The urge, in a time of suspected crisis, to draw comparison with history is a strong one. No matter how bad things are, the idea that we’ve been there before and come out the other end, is a potent security blanket in times of strife.
In fact, everyone seems obsessed with 1998. And the trouble with comparisons is that, like statistics, the results very much depend how you cut them.
Nouriel Roubini made waves with his assertion last week that the current situation is “much worse” than the 1998 crisis surrounding LTCM. In a nutshell, he argues that in tipping over from illiquidity into the realms of insolvency this episode will have further-reaching, real effects than its 1990s semi-equivalent.
The European portfolio strategy team at Goldman Sachs instead have homed in on the place of the banks in the two crises.
In the summer of 1998, says Goldman, banks shed 40 per cent of their value after peaking in mid-July, while the overall market lost 20 per cent. This time round, as of Thursday, the banks are down 3 per cent, with the overall market up 2 per cent.
In general, equity market performance was quite strong in the months leading up to the Russian debt default and LTCM crisis, and the market was up 32% through the peak on July 15, 1998. Bank stocks performed even better, returning 37%.
In contrast, say Goldman, in this run-up bank performance and that of the market has been more moderate. Indeed, over the course of this year banks have experienced a “gradual drift of underperformance.”
Banks’ earnings multiples peaked at 19.5 times before the 1998 crisis. Currently trading bat 10.4 times NTM earnings , the banks are already lower than the trough reached in October 1998, point out Goldman, with accompanying graph.
From another corner of the Goldman empire comes more on the 1998/2007 parallels. In Monday’s daily note, GS economists Peter Berezin and Binit Patel, run through the similarities:
In contrast, the US economy was arguably on a stronger footing in 1998, with the housing market now looking in dire straights.
More fundamentally, the source of the problems in the US are largely emanating from the US, whereas in 1998 they were largely emanating from the EM sphere.
The lessons, say Goldman, are to avoid the kind of complacency with which market participants greeted the 1990s problems in Asia, but to remain optimistic for a longer-term recovery. The generally favourable backdrop, healthy corporate balance sheets, and strong profits give good reason for that.
In the meantime:
The constant dribble of news about who may be exposed to what is likely to keep the market on edge and volatility at elevated levels. Longer term, the issue will center on whether the repricing of risk that we are seeing will create a credit crunch that will squeeze cap ex spending and in the US, further undermine the struggling housing market.
