1989 Credit Crunch Redux

I see this market like the market in 1989. In October of 1989, the United Airlines junk bond deal for the employee led buyout of the company fell through. This caused a similar crisis of confidence and an end of the “buyout” boom of the late 1980s. The following chart shows what the market looked like in 1989. Like, today, the market had experienced a sharp rally coming off of the 1987 lows.

click all charts to enlarge

This is what the market looks like today…

This is what the 1989 market turned into – a giant ugly trading range that culminated in the decline going into the first Iraqi war. To make money, you had to sell moves to the old highs and buy dips below the 200 day moving average.

I think one of the keys to determining whether we’re in a similar environment is the transportation average. In 1989, the transports took a nasty fall after a strong run higher. They never recovered and never even made a stab at the old highs. That indicated underlying weakness in the economy and the markets.

If the transports don’t recover, I think a similar 1989 – 1990 scenario is likely.

The other problem is that we are not at a 40 week cycle low. The 40 week cycle has worked fairly well since the 2004 bottom. The cycle isn’t due to bottom until November. Therefore, we’re probably in for another test of the lows at some point in the next several months.

And all this leads investors to seek the safety of large caps.

Comments

[Solution]

1990 fall is because of 2nd year of election cycle. President had free hand to fix the credit crunch in 2nd year. Current problem is likely to be delayed by lower interest rate. If the current problem is allowed to continue, 80% of Republican will be removed from Washington. They won't do that.

[timjowers]

Nice article. How does offshoring/loss of manufacturing base play into the mix? Were CPI and other government numbers being falsified in the 1980's? The reason I ask is I think now the USA has a culture of dishonesty and this has led to common excesses. E.g. the city we live in (Cary, NC) just bankrolled $20M (or maybe as much as $30M) into an enclosed swimming pool. Anyone with any sense knows it would cost less than $1M to build if they used their own money in this area. Clearly $19M to $29M was embezzled somehow. My point is dishonesty is rampant and the numbers being used throughout business and gubermint have no resemblance to the laws of supply, demand, productivity, and capacity. The snap could be much larger/different than in the past.