The meltdown before last, that of the 2008 era, was in some ways the mirror image of the one we may still be in the midst of, depending on perspective. There are always two of these, the financial markets perspective and the economic one. The former would suggest we’re now in a bull market for equities, which is why most of us tend to focus on the latter. Because it’s hard to believe.
Regardless, there are two, usually in some semblance of lockstep, or a sort of dance in which one leads and the other follows. In 2008, the breakage originated in financial markets and flowed from there to the economy. In 2020, the damage has been economic (though damage is a ridiculous understatement) and dragged financial markets down, at first.
The bifurcation of a market on the rise and an economy on the wane isn’t necessarily of note, as markets after the initial shock can pull themselves together and start looking sharp more quickly. The economy takes longer, and markets understand its plight and are mindful of the load that must be carried. The rising tide of money flows, of course, may help to make the markets gracious, and in this, 2008 and 2020 haven’t been particularly different.
The difference now is one of the extremes. In 2008, the economic turmoil was contained and, with the benefit of hindsight, seems almost cyclical in nature, albeit steeper than a normal cycle: The Great Recession, it was called. In 2020, we don’t even know what to say. It all depends on what comes next, which no one can really even guess. But here and now, for all intents and purposes, it feels like there is no economy at all, or just a breath in any case. The money that is being printed makes the post-2008 installments seem playful in comparison.
In other words, the balance between fundamentals (economy) and liquidity (markets) was approximately as one might expect in 2008, with markets (liquidity) leading to a fundamental (economic) recovery. Fast forward to 2020, there isn’t any balance at all. The markets are just out there doing what they do, as though everyone is merely trading options, blindfolded. Sometimes there is chatter about a fundamental rationale, but that tends to vagueness and lip service.
The current parallel, rather than 2008, which isn’t, may more truly be that of cryptocurrency. So far, for better or worse, Bitcoin at least has seemed to be a speculation vehicle, where there is arguably a fundamental underpinning to the trade, but this is not altogether convincing. Or, rather, the fundamental argument is based on a loose set of promises that may or may not take form in the distant future, depending on some other things that may precede or follow. All the while, the price swings that are large and frequent are driven by market demand. Does this sound familiar?
Assuming this view to have some merit, another interesting contrast between 2008 and 2020 has emerged. Back then, institutional money was quick to jump into the activity, while retail watched the opportunity missed for it forever. Lesson learned… This time around, it feels as if the retail trade has acted fast to buy the dip, while the collective institution scratches its collective head and contemplates, like I am now.
In this too, the pattern has been similar to crypto.