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 . . .


1980s Redux?
David A. Rosenberg
Merrill Lynch Economics | 22 October 2007

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. KP commented on Oct 25

    You mean the business cycle may actually still be intact? Get outta town!

  2. Frankie commented on Oct 25

    The business cycle is still around…only it is different.

    Yup! This time is different.

    (I’d better run outta town fast!…He He!)


  3. Ross commented on Oct 25

    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.

  4. Frank G. commented on Oct 25

    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….

  5. GerryL commented on Oct 25

    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?

  6. matt commented on Oct 25

    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.

  7. Estragon commented on Oct 25

    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.

  8. larrybob commented on Oct 25

    this is america; we don’t torture!

  9. Estragon commented on Oct 25


    Sorry… it smacks of aggressive interrogation techniques ;-)

  10. Mongo commented on Oct 25

    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.

  11. peter from oz commented on Oct 25

    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

  12. Fred commented on Oct 25

    I’ll take late 80’s stock market performance anyday.

  13. Gooner commented on Oct 25

    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.

  14. Suge Knight commented on Oct 25

    Hmmm, eventually you guys will be right and the market will tank, until then it will go up, LOL.

  15. mdy commented on Oct 25

    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…

  16. jkw commented on Oct 25

    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.

  17. Roger commented on Oct 25

    population is not the same.

    technology is not the same.

  18. mdy commented on Oct 25

    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.

  19. The Dirty Mac commented on Oct 25

    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.

  20. Stormrunner commented on Oct 25

    So what rumor today resulted in the 150 ramp just after 2 PM for the second day in a row

  21. Marcus Aurelius commented on Oct 25

    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.”

  22. Eric Sebille commented on Oct 25

    Do we really want to look to Merrill analysts for the direction of our economy?

  23. Tom B commented on Oct 25

    “• Back then, the Asian stock market that caught everyone’s attention was Japan – today it is China”

    I’d love to see China hit a brick wall like Japan (unfortunately) did. I don’t think it’s too likely, though.

  24. whipsaw commented on Oct 25

    stormrunner said:
    So what rumor today resulted in the 150 ramp just after 2 PM for the second day in a row

    Most of the Dow push came just before 3 when a rumor that AIG had eaten $10 billion was dispelled. Rumors are a two-way street and for today at least, the better question was why the index was down to begin with?


  25. scorpio commented on Oct 25

    no need for rumors at 2 pm anymore. the Fed’s just going to buy futures when it feels like it, like today. yesterday i think it was the Pentagon buying at 2 pm. had to paint the tape so Mr Market will get totally behind the Iranian bombing Condi had to announce first thing this morning.

  26. JJL commented on Oct 25

    What if the reason that we have not seen a consumer spending pullback is because the consumer both cannot pull back and/or is not aware that they need to stop piling on debt? Living paycheck to paycheck may be blinding them to what’s going on.

  27. whipsaw commented on Oct 25

    The Dirty Mac said:
    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.

    I have to agree in both respects. I suspect that we are already in recession and that stagflation will be the ultimate result, but none of that is going to become obvious until after the elections.

    The Apocalyptians have taken a bride who is notoriously unfaithful and never seems to show up on time. They also make some assumptions about the nature of their marriage partner which I consider unproven if not fanciful, i.e., 1) that she is a goddess who cannot be controlled by men and 2) that by embracing her, they will be spared her wrath. This belief system is essentially just religion wrapped up in capitalist trappings.

    It’s reasonably obvious to me that trading based on quasi-religious conviction is just a good way to blow an account. Fed policy is to provide a put without calling it that, so why be surprised when things bounce mysteriously? Aside from that, there are circuit breakers to prevent a 1000 point drop, but nothing to prevent a 1000 point gain, so you already know that a short has an expectancy problem.

    The upshot is that over all time, shorts are screwed because they are betting against the house. You can pop in and out of short trades and make some money, but trying to follow a strategy based on everything going to hell is a loser. You are much better off just staying out of the market altogether in my opinion.


  28. scorpio commented on Oct 25

    how’s this for apocalyptic: we’re making a Boomer-Generational double-top in the S&P from 2000 to 2007, there’s nothing the Fed can do to stop the right shoulder, just prop up the downward slope as the old boy ages. First their housing nest egg was wiped out, next it will be their stock portfolio. Nuclear Winter can be very coldddddd

  29. whipsaw commented on Oct 25

    yes, scorpio, that qualifies as apocalyptic I think. For one thing, there isn’t a right shoulder just yet; for another, $SPX is the only thing that I know of that is in this posture at present- $INDU, $OEX, $NDX and $RUT are all off to the races if you look back to 1990.

    I know you guys get frustrated, but overall I can’t see how you make any money waiting for the sky to fall. Sooner or later, you will be right, but I got cured of expecting the market to act rationally and/or the economy to roll over on its back when it should have. Good luck.


  30. Justin commented on Oct 25

    I might be reiterating someone’s similar earlier comment here: Unlike the late 80’s, where productivity gains were unprecedented, which I suspect kept inflation at bay during the 90’s. (and Mr. Alan Greenspan admitted as much), we are now on a downward productivity slope, which to me has the feel of the 60’s, 70’s to it.

  31. JAN commented on Oct 25

    Down the road, as the economy begins to recover from this upcoming recession, we’ll see a large part of the higher income demographic, baby-boomers, cashing in their chips and looking for Mr. Bigger Fool.

    I think it will be different.

  32. Dove commented on Oct 25

    Don’t complaint about your wrong bet about dovish FED when FED cut rate by 100bp. Blind faith in dovish FED will be costly. Fed will cut rate to the bone 0% regardless of rising commodities, cost of living, and inflation. They did in 2000. Japan did for past two decades.

  33. DealBreaker.com commented on Oct 26

    Opening Bell: 10.26.07

    Baidu profit doubles, but shares slip on forecast (Reuters) Ruh-roh. Remember a few weeks ago when the market tanked and everyone said it was because Baidu had been downgraded that day? Didn’t make much sense, but let’s just play…

  34. Suge Knight commented on Oct 26

    If you guys spent a little less time complaining and predicting the next “crash” and spent more time buying you’d be better off. Guess what? We’re going higher and yes, the market will “crash” eventually so you can be wrong and eventually be right.

  35. charles commented on Oct 27

    love the BS comment about concerns about inflation and the dollar being overdone..ONLY because Volcker raised rates to 20 per cent..HUELLO?

  36. Knucklehead commented on Nov 5

    Just some quick notes about the “geopolitical stability” of the 80’s:

    – Failed U.S. Rescue Attempt to Save Hostages in Tehran

    – Assassination Attempt on the Pope
    – Assassination Attempt on U.S. President Reagan

    – Falkland Islands Invaded by Argentina

    – Reagan Announces Defense Plan Called Star Wars
    – Soviets Shoot Down a Korean Airliner
    – U.S. Embassy in Beirut Bombed

    – Huge Poison Gas Leak in Bhopal, India
    – Indira Gandhi, India’s Prime Minister, Killed by Two Bodyguards

    – Famine in Ethiopia
    – Mikhail Gorbachev Calls for Glasnost and Perestroika

    – Chernobyl Nuclear Accident
    – Ferdinand Marcos Flees the Philippines
    – Iran-Contra Scandal Unfolds
    – U.S. Bombs Libya
    – Swedish Prime Minister Olof Palme was assassinated.

    – West German Pilot Lands Unchallenged in Russia’s Red Square (OK, VERY QUIET YEAR)

    – Pan Am Flight 103 Is Bombed Over Lockerbie
    – U.S. Shoots Down Iranian Airliner

    – Berlin Wall Falls
    – Students Massacred in China’s Tiananmen Square
    – non-violent revolution in Czechoslovakia that saw the overthrow of the Socialist government

    1980 – 1989: Iran-Iraq War; Sri-Lankan Civil war; Soviet-Afghan War; numerous conflicts throughout Africa

Posted Under