“History doesn’t repeat itself, but it often rhymes.” – Mark Twain
Financial crises have hit the global markets on a regular basis throughout history. And it appears financial crises will continue to pop up at regular intervals into the future. The first recorded speculative bubble was Tulip Mania in 1637, a period in the Dutch Golden Age during which the prices for fashionable tulip bulbs reached extraordinarily high levels only to dramatically collapse. Today, we view stocks, bonds and commodities as our investments of choice and, as always, current events continue to cause the financial markets to fluctuate, sometimes dramatically.
Listed below is a brief history of major financial crisis that have hit the globe in the past few decades. Each time, the stock and bond markets have taken a beating. And time and again, they bounce back to higher highs.
1980s – Savings and Loans crisis
Starting in the early 1980’s and extending into the 1990’s, Savings and Loans institutions were selling long-term, fixed-rate loans using short-term money. Additionally, political policy of the time emphasized deregulation of the financial industry. In the short run, this wasn’t a problem. But, as interest rates began is rise, many S&L’s began to look like Ponzi schemes. The government responded with new regulations and, in the end, 1 in 3 S&L’s went bust 1986 to 1995.
1987 – Stock Market Crash
Black Monday. October 28th, 1987. The crash began in Hong Kong and spread west to Europe, hitting the U.S. after other markets had already sustained significant damage. The Dow fell over 500 points or just under 23%. If such a rout were to happen today, the Dow would fall almost 6,000 points. The causes continue to be debated. Some argue program trading, in its infancy, was the culprit. Others say it was the result of end of the early 1980’s recession and subsequent “soft-landing” which resulted in the stock market surging 44% from 1986 to 1987. Unlike the S&L crisis, this event was short lived. By the end of December, the Dow had fully recovered and finished the year positive.
1989 – Junk Bond Crash
Junk bonds have a history of hitting bumps in the road starting with the S&L crisis. S&L institutions over-invested in higher-yielding, higher-risk corporate bonds that led to their demise as interest rates rose. The junk bond market rose 34% per year from 1979 to 1989. In 1989, however, the government began implementing new regulations that essentially led to the collapse of Drexel Burnham and resulted in the end of new junk bonds for about a year.
1994 Tequila crisis and 1997 Asia crisis
In 1994 a sudden devaluation of the Mexican peso triggered what would become known as the Tequila crisis, which would become a massive interest rate crisis and result in a bond rout. The crisis was triggered by the transition of a new president who reversed tight currency controls his predecessor had put in place. While the controls had created market stability, it resulted in banks lending large amounts of money at very low rates. Global debt markets, sensing a repeat of S&L/Junk Bond debacle, pulled financial support from Mexico, then the entire region. The U.S. Government stepped in with $50 billion in loan guarantees. The value of the Mexican peso 50% in less than a week and yields on debt shot up across the region and spread to other emerging market economies.
15 years later, history would indeed repeat itself in Asia. In 1997 Thailand’s currency collapsed when the government was forced to floating it on the open market. Thailand owed a huge amount of debt to other countries and had no means to repay it since it’s currency was becoming worthless. Again, the crisis spread across the region. This time, the IMF provided a $40 billion bailout. One year later, a carbon-copy crisis happened in Russia.
1999 & 2000 – Dotcom Crash
In the 1990’s the interest the internet and anything that supported or used it, skyrocketed. Like Tulip Mania, there was a mad rush into the technology sector. Companies that had never made a penny, nor ever would, went public. In the feeding frenzy that followed, company valuations became completely irrational. By 2000, the economy was slowing, and interest rates were going up. Many dotcoms went bust and were liquidated. It took 15 years for the NASDAQ to fully recover to its previous highs set in 2000.
2007 & 2008 – The Great Recession
The nastiest of all the crises. In many ways, it still has not ended. The causes are numerous, but the main trigger appears to be the crash of the U.S. housing market. Home loans were made to just about anyone. Complex financial products (derivatives) were created holding these loans and then sold and resold to largely unsuspecting governments, businesses, institutions and individuals as safe investment products. Warren Buffet once called these instruments “financial weapons of mass destruction” and they almost were. The global financial system ground to a halt as these products blew-up.
It resulted in the collapse of several large financial institutions and is considered by many economists to be the worst financial crisis since the Great Depression. This crisis is like many other crises except this time, it happened with bigger, much, much bigger numbers involved.
2018 – The Great Tariff Tiff (… to be continued …)
In February of this year, President Trump acted on his campaign promise in Tampa, Florida, to raise tariffs on goods imported into the U.S. Specifically, “Any country that devalues their currency to take unfair advantage of the United States and all of its companies that can’t compete will face tariffs and taxes to stop the cheating.” The argument is tariffs protect domestic industries by causing imports to become more expensive. The cause-and-effect has been for China (and other countries) to raise tariffs on U.S. exports, making them look less attractive to global buyers.
How will the Great Tariff Tiff end? No one knows for sure. Does the tariff tiff go global where the U.S. takes on all comers? Or will it end with a nod and a wink, the old boys doing a deal? As with all financial crises, there will be winners and losers; both short term and long term. The whose-who of winners and losers is still being figured out.
Once Again, History is Repeating Itself
Not to worry though, one thing is a given, as with all the other financial crises, we will survive and move onto another one – given enough time.