The Current Economic Cycle Is Similar To Previous Bubbles, But Which One?: BMO

Every asset bubble has common issues, and leads to a scramble to identify which bubble we’re in. After all, if you identify which bubble this is like, you might be able to identify the outcome. BMO Capital Markets shared the similarities of this cycle with five major booms-and-busts. Here’s what’s similar, and what isn’t.

Post-War (late 1940s)

The pandemic is frequently compared to the post-war shock. As activity resumed supply shortages resulted in surging inflation. The bank estimates equities fell 26% from 1946 to 1949. 

Off the bat, BMO argues it’s a bad comparison. “… the scale of that disruption and the burst in U.S. inflation to above 20% y/y make that a much more extreme episode than today’s,” said Robert Kavcic, a senior economist at BMO.

1970s Inflation

Many are drawing parallels between today’s out-of-control inflation and the 1970s/80s. An economic shock, oil shortage, and soaring inflation sound all too familiar. Naturally, many people will think we’re seeing a repeat. 

“A lot went wrong in the 1970s, and arguably there were a number of episodes packed into this period,” he said. Adding, “ultimately, inflation peaked just under 15% by the early 80s before the Fed broke its back, and equities went nowhere in nominal terms for 14 years starting in 1968.”

How many people see 14 years of stagnation coming up? Or even 15% inflation? Willing to bet not too many. Though, it’s hard to see how many people saw those conditions at the time. Risk happens fast.

1990s Bubble 

Today’s monetary tightening is the fastest since the early 90s, drawing similar comparisons. BMO notes it was the last time the US Federal Reserve used a 75 basis point (bp) hike in a single meeting. Equities fell less than 10%, meaning the stock market didn’t even print a technical correction. Heck, it even recovered 12 months later, while inflation stayed with a stable range of 2.5% to 3% the whole time. 

Early action from the US Federal Reserve means they were able to minimize damage. “… the Fed was able to stop before inverting the yield curve—not so this time,” he said.

The 2000s tech bubble

Rapidly changing technology and loose monetary policy? Hey, we have that right now. BMO compares today’s FAANG stocks to the telecom/software boom of that era. Crypto’s speculative bubble also resembles the leap of faith seen during the 2000s.

 “…while equity valuations certainly exploded this cycle, they didn’t reach the extremes seen in early-2000. On the other hand, there is a much tougher underlying inflation battle for the Fed to grapple with today, beyond just pricking an asset-price bubble,” he argues. 

Housing Downturn of 2008 and 1989 

The 2008-comparison is probably the one we see most often, but today is very different. BMO warns home prices on the Case-Shiller jumped 21% at the 2022-high. That tops even the sharpest gain seen pre-financial crisis. Similarly, Canada’s stretched valuations and supply-side arguments resemble the 80s bubble. 

BMO sees a correction through 2023, so home prices are definitely overvalued. However, they don’t see this spreading to the broader financial system, like in 2008.

“… a lot of other things went wrong to make the cycle so difficult, including much higher real interest rates, a demographic drain which we don’t see any sign of today, and currency/fiscal crises,” said Kavic. 

The takeaway? History rhymes, but it doesn’t repeat. There are a lot of similar issues observed today, however they aren’t exactly the same. This means the solution and outcome will be very different, regardless of how similar it looks to the ghost of bubbles past. 

7 Comments

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  • Reply
    Ravi Bhindi. Realtor 6 days ago

    The only thing different this time is that inflation went too high. Which is coming down towards the positive direction.

    Second. We have a lot of inward migration coming.

    Third. Unemployment rate is all time low which is not good for inflation.

    With time and during the growth part of the economic cycle, we will see again home prices go up eventually.

    Nothing goes up forever. Nothing goes down for ever. You just have to catch the right deal and the right time.

  • Reply
    Ed Timermanis 6 days ago

    Hi David,

    I will repeat my observation of last week. Having Google ads between your contacts cheapens your message.

    As I said before I would rather pay a subscription fee and have these cheap ass interspersed between the content that you provide
    Kind regards, Ed

    • Reply
      Trader Jim 3 days ago

      Not sure who David is, but you can sign up to the institutional service and there’s no ads and more content. Most people aren’t willing to shell out what funds have to pay to access micro insights though.

      You also have to realize asking someone to change their business model for $10-20/month or whatever a consumer is expecting them to pay is a big ask that probably takes creating projections, approval from a board, asking investors, and risking the employment of dozens of people.

      I don’t think repeating an observation you made last week is enough time.

  • Reply
    richard 6 days ago

    some items that weren’t looked at. the length of time global central banks gave away money to their corporate buddies. coupled with soveriegn debt adds up to global debt the world has never even come close to seeing. at one time there was over 20 trillion dollars of debt with a negative yield. there will be a price to pay for this folly and it won’t be cheap or lacking pain.

  • Reply
    Wise Old Fool 6 days ago

    Financial insanity by locals and foreigners will end in disaster forlenders and insurers. No money to pay it back, job losses, lay offs foreign students jumping on planes ad never returning are the real dangers. Banks on the hook for billions.

  • Reply
    Yoroshiku 5 days ago

    We all know home prices are overvalued, and have been for years. How can this not ‘spread to the broader financial system’ when the housing bubble finally, actually bursts. Right now it’s just losing air.

  • Reply
    Fool who thinks 4 days ago

    If only I knew the future 5 minute ahead?

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