Today, as in 2007, the economic zeitgeist is marked by a palpable sense of major headwinds and anxiety about looming disaster.
Certainly, the uncertainties and underlying risks that are causing this sense of doom now are very different from the circumstances back then, but every cycle comes with its own challenges and unique stories of why markets go into overdrive and why they revert to the mean.
This is certainly a case of history repeating itself: the exact circumstances do not simply repeat themselves, but provide a rough guide that astute observers can utilize to navigate ever-changing market conditions.
That being said, there are several recurring dynamics that influence every cycle that play out like basic truisms that arise as a result of fundamental weaknesses in human behavior expressed throughout markets.
For example, the “boom and bust” cycle itself may appear to be a natural “two steps forward, one step back” growth scheme, in which market participants as a whole always over-embrace the growth-phase optimism of an expanding market environment, only to ultimately experience a major setback as the system re-equilibrates.
Moreover, at the height of every “boom” there is always activity that, in retrospect, was clearly entirely pointless speculation, driven by fever dreams of easy riches.
Finally, the average speculator or other naive participant seems to have a hard time realizing that the boom is over and tends to stay inactive, but when faced with the clear evidence of an emerging “bust period” they race to get out like scalded monkeys.
By 2007, the “housing bubble” had clearly reached a level of excess, and any astute observer using basic “rule of thumb” analysis could have predicted that trouble was on the horizon.
Now we have a “bubble of everything” marred by a lot of frivolous speculation, and the Fed is finally ready to pump in the “stimulus”, risking a major reversal.
Given the clear headwinds, one cannot help but wonder at what point there will be a “Minsky moment” when the evidence that a major economic downturn is inevitable will mount and market participants will finally throw themselves into mass panic and asset values will suddenly collapse.
There's no way to truly know, but let's see if comparing the current trend of the S&P 500 with its 2007 run might provide some insight into tracking the evolution of today's panic.
The following data visualization (click to enlarge) overlays the 2007 bubble buildup and peak of the S&P 500 on the peak of this cycle, allowing for an easy comparison of how panics progress: Again, history never repeats itself exactly, but this visualization gives us a rough point of comparison and a valuable overall perspective.
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