Merrill Lynch has a fascinating analysis on the various striking similarities between this financial cycle (mostly in the US) and the one in the late 1980s. Have a look at the article – just the charts should be enough to provide a lot of food for thought.
- 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 fuelled 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.
Latest posts by Udhay Shankar N (see all)
- Mary Meeker’s 2014 Internet Trends report - May 28, 2014
- Andreessen-Horowitz raises $1.5B for its new fund - February 1, 2012
- WestBridge launches India “evergreen” fund - November 15, 2011
0
The link in the post has expired. Use this instead.
The similarities make a very intersting read. The graphical illusrations tend to further substantiate the claims. The figures also indicate diffrenceces. The household debt to income ratio is not cyclical but is a continuous trend. It will almost show a constant gradient if teh stats for teh intervening 10 yrs is studied.
Look at the short term ineterst rate changes, see how planned and controlled it is this time round. The latter part of teh study hovers around teh housing sector and construction and housing are cyclical anyway.
The rise and rise of Asian stock indices, another widely talked about story and the similarity between Japan in teh 80s and China today seem to be valid (are teh Chinese banks listening!)
But what do we get from all these, does inflation have a purging effect. So when dollar is plummeting and unemplyment is on teh rise, does that make a community more indutrius and enterpreneural.
Can we derive soem happiness seeing the light at teh end of the tunnel..
Great comparison…Fantastic timing for ML to bring out that report…!
Yesterday Stan O’Neal, CEO, Merryl Lynch was sacked by its Board of Directors being held responsible for $7.2 billion write-down related to subprime losses and his unauthorised bid to sell the company to retail bank Wachovia. (That deal could’ve handed him $250M separation package if he was not chosen to lead the new company!)
O’Neal’s is a classic tale. A *nobody* rises to the top, rules the kingdom and is ultimately brought down by the qualities that made him king in the first place.
Wonder had there been his equivalent at ML in the 80’s…I am sure the author of that report must have figured it out 🙂