Recap Of The Last 50 Years In The Global Financial Markets

Key highlights:

The global economy might be unpredictable, but there are still undeniable patterns that investors can take advantage of

The bond yield curve reverses before every major financial crisis

The bull run between the 2008 recession and the current recession is the longest uninterrupted period of growth recorded in modern economic history

Taking a look back at the global financial markets

Although the modern global financial market is too complex to capture in its entirety, analyzing the past can give us valuable intelligence regarding what's yet to come.

In this article, we'll be taking a dive back in time. More specifically, we will recap the events of the last 50 years starting from 1970, and that in order to extract anything we could learn from history, make sense of what could be avoided based on present facts, and prepare for a future where economic recessions would not appear in the form of a boogie-man for grown-ups but rather as a socially accepted phase.

1970-1980

During the 70s, global inflation started to rapidly accelerate and by the end of the decade, the United States' primary mission was curbing it. Paul Volcker, the newly appointed Fed chairman, promised to follow a disinflationary monetary policy, essentially putting a leash on the rate new fiat currency was being introduced into the system.

To give you a hint of the situation back then, you should analogize the fact that the inflation rate went from 1% in the late 60s up to 14% by 1980, while the unemployment rate rose from 3.5% to 9.7% in the same period.

Volcker's bold decisions (he basically re-arranged all the policies his predecessors issued) had a positive impact on the US and, by extension, on the global economy in the decades to follow.

Right before the end of the 70s, the Iranian Revolution resulted in an increase of oil prices even further than the 1973 oil embargo.

Since commodities such as oil and/or gold are essentially run by a handful of monopolies, it would be natural to see increased volatility, whether upwards or downwards during major economic shifts.

Remember the Aramco IPO back in 2019, where they hit a valuation of $2 trillion? Well, obviously we didn't buy that, but many investors who trust their gut more than their history lessons lost tens of millions of dollars, considering that oil prices plunged in 2020.

Moving into the 80s, both the US as well as the broader global economy started to flatten out before the US showcased a significant growth in 1983, one that's remembered as the 'longest periods of sustained growth' since WWII.

The economic spring, attributed to low interest rates, and the overall positive performance of the financial markets spearheaded alternative investments. At that time, the collateralized debt market (savings/loans etc.) started to pay attention to speculative arbitrary opportunities involving high yield bonds that usually subjected real-estate assets, similar to what happened during the 2008 crisis.

In combination with investors' over-reliance on insurance, the introduction of computerized trading managed to bring the US stock market the greatest one-day percentage drop in history back in 1987. At that point, savings & loans failures brought over a thousand financial institutions to their knees.

1990-2000

Moving forward to 1990, and the situation did not look any better. Many popular leveraged buyouts generated during the 80s failed, significantly affecting the yield bond market, which also an indicator for overall market confidence.

A leveraged buyout (LBO) is basically the concept of acquiring a company using borrowed money. This is a common practice to issue easy loans as the assets of the company being acquired are usually presented as collateral to the loan issuer, along with the assets of the acquiring company, making it a high-risk money-grab.

As for the bonds yield market, there is a chart called the bonds yields curve, which is essentially a traction reference of market confidence/volatility. Elizabeth Warren, who had previously predicted the crisis of 2008, warned us about a financial recession last year, basing her prediction on the bonds yields curve, which is said to be reversed every time a new recession is approaching.

1990 was the year Oaktree Capital characterizes as 'the start of the end of the Cold War', or simply the year military budgets could get a break and money could flow back to those affected by the economic instability.

A short recession that lasted less than a year between 1990 and 1991 was followed by the "golden age", where the U.S. economy started to flourish again, this time more stable and mature, with new bond yields attracting billions of funds from foreign investments.

It was during the mid 90s when we realized that the concept of a 'digital age' is not as far-fetched as it sounded back in 60s sci-fi movies.

As a matter of fact, in 1997 The Taxpayer Relief Act enabled speculative investors undertaking some high-risk bets targeting tech, media, and telecommunications companies in particular.

That same year, a rapidly devaluing factor messed with Thailand's currency, sparking fears of a global financial meltdown due to the 'financial contagion' and marking the year as the 'Asian Financial Crisis'.

In a nutshell, after the Thai government was forced to devaluate its native currency baht, due to lack of foreign currencies to support its relation to the USD, most Asian economies who bartered with Thailand lost millions in funds due to the fast devaluation of the currency used by regional nations.

Between 1997 and 1998, many Asian and European countries cut their ties with Asian economies infected by the ongoing crisis, contributing to a domino of mergers and acquisitions that led the year right after. In late 1998, one of the world's leading hedge funds, Long-Term Capital Management, collapsed, influencing and preparing the global market's psychology for the worst.

At the beginning of the new Millennium, Alan Greenspan, who served as the Fed chairman at the time, warned financiers that interest rate hikes are essential in fighting inflation, the economy's returning invisible enemy.

Nevertheless, and besides the warnings, the markets rose past all-time-highs, relying on the decade-long spree of success. However, the tech bubble would burst, signifying the end of the previous trend. The three-year recession that followed was paralleled to the Great Depression, although that would be certainly not the last time we would hear this expression.

2001 marked the start on the global war on terrorism that was sparked by the 9/11 attacks. This was a one-way war where both the US as well as US allies could simply invest in military firms, ammunition manufacturers and missile engineers to fuel their campaigns in the Middle East.

Obviously, tech stocks and everything else started to fall, and investors had to look up for alternative markets. Since not everyone was into 'war-games', the idea of creating subprime mortgages was gaining popularity among shorted portfolios.

These are packaged into mortgage-backed securities that are invested in by financial institutions. Eventually, when subprime mortgages and MBS defaulted in large numbers, it caused a wave of collapsing financial institutions.

In 2008, Lehman Brothers, one of America's largest banking institutions, filed for bankruptcy. This affected the global market and reversed the bond yield curve once again, signifying the start of what will be remembered as the Global Financial Crisis.

2010-2020

In 2009, the global economy reached its bottom, while some western economic titans started to recover thanks to unprecedented monetary accommodation (a fancy term for quantitative easing). In combination with other policies, governments to contain the spread of the financial instability.

Nevertheless, some countries, including but not limited to Greece, Argentina, and Germany, were hit severely by the crisis, and in some cases, the shift towards a positive economy was extremely painful and slow. Greece, in particular, was eventually relieved from the crisis in 2016.

Although the global financial crisis displaced many people's dreams in an instant, new financial regulations didn't take long to be implemented. The US was again the catalyst for a trend that lasted until the end of the next decade, with near-zero yields being the new speculative toy for risky investors.

This economic expansion is the longest recorded in history - nearly 13 years straight - and it wasn't limited to the US.

Many new economic super-titans were created during this bullrun, with the most significant being China, thanks to its approach to technological advancement that has been quite more efficient when compared to the previously leading player in the field, the US. Additionally, several tech giants hit or surpassed the $1 trillion market cap milestone.

By the end of 2019, the global economic growth slowed down, but it didn't give us any hints of worries as of yet.

However, the first global warnings subjecting the ongoing pandemic attributed to COVID-19 forced pretty much everyone to reconsider their stakes when it comes to the future.

In March and April, most economic centers went into lockdown to an extent seen before in times of peace. Millions of businesses cannot function properly due to the major lack of human resources in the workspace.

The global equity market collapsed, while US stocks experienced their fastest transition from bull to bear mode in history.

Global governments already started to print money out of thin air in order to balance the interest-focused economy at a time that more than half of the world's workforce doesn't actually work.