Early in 1992, Time magazine projected that the nascent economic recovery would be “one of the slowest in history and the next decade one of lowered expectations.” That was the conventional wisdom and, at the time, seemed eminently reasonable. It also turned out to be completely wrong. The Internet and huge productivity gains propelled above-average economic growth and a rip-roaring, “Cult of Equity” bull market that surged into the year 2000. We spent and borrowed like mad and eased into fluffy college majors.
Now, some on Wall Street are wondering if we’re about to replay some version of that ’90s mix tape. Liz Ann Sonders of Schwab and Ed Yardeni of Yardeni Research have been discussing this theme of late with clients.
“The global economic scene is increasingly reminiscent of the 1990s, when the U.S. economy and stocks outperformed relative to the rest of the world,” wrote Yardeni last week. “Back then, emerging markets submerged when the Asian Tigers were hit by a currency crisis in 1997 and Russia defaulted on its debt in 1998.”
“Today,” he adds, “the high-tech revolution that started in the 1990s is spreading to lots of other industries that are using technology to innovate and to boost productivity. Once again, the U.S. seems to be leading the way. Emerging markets are submerging again. Europe’s recovery is lackluster. … Commodity prices are flat-lining.”
In her March 17 note—“Objects in the Rear View Mirror May Appear Closer Than They Are: A Look Back at the 1990s”—Sonders tallies the many similarities between then and now, including extremely easy monetary policy transitioning to some semblance of normalcy; persistently low inflation; a major developing-market deleveraging (Japan then vs. the euro zone today); rising interest in stocks and partisan gridlock in Washington.
Sonders reminds us: “Partly due to the characteristics of a post-financial crisis era, the mid-1990s was considered the first ‘jobless’ recovery, although it followed a much less-severe recession than the current ‘jobless’ recovery.”
The Federal Reserve under Alan Greenspan, she notes, was the first major global central bank to begin tightening monetary policy two decades ago, while Germany’s Bundesbank and the Bank of Japan were still easing. Today, by comparison, with the Fed tapering quantitative easing, the U.S. is again out in front of most other global central banks (save for the Bank of England)—all while inflation remains low with a muted risk of a spike-up from these levels, even if wage growth accelerates here (as it did in the mid-1990s).
As for markets: As in the 1990s, shares in the U.S. have wrested leadership from out-of-favor emerging markets such as Russia, Brazil, and China. “Emerging markets,” observes Sonders, “are now facing long-term structural problems amid rolling currency crises; not all that dissimilar to the Asian currency crisis/Russian default/LTCM [Long-Term Capital Management] failure era of the late-1990s.” The U.S. market, which bottomed five years ago, appears to be in the first few innings of another stretch of outperformance to developing economies—in sharp contrast to the state of affairs during America’s lost market decade, the 2000s.
The Schwab strategist further quotes a January report by the firm BCA Research to compare today’s deflationary euro zone to 1990s Japan: “In the first half of the 1990s, Japan was struggling with debt deflation. Economic growth in Japan fell apart, profits collapsed and the economy was marching toward sustained price deflation. … Today’s euro zone is yesterday’s Japan: excluding Germany, the rest of the euro zone economy remains mired in stagnation.”
There are, of course, major differences between today’s backdrop and that of the early-to-mid 1990s. Never has the Fed thrown so much stimulus at an economic slowdown, the 2008-09 likes of which was more painful than anything seen since the 1930s. Today’s profit margins are unusually fat. Income inequality is worse. The giddy 1990s, moreover, set us up for the triple trauma of the following decade: the tech crash, Sept. 11, and then the housing collapse and Wall Street’s near-death experience. So, says Sonders, it stands to reason that a thrice-bitten skepticism stands in the way of a full 1990s redux.
Is it really different this time? It should be remembered that then-Fed Chairman Greenspan gnomically warned of irrational exuberance three-plus years before that bubble hit peak swell. With that kind of lead time in mind, current rookie chief Janet Yellen might want to start drafting something equivalently indecipherable soonish.