Longtime market and economy watcher Ed Yardeni recently made a comparison between the current global equities selloff and the infamous 1987 crash. Despite the similarities, Yardeni believes that the current situation may not lead to a recession, much like the outcome in 1987. Yardeni pointed out that the crash in 1987 was primarily driven by internal market dynamics rather than fundamental economic weaknesses.
One of the reasons cited for the current plunge in equities is the unwinding of bets that took advantage of near-zero funding costs in the Japanese yen to invest in other assets. This carry trade was disrupted by the Bank of Japan’s interest rate hike and pledge to consider further moves. Additionally, traders have been unwinding bets on big US tech companies, further contributing to the selloff.
Yardeni, the president of Yardeni Research, highlighted the importance of central bank responses in times of financial panic. He anticipated that monetary policymakers would respond to the current situation, although he did not predict an emergency rate move. Yardeni drew parallels to the actions taken by then-Fed Chair Alan Greenspan in response to the 1987 crash, where interest rates were lowered and liquidity was injected into the financial system.
As the global financial panic continues, Yardeni suggested that central banks would likely lower concerns about the US economy and potentially consider rate cuts. He warned of the possibility of the selloff morphing into a credit crunch, which could potentially lead to a recession. However, Yardeni remained optimistic about the US economy, noting that the labor market is still in good shape despite recent weaker-than-expected job reports.
Yardeni’s expertise in the financial markets dates back to the 1980s when he coined the term „bond vigilantes,“ referring to investors‘ ability to influence policymaker discussions by driving up interest rates. With his deep understanding of market dynamics and historical context, Yardeni provides valuable insights into the current equities selloff and its potential implications for the broader economy.
In conclusion, while the current global equities selloff bears some resemblance to the 1987 crash, Yardeni remains cautiously optimistic about the outlook for the US economy. He believes that the current situation may be more of a technical aberration in the market rather than a precursor to a recession. As central banks continue to monitor the situation and potentially intervene, investors will be closely watching for any signs of stabilization in the markets.