The specter that is haunting the markets lately goes by the name “1987.” A stock market runup, a buyout boom, high-yield bonds, increased government regulation, tax hikes on investments and buyouts. It all seems eerily familiar to many people with long memories. And the chart above is not exactly re-assuring.
But, surprisingly, some traders take the similarities to 1987 as a contrary indicator.
“There’s no way the Fed will allow October 19, 1987 to happen all over again,” a trader told us Monday night after his fifth scotch.
For some people, there’s always a bull market somewhere. And the assumption that a rate cut can and will save the markets—or even the broader economy—may be wishful thinking. Or just the scotch talking.
The Federal Reserve’s intervention is credited with the fast recovery in the Dow in 1987, when the stock index finished slightly up for the year. A gross domestic product grew 3.7 percent in 1987′s third quarter, and continued in to grow in the subsequent quarters. There was the Fed fueled rock growth of 7.2 percent in 1987′s fourth quarter, 1.9 percent in 1988′s first quarter, 5.2 percent in 1988′s second quarter, and 2.2 percent in 1988′s third quarter. Buyouts resumed. High yield debt kept finding buyers. Jim Cramer famously made a lot of money.
But it didn’t last long. The leveraged buyout market came to a crash in 1989. The Dow turned bearish the next year. The country went into a recession. And many believe that the bear market and recession were on the early nineties were made far worse by the Fed’s 1987 intervention, which inflation hawks say created the illusion of prosperity and led to lots of capital misallocation. When market realities began to set in and capital started fleeing the dead-ends into which it had been led by the siren song of easy money, the pain really started?
Is the Federal Reserve trying to trod a more careful path this time? One thing’s for sure, if they don’t cut rates in September some will no doubt scream “they don’t know what they’re doing.” But it’s still an open question whether the Punch Bowl Caucus really understands what it’s doing.
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- Use the Bloomberg command
NH BLG_DEALBREAKER <GO>
to access Dealbreaker
Citi’s Michael Rosborough, PIMCO and Moore Capital graduate, has a 10 page piece out today explaining why, from a capital flow perspective, we are very much back to 1987 type instability. Ask your Citi sales rep for the piece.
Your poor grammar makes this blog borderline unreadable.
“The specter that is haunting the MARKET’S lately goes by the name “1987.” A stock market runup, a buyout boom, high-yield bonds, increased government regulation…”
I don’t see how you can expect to be taken seriously if you can’t even turn on spell/grammar check on your pc.
10 times out of 10, it’s better to take your medicine and get past it rather than delaying and grasping for every last straw out there.
12:57- get over yourself, this is not fucking english class.
amen ian. adios seadog.
Despite Cramer’s rant about how the Fed needs to step in to help Joe average American when he was probably just upset he lost money like everyone else, the Fed should let things run their course. People made bad decisions; the market deals with them quite efficiently.
try giveing each of those lines an accurate relative scale and you’ll see a much different picture. charts can show whatever you want them to show
ugh should be giving not giveing, sorry didn’t run my spellchecker — sorry seadog
Carney:
Don’t be stupid. you can take any random section of stock market movement and it will kind of look like another random section of stock market movement. Even if it were august right now 1987 the market wouldn’t behave the same way because everyone knows what happened in 1987.
That is to say if the past had complete predictive value then everyone would adjust their behavior and past observations would become useless.
Or to put it another way, history doesn’t repeat, it rhymes.
To add to market M.A.C.’s point. it really looks like the chart cheats. The time frame from teh Feb 27 selloff to what is labeled 4/22 looks suspiciously short.
Spurious correlation on the stock return series.
Different topic: I don’t agree with Cramer that the Fed has to loosen, but I don’t doubt his good intentions. He may be a self-promoter, but still remembers his humble beginnings. I know he’s a guy that some love to hate, but he started TSCM for the little guy, not for those who had already made it. That’s part of why I write there.
Inappropriate scaling can give you whatever you want to see. If you’re going to do time series comparisons, just use percent scales (day 1 for both periods = 100).
9000 – 14000 = a range of 50% of initial value, while 1500-3000 = a range 100% of initial value.
that first paragraph is embarrising, enter, you will win.
http://www.bulwer-lytton.com/
I know the picture’s an easy shot. But we’re not the only ones talking about 1987. In fact, I’m not even convinced of the case.
The main point of the item is that people, lots of people, are talking about 1987. And some are even talking about it as a way of persuading themselves that the Fed will cut in advance of a crash to avoid 1987.
I like the line about history rhyming rather than repeating. My philosophy professor in college was pretty sure history did repeat but on a cosmic, eternal-return-of-the-same scale and not on a “we do the same crap every twenty years” scale.
Carney went to college? Had professors?
I though John Carney was raised by wolves. One day they killed a man wearing a suit and Carney put it on. A guy walked by, saw Carney in a suit, and hired him. Thus began the legend that is (which is?) John Carney…
Ghosts of 1987, meet the Plunge Protection Team–equipped with unlicensed nuclear accelerators and a Treasury printing press.
Yeah it’s fine, we can just print more money, duh. As long as the Fed keeps the currency artificially propped up, there is nothing about which to worry.
I’ll let all you suckers worry about the market during your last days of summer. I’m going to be sleeping well at night – - I’ve got portfolio insurance.
“cosmic, eternal-return-of-the-same scale”
So THAT’s what your plot is attempting to convey. Now I get it.
I remember seeing the same graph comparisons periodically from 1995 through 1999. There is nothing see here. Move along.
“Punch Bowl Caucus” ??
Blatant plagiarizing….
http://www.slate.com/id/2172872/fr/flyout
@SoD – or they wrote up a summary of the slate article on DB yesterday…
there is no interest rate analysis here
there’s a big difference with the long bond behavior; then vs. now
Son of Dud,
Plagiarizing the exact same link he used in the original “Punch Bowl Caucus” link?
I’ll be you were the top banana due diligence monkey for AAA subprime CDOs.
From B Berg earlier today – “Pessimism on US Stocks remains at a 4 year high”
The proportion of bearish newsletter writers was unch’ed at 37.4% in the week ended 8/24, the highest since March 2003.
For the contrarians out there – and who isn’t a contrarian?
Lebron: man up! Email us your view on the bond situation.
Carney says:
Even if it were august right now 1987 the market wouldn’t behave the same way because everyone knows what happened in 1987.
That is to say if the past had complete predictive value then everyone would adjust their behavior and past observations would become useless.
Or to put it another way, history doesn’t repeat, it rhymes.
___________________________
Sorry, history does repeat itself. The 1987 decline reminded me of the 1962 decline so I wasn’t as scared as others who had nothing to compare it with.
Stock patterns reflect investor pyschology so they do repeat. Human nature–greed and fear–do not change. Investors are gradually moving from greed to fear and the chart reflects that change.
1929 vs. 1987 track quite closely. Not so much 2007- for one thing the vol is much lower (39%/34%/13% for 1929/1987/2007). Assuming the analogy is correct, crash would be week of Sep 8th, but only about a 10% drop.
Ok, nostradamus, so is ’08 gonna be ’30 or ’88?
Bulging Bracket is right. Look at that chart after indexing each line to the beginning level, and it looks entirely different. There hasn’t been much of a run-up this year the way there was in 1987. And so even if the market were to fall precipitously so that your graphs remain parallel, it would be a small hit compared to ’87.
Thank God I trade foreign currency. This way, if he is wrong, I can make dollars.
If he is right – I can make Yen.
In the end, it’s all the same.
And most of you are probably bad traders, judging by the outbursts I see here.
Someone who cannot hold the venom on a forum, almost certainly would have trouble holding the panic in a sell off.