mack

This week marked the 30th anniversary of the October 19th, 1987 market crash when the blue-chip Dow plummeted nearly 25%, behaving like the shakiest of emerging markets. It’s a stark contrast to the market’s current behavior which is eerily subdued and trading at record highs.

What caused the Dow to drop 508 points on that single day, now forever known as Black Monday?  As Ben Levisohn wrote in his excellent article in Barron’s  titled Black Monday 2.O: The Next Machine-Driven Meltdown: 
“…experts found a culprit: so-called portfolio insurance, a quantitative tool designed to use futures contracts to protect against market losses. Instead, it created a poisonous feedback loop, as automated selling begat more of the same.”

Fast forward 30 years and that type of automated trading program seem almost quaint.  Quantitative, rules-based systems known as algorithms, computer-based trading programs and strategies have grown exponentially in number, trading volume, and complexity since then. And as Barron’s Levisohn wrote: “…bear a resemblance to those blamed for Black Monday.”

How risky are the markets now?

That is the focus of this week’s WEALTHTRACK and our guest, a leading expert on risk.  We’ll be joined by Richard Bookstaber, Chief Risk Officer in the Office of the Chief Investment Officer for the $110 billion University of California Pension and Endowment portfolios.  Bookstaber has had chief risk officer roles at major investment firms ranging from hedge funds Bridgewater and Moore Capital to investment banks Morgan Stanley and Salomon Brothers.  From 2009 to 2015 he switched to the public sector, working at the SEC and U.S. Treasury. Among his projects was helping build out the risk management structure for the Financial Stability Oversight Council and drafting the Volcker Rule which restricts proprietary trading by banks.

Bookstaber is also an author of two highly regarded books on financial risk. His most recent is The End of Theory: Financial Crises, The Failure of Economics, and the Sweep of Human Interaction.  His first, A Demon of Our Own Design: Markets, Hedge Funds and the Perils of Financial Innovation, published in 2007 presciently warned of the perils of the explosion of financial derivatives, some of which he helped create.

In a 2007 WEALTHTRACK appearance he alerted us about the twin risks of high leverage and complex financial instruments. How right he was. On this week’s program, we will discuss the new risks he sees in the markets now, some created by regulations created to solve the old ones!

If you’d like to see the show before it airs, it is available to our PREMIUM subscribers right now.  We also have an EXTRA interview with Bookstaber about his new book,  which can be seen exclusively on our website.  Also, a reminder that WEALTHTRACK is available as a YouTube Channel, so if you are unable to join us for the show on television, you can watch it on our website, WealthTrack.com, or by subscribing to our YouTube Channel.

Have a great weekend and make the week ahead a profitable and a productive one.

Best regards,

Mathews Asia


  • Bucket of liquid, short-term assets:
  • – Cash in savings account
  • – Cash equivalents such as short-term Treasury bills
  • Savings bucket will see you through bear markets without depleting principal retirement account

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation

The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction


  • Invest in the capability in India
  • Morningstar recommends:
  • Matthews India Fund (MINDX)

No stock mentions in this episode.
Download the transcript here free for a limited time [.pdf].

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Richard Bookstaber from the WEALTHTRACK archives:

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Well before the 2008/2009 financial crisis leading risk expert, Richard Bookstaber warned about the potential dangers of high leverage and complex financial derivatives in his book, A Demon of Our Own Design: Markets, Hedge Funds and the Perils of Financial Innovation. He is now concerned about two new market risks: illiquidity and low volatility and writes about them in his new book, THE END OF THEORY: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction. He explains why its titled THE END OF THEORY.

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