Aug

12

This chart is interesting. It comes from a passionate market historian, Robert Prechter and his Elliott Wave group.

However, I disagree with it. A local maximum in interest rates is established only after they peak out somewhere and start declining again. So this illustrious list of busts and crises is not happening during the spike, but at its end.

A classical cart and horse problem. Framing Bias will make it appear that each time a spike in interest rates happened a crisis happened. The reality is likelier that each time a crisis could no longer be shoved under the carpet, when the economy could not sustain playing on the house money, when the illusory money effect succumbed to gravitational pull of reality, when the epidemic effect of the meme played out the asymptotic end of the S-curve, no one was willing to pay more for using Other People's Money (OPM). Interest rates are a willingness of people to undertake risk. Yet when this willingness becomes a larger risk than the aboriginal risk, a crisis comes.

Also, in the customs I learned on this list, there is always a chance that endless other financial crises have come along the curve too. Not sure, just checking with the specs which other key crises have happened at the troughs of interest rate cycles? Have there been any or as many?

Steve Ellison writes:

Yes, there is always bad news around, and any number of events could have been annotated at the low points on the chart, too.

Here is an example I posted on the site in 2005.

One of my prized possessions is a chart of stock market returns in Venita Van Caspel's book "The Power of Money Dynamics." Each year is annotated with a reason to have been bearish that year:
 

1934: Depression
1935: Civil war in Spain
1936: Economy still struggling
1937: Recession
1938: War clouds gather
1939: War in Europe
1940: France falls
1941: Pearl Harbor
1942: Wartime price controls
1943: Industry mobilizes
1944: Consumer goods shortages
1945: Post-war recession predicted
1946: Dow tops 200 - market "too high"
1947: Cold war begins
1948: Berlin blockade
1949: Russia explodes A-bomb
1950: Korean war
1951: Excess profits tax
1952: U.S. seizes steel mills
1953: Russia explodes H-bomb
1954: Dow tops 300 - market "too high"
1955: Eisenhower illness
1956: Suez crisis
1957: Russia launches Sputnik
1958: Recession
1959: Castro seizes power in Cuba
1960: Russians down U-2 plane
1961: Berlin Wall erected
1962: Cuban missile crisis
1963: Kennedy assassinated
1964: Gulf of Tonkin
1965: Civil rights marches
1966: Vietnam war escalates
1967: Newark race riots
1968: USS Pueblo seized
1969: Money tightens; market falls
1970: Cambodia invaded; war spreads
1971: Wage-price freeze
1972: Largest U.S. trade deficit in history
1973: Energy crisis
1974: Steepest market drop in four decades
1975: Clouded economic prospects
1976: Economic recover slows
1977: Market slumps
1978: Interest rates rise
1979: Oil prices skyrocket
1980: Interest rates at all-time highs
1981: Steep recession begins

(Van Caspel, 1983, pp. 124-125)

Unfortunately, I have the 1983 edition, so the chart ends there.

A modest attempt to bring the record up to date:

1982: Double-digit unemployment
1983: Record budget deficit
1984: Technology new issues bubble bursts
1985: Dollar too strong
1986: Dow at 1800 - "too high"
1987: Stock market crash
1988: Worst drought in 50 years
1989: Savings & loan scandal
1990: Iraq invades Kuwait
1991: Recession
1992: Record budget deficit
1993: Clinton health care plan
1994: Rising interest rates
1995: Dollar at historic lows
1996: Greenspan "irrational exuberance" speech
1997: Asian markets collapse
1998: Long Term Capital collapses
1999: Y2K problem
2000: Dot-com stocks plunge
2001: Terrorist attacks
2002: Corporate scandals
2003: Gulf War II
2004: High oil prices
2005: Trade deficit


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