(Bloomberg) - Longtime market and economy watcher Ed Yardeni said that the current global equities selloff bears some similarity to the 1987 crash, when the economy averted a downturn despite investor fears at the time.
“This is very reminiscent, so far, of 1987,” Yardeni said on Bloomberg Television’s Bloomberg Surveillance. “We had a crash in the stock market — that basically all occurred in one day — and the implication was that we were in, or about to fall into, recession. And that didn’t happen at all. It had really more to do with the internals of the market.”
Among the reasons cited for the current plunge in equities has been an unwinding of bets that took advantage of near-zero funding costs in the Japanese yen to invest in other assets. That so-called carry trade was undermined by the Bank of Japan’s interest-rate hike last week and pledge to consider further moves. Traders have also pointed to an unwinding of bets on big US tech companies.
“I think there’s the same thing going on here” as in 1987 with regard to internal market dynamics, said Yardeni, president of Yardeni Research. “A lot of this selloff has to do with this carry trade unwind.”
In the historical case, then-Fed Chair Alan Greenspan lowered interest rates and pumped liquidity into the financial system. Yardeni said he anticipated that monetary policymakers will respond to the current situation, though didn’t predict an emergency rate move.
Credit Risk
“This is turning into a global financial panic, and I think we can expect that the central banks will respond to it,” he said, before US stocks pared losses by the middle of Monday’s session on Wall Street.
The S&P 500 index was down about 2.3% as of noon in New York, after sliding as much as about 4.3% earlier in the day. Japan’s Topix Index plunged more than 12%. Treasuries also soared before paring the move.
Policymakers’ first response may be to “lower concerns about the US economy” and to push back against the potential for the Fed to begin its easing cycle with a 50 basis-point rate cut, Yardeni said. “But you know, another couple of days like Friday and this morning’s futures selloff, and I think the central bank will be going into the mode of providing liquidity — and that could very well mean a 50 basis-point cut.”
The danger is that the plunge in markets feeds on itself and morphs into a credit crunch, said Yardeni. “It’s conceivable that this carry trade unwind becomes some sort of financial crisis that, in turn, leads to recession,” he said, while highlighting that’s not his expectation.
“The labor market is still in good shape,” he said, even after Friday’s weaker-than-expected US jobs report. The July data showed a marked slowdown in payroll gains and an unexpected climb in the jobless rate, which stoked concern the Fed may be behind the curve in reducing rates from their highest settings in more than two decades.
“The US economy is still growing, I think the service economy is doing well,” he said. “All in all, I think this will turn out to be more of a technical aberration in the market than something that turns into a recession.”
Yardeni is famed for coining the term “bond vigilantes” during the 1980s, referring to investors’ potential to shape policymaker discussions by driving up interest rates out of concern about the fiscal trajectory.
By Christopher Anstey
With assistance from Jonathan Ferro and Dani Burger
