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 verysimilar patternshave 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 . . .
David A. Rosenberg
Merrill Lynch Economics | 22 October 2007