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 Is It Different This Time? Comparison To 1997

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Registration date : 2007-07-01

PostSubject: Is It Different This Time? Comparison To 1997   Fri Aug 24, 2007 11:15 pm

Is It Different This Time? Comparison To 1997

Mike Goodson

knows that the four most dangerous words on Wall Street are "this time
is different." Many investors have lost money buying the stock of a
company that never quite seems to get its act together despite
intermittent positive signs and consistently favorable comments from
management (think Home Depot during the Nardelli years). We also hear
this phrase applied to the macro outlook. Time and time again when
faced with similar macro backdrops, people are often heard to say,
"Yeah, but this time it's different."
the debate rages on about what the Fed is doing or might do, I am
reminded of the crisis of 1997. As you may recall, in July of 1997,
Thailand devalued its currency and this sent a tsunami of equity market
weakness that reverberated globally. Shortly thereafter a hedge fund
called Long-Term Capital went belly up. It had made leveraged bets that
the spreads between two securities could NOT move apart farther. They
did. I recall at the time speaking to Richard Bookstaber (see his blog here),
who at the time was the risk manager for Salomon Brothers, and he told
me that all the models he was looking at suggested that that trade was
a good one and this development was very surprising. A lot of people
were surprised by this. Just like all the folks were surprised when the
quant models all of sudden stopped working this summer.
collapse of Long-Term Capital had implications far beyond the hedge
fund community because many banks had various loans and commitments
extended to it. The Fed intervened (cutting the Fed Fedds rate as I
recall), not to help out the economy in any way, but to stabilized the
banking system and to reassure all investors and market participants
that there would not be long-lasting troubles from this one firm's
At that time the economy was doing pretty well and the
easier money really helped it to improve. Shortly afterwards the
Internet boom took hold and the Y2K-related tech spending helped propel
the equity markets to all-time highs. Although it may be hard to
measure the precise effect the Fed's actions had on the bull market of
the late 1990s, I think most people would agree they were positive
factors and may have starting the ball rolling, as it were.
So how does the current situation stack up against 1997? Is it the same? Is it different?
The economy is doing well. The expansion may be long in the tooth, but
continues to chug along and has been able to absorb higher energy and
food prices without significant impact.
2) The Fed Fedeasing
(if it is easing) for reasons not tied directly to the current economic
environment. IF there is a perceived credit crunch and Fed Fedls
compelled to address this by easing, it seems to be similar to 1997.
This could be good for the equity market, especially if the Fed Fedomes
more accommodative that it feels it needs to be given where the economy
As always, I am making no predictions here or giving any
advice, but wanted to throw out this observation to stimulate
discussion. Any thoughts?
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