1980s Parallels?
Merrill Lynch's two top strategists, David Rosenberg Richard Bernstein, both concur that the current backdrop is "highly reminiscent of the late-1980s cycle. While no two cycles are ever the same, some very similar patterns have emerged.
A backdrop highly reminiscent of the late 1980s:
• The late 1980s was a cycle characterized by a synchronized global expansion, but in the context of a fatigued US economy and strength back then in Europe and Asia.
• A cycle fueled by tax cuts and highly accommodative monetary policies early on, “new paradigm” views on the equity market bull run, and a massive housing boom that morphed into a bubble and credit excesses that turned into a crunch.
• As was the case this time around, the Fed moved in the latter stages of the cycle to hike rates aggressively and invert the yield curve. As is the case today, practically every reason was cited for why the yield curve didn’t matter any more (nice call).
• Back then, the Asian stock market that caught everyone’s attention was Japan – today it is China.
• We also experienced a wave of LBO-financed merger and acquisition activity that certainly also took hold through most of 2005 and 2006.
• Of course, we also had a faltering dollar in the late 1980s and rising commodity and gold prices igniting concerns over the inflation landscape – concerns that we can now say were overdone.
Interesting observations from the crew at Merrill . . .
>
Source:
1980s Redux?
David A. Rosenberg
Merrill Lynch Economics | 22 October 2007
http://tinyurl.com/2eyell
Thursday, October 25, 2007 | 01:30 PM | Permalink
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Tracked on Oct 26, 2007 7:48:14 AM
Comments
You mean the business cycle may actually still be intact? Get outta town!
Posted by: KP | Oct 25, 2007 1:45:25 PM
The business cycle is still around...only it is different.
Yup! This time is different.
(I'd better run outta town fast!...He He!)
Francois
Posted by: Frankie | Oct 25, 2007 1:48:27 PM
Looks more like the early 1970's to me. Back then it was the rise of Japan, monitization of the crude oil spike and general stagflation. Tricky Dick imposed wage, price and profit controls when inflation got to 4%. We renigged on Breton Woods and the Father of Greenspan and Ben Dover, Arthur Burns was at the helm of the printing presses. Back then we had 10 more years of commodity inflation ahead of us. Samo samo........This time I fear it will be worse.
Posted by: Ross | Oct 25, 2007 2:03:35 PM
Yes, they are on the money, but left out….
Major housing correction
High commodity prices
Followed by ….
Twenty-one month market correction of 25%
beginning in December 1980 and lasting until August 1981….
Also PE’s of large cap stocks were at their lowest at the end of the correction….
Posted by: Frank G. | Oct 25, 2007 2:20:18 PM
Rosenberg of Merrill has been writing about potential problems for a long time. He hasnt gotten a lot of publicity because he isnt a follower of Goldilocks.
As I read about CDOs it makes me wonder about something that hasnt gotten much publicity. Most of the conversation has been about all of the bad CDOs which is obviously a significant problem. What I am wondering about now that the CDO market is basically dead what happens when you eliminate all of that liquidity?
Posted by: GerryL | Oct 25, 2007 2:20:34 PM
Except equities are now trading for 2 or 3 times the book value of the late '80s. The mortgage industry, as we know it, was in its infancy in the 1980s and the problems there were nothing like the doubling of the Case Shiller composite during stagnant wages we have today. The United States NIIP had only recently turned red back then; now, we're the largest debtor in the history of the world. The US still had a manufacturing base and produced non-paper assets.
etc. etc. etc.
Posted by: matt | Oct 25, 2007 2:24:58 PM
The similarities are certainly there, but the charts in the piece have both value and time scales altered to make the case more visually compelling.
I'm always a bit suspicious of this tactic, as it smacks of torturing the data until it confesses.
Posted by: Estragon | Oct 25, 2007 2:29:33 PM
this is america; we don't torture!
Posted by: larrybob | Oct 25, 2007 2:48:57 PM
larrybob,
Sorry... it smacks of aggressive interrogation techniques ;-)
Posted by: Estragon | Oct 25, 2007 2:53:29 PM
When comparing the 80's versus 2007, one large difference is the current higher level of geopolitical instability, and the effect of possible events to market sentiment.
Geopolitically, the 80's were idyllic by contrast. Iraq (and the war's direct and indirect economic effects) and the possibility of an expanded conflict (Turkey and Iraq; the U.S. and Iran) in a major oil-producing region head the current list.
Posted by: Mongo | Oct 25, 2007 3:33:07 PM
forget why is this like the 80s
why is this afternoon like yesterday and the day before
wall street didn't have the technology to fudge the market in the 80s (probably didn't think it had to!)
this is becoming a joke (if it wasn't so serious)
rgds pcm
Posted by: peter from oz | Oct 25, 2007 3:53:10 PM
I'll take late 80's stock market performance anyday.
Posted by: Fred | Oct 25, 2007 4:11:16 PM
I was doing some data trawling over the New Homes Data today. 'Its 1989 all over again'. - The Supply of new homes, 3 monthly average has now been over 8 months since July. -The last time this happened was '1989'.
Ironically I looked back further, and this is the fifth period where the supply of monthly homes for sale has been above 8 months since records began in 1963. The other occasions apart from 1989 were 1973/4, 1979, and 1981. On all occasions recessions followed, on all occasions the NBER declared that recessions had started within at most 4 months of the cross above 8 months supply.
Looking further into this, on all occasions unemployment was at least 0.5% higher within 6 months, and NFPs started to fall sharply pretty soon after the 3 months average supply crosses over 8, - perhaps the end of the NFP conundrum will appear in the next few months. Finally with regard to stocks, 3 out the 4 prior occasions saw the S&P approx 8-10 % lower within 6 months, the other occasion saw the S&P 6% higher. Within a year most losses usually had been recovered.
Posted by: Gooner | Oct 25, 2007 4:15:37 PM
Hmmm, eventually you guys will be right and the market will tank, until then it will go up, LOL.
Posted by: Suge Knight | Oct 25, 2007 4:22:47 PM
I see similarities to the last cycle in Japan, the echoes of their housing market bubble is still being felt today with JCB's monetary policy -- giving the yen away, thereby hoping to use the manufacturing base into exporting the economy into life. One of life's twists in that the yen carry trade as a result of JCB policy has lead indirectly into the condition the US economy is in now. As if Japan passed on to the US a variant of last cycle's contagion it's just now getting over. But the tempo of this downturn is amplified by these nouveau riche, jullienned baskets of junk mortgages that cannot be priced lest politicians upset their corporate paymasters. Moral hazard indeed.
London became the financial global capital after Soros shook some sense into the buffoons running the country and breaking the Bank. Can't the United States bear a little shock therapy?
Toyota, essentially #1 and the best positioned for the 21st century, while GM sells cars at a loss and makes it money selling shoddy paper and Ford's board is the usual clown's alley of nepotism is looking at $8 stock. This mess has been coming down the pike for a while. Time to make money on the movement...
Posted by: mdy | Oct 25, 2007 4:39:02 PM
This is more like the 20's then the 80's. Next is a repeat of the 30's. The only question is will we repeat 1930's America (deflationary depression) or 1930's Germany (hyperinflationary depression). Unfortunately, it is impossible to properly prepare for both. The Fed seems to think that hyperinflation is a better answer, but I'm not convinced they have the power to make that choice.
Posted by: jkw | Oct 25, 2007 4:51:00 PM
population is not the same.
technology is not the same.
Posted by: Roger | Oct 25, 2007 4:59:15 PM
This is more like the 20's then the 80's.
Possible, people were buying garbage on margin here and then. Except now it's housing backed by exotic debt, not just equities. The regulatory environment was completely different back then, though.
Posted by: mdy | Oct 25, 2007 4:59:20 PM
Where I live, the late 1980's resulted in about 20% of the banks failing (including two of the three largest banks in the state, many or most subdivisions in foreclosure, and a general 30-40% fall in RE values. Call me Raging Bull, but I'm not seeing that right now.
I see a lot of 70s-like trends especially when I see some of the policies that are being proposed with straight faces. OTOH, I see some of the apocolyptic sentiment I read (not bearish but apocolyptic) and I consider it bullish.
Posted by: The Dirty Mac | Oct 25, 2007 5:08:38 PM
So what rumor today resulted in the 150 ramp just after 2 PM for the second day in a row
Posted by: Stormrunner | Oct 25, 2007 5:13:41 PM
Late 80's as in 1989.
Posted by: Owner Earnings | Oct 25, 2007 5:18:34 PM
You can find a similar analysis in http://www.ft.com/cms/s/0/bead93ee-8184-11dc-9b6f-0000779fd2ac.html
Posted by: JMQ | Oct 25, 2007 5:29:13 PM
Q: Why is this not like the 1980s?
A: 2+ Bllion more hungry capitalists, and a little thing called the European Union and their take on currency.
I could never understand why US business interests disliked communist trading (or even non-trading) partners. Nothing is as dangerous to to a major, established, capitalist power than a huge, young, hungry capitalist power.
Gives a whole new meaning to the phrase. "they'll eat your lunch."
Posted by: Marcus Aurelius | Oct 25, 2007 5:40:04 PM
Do we really want to look to Merrill analysts for the direction of our economy?
Posted by: Eric Sebille | Oct 25, 2007 5:47:51 PM
Wasn't it Mark Twain that said 'History doesn't repeat itself, but it does rhyme'?
The ABX indices of 2007 are starting to rhyme with 1987. Many of the AAA and AA took a big hit today.
http://www.markit.com/information/products/abx.html
Posted by: Will T | Oct 25, 2007 6:12:41 PM
