Then vs. Now. The Beginning of A Long-Term Cycle vs. The End of One

Often a new economic boom begins when things couldn’t get much worse. High unemployment, high inflation, low / negative growth, and stagnant / declining asset prices all contribute to a feeling of misery, which is usually the prevalent emotion at the bottom of a bear market or economic cycle.

Conversely, bull markets come to an end when things feel great. Ironically, the end of a boom is characterized by widespread optimism, even euphoria. During this last phase of a bull market, unemployment is very low, markets are setting new records seemingly every day, analysts are raising corporate earnings expectations that are then used to justify the already-extreme stock prices, new technologies make us feel like it’s “different this time,” etc..

It’s easy to get caught up in the emotions of the day, which is why it’s so important to maintain a healthy, big-picture perspective. With that goal in mind, I compare economic and market conditions from 1981 to present-day (update to the comparisons I laid out almost a year ago).


Notice these two periods are almost mirror images of each other.

Public debt as a share of the economy has tripled. Total debt (private and public combined) as a share of the economy has doubled. Household debt relative to income has doubled while personal savings rates have been cut down to a third of what they were in January 1981. Today, many Americans are spending more than they earn and racking up debt in the process.

Meanwhile, the stock market has set almost 80 new records over the last 12 1/2 months. The value of the market relative to the size of the economy has tripled compared to early 1981.

In 1981, inflation was very high and falling. Today, inflation is low and rising.

Interest rates were also very high and falling back in 1981, while we’re experiencing the opposite condition today.

In 1981 the Federal Reserve was completing a record tightening cycle and about to embark on an easing campaign while today. Today, the Fed has recently completed a record easing campaign and have begun tightening monetary policy (raising interest rates and reducing balance sheet).

1981 marked the beginning of the greatest secular bull market in history. What follows from here?

Much of the growth and stock market appreciation since 1981 has been funded by debt, which is clearly evident in the numbers above. However, that tailwind of leverage starting in 1981 has become a headwind of deleveraging since 2008. In my opinion, this is why economic growth has been so sluggish even during the recovery. In 1981, we had a lot of capacity for debt. Today, we have very little. The economy is trying to rid itself of a debt disease even as the Federal Reserve fights that necessary healing process. It does that by suppressing interest rates and outright monetizing government debt.


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