Jul 31, 2023

Contrasting Today's Markets with the 1940s and 1990s

Bitcoin Macro

You can look at charts and data all day, but some of the deepest insights for traders come from history–which doesn't repeat, but often rhymes. #trading #history #markets

As the hashtag#stock market continues its epic hashtag#bull run past the decade mark, many hashtag#investors are searching through history for clues on where we go from here. Two decades that stand out as potential guideposts are the 1940s and 1990s. While no historical analogy can fit our current context perfectly, examining the parallels can provide a useful perspective. As Mark Twain observed, "History doesn't repeat itself, but it often rhymes." Identifying these rhymes helps provide perspective on the future path. Let's explore why today's financial landscape rhymes more with these postwar and internet-fueled eras, versus the stagflationary 1970s or the flip-flopping 2000s.

Starting with the 1940s, the massive hashtag#growth in hashtag#US debt relative to hashtag#GDP mirrors levels last seen during and after World War II. With debt now exceeding 100% of GDP, some worry that the US may eventually need to resort to policies used in the 1940s to reduce the real debt burden, like devaluing the dollar or yield curve control.

Today's substantial deficit spending also recalls the 1940s, as the US marshals its resources for perceived "wars" against threats like Russia, China, climate change, and more. While clearly different from WWII itself, the deficit expansion and rallying against common "enemies" revives a comparable mentality.

Looking at even longer historical cycles, the 2008-09 financial crisis rhymes with the 1929 crash and Great Depression, spaced about 80 years apart. Major economic upheavals have tended to repeat on this timescale, suggesting we could see another crisis around 2029. This pattern of four-generation cycles implies the 1940s offers the most relevant historical blueprint for today.

Regarding the 1990s, the 1987 "Black Monday" crash served as prelude to an enormous 1990s stock boom. The 2020 COVID-crash played a similar role ahead of the current bull run, providing a buying opportunity leading into a multi-year upward surge.

Consider also the long sideways market from 1968 to 1982. Once stocks broke out of that range, they powered higher until 2000. Following the similarly flat period from 1996-2009, we've now seen over a decade of gains since stocks broke out to new highs. If the pattern continues, it points to potentially another 10+ years of upside ahead.

Like the 1990s, rapid technological change drives today's landscape. The 1990s brought computing and the Internet into the mainstream, just as AI, robotics, and other innovations propel the current boom. China's emergence then parallels India's rise today, unlocking massive economic potential.

In contrast, the 1970s show few parallels to today beyond high inflation. But the underlying drivers differ significantly. The 1970s inflation stemmed largely from loose monetary policy, while today's inflation is fueled more by supply chain breakdowns and geopolitics.

And the stagflationary mix of slow growth and high inflation that defined the 1970s differs starkly from the current backdrop of continued economic expansion. Today's central banks have also learned important lessons about managing inflation expectations that were not appreciated in the 1970s.

Demographics present another key difference. The 1970s saw the baby boom generation dominating the workforce, driving up household formation and economic activity. Today's rapidly aging population leads to very different economic pressures.

Turning to the 2000s, comparisons seem similarly misplaced. That era saw speculative bubbles and manias surrounding dot-com stocks that simply do not characterize today's more sustainable, earnings-driven bull market.

Technological adoption curves also support the notion that we're still early in the current tech boom. The 2000s tech revolution stale-mated as the pioneers failed or consolidated. Today, AI and other innovations are still gaining steam, penetrating into wider applications across industries.

Rather than a bubble, we are seeing genuine productivity-enhancing technological progress. The underlying digital transformation of business is still in its infancy, and the expanding internet-connected global marketplace provides room for further penetration.

While no historical period provides a perfect template, the 1940s and 1990s best rhyme with today's financial backdrop. Their spirit of tech-driven growth, deficit stimulus, and bull market breakouts resonates strongly. Of course, unprecedented factors like demographics and debt loads make this cycle unique. But in the end, only time will tell how this chapter unfolds.

Historical analysis is a powerful predictive tool, but no approach can fully encompass all the complexities of a living market. Always proceed with caution and consult a skilled financial planner when you make your trades.

Bitcoin Macro

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