“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.