I hate to bring this up again…

Over the past two years I've brought up 1987 periodically as just a mere possibility that has to be factored. I don't want to think back to those days of currency wars, political grandstanding, and crazy volatility, but alas, every time I try to clear my mind . . .Viewing the remainder of this article requires a Subscription

Ever wondered what 1987 looked like?

I thought this was interesting. Here are a few charts that might give you a picture of what that famous year looked like. The danger, of course, is that it’s already in the distant memory for most investors.

The S&P 500 hit a new YTD high in August, then…

Gold meandered it’s way up:

The USD was on its way to making a new low byt the end of the year:

I’m not drawing any comparison, since I think we are in for a much more difficult period, more closely related to Japan’s experience than to the 1987 experience, but I always like to go back and revisit, especially when thinking through different scenarios and outcomes.

And I’ll end with a quote from John Murphy (Intermarket Analysis, 1991):

Consider the sequence of events going into the fall or 1987.  CRB prices had turned sharply higher, fueling fears of renewed inflation.  At the same time interest rates began to soar to double digits.  The USD which was attempting to end its 2yr bear market, suddenly went into a freefall of its own (fueling even more inflation fears).  Is it any wonder, then, that the stock market finally ran into trouble?  Given all of the bearish activity in the surrounding markets, its amazing the stock market held up as well as it did for so long.  There were plenty of reasons why stocks should have sold off in late 1987.  Most of those reasons, however, were visible in the action of the surrounding markets and not necessarily in the stock market itself.

Euro is remarkably stable – Ireland anyone?

If a currency falls in the forest …

According to the Irish Independent the Labour Party, Eamon Gilmore, came very close to suggesting that Ireland is considering defaulting on its debts “when he talked about the Government “negotiating” with bondholders in Anglo Irish Bank.” Additionally, the same newspaper also reported that Ireland is on the verge of calling in the IMF for a bailout, citing “a report from Barclays, one of Europe’s largest banks, said Ireland may yet need financial help from the IMF or the EU if conditions got any worse.

Read the article from zerohedge here.

Currency markets are not reacting to anything, but gold is. Gold hitting new highs. Silver up as well. This is 1987 sort of stuff – currency market turmoil, some politician says something irrelevant which awakens the markets to underlying risks, and WHAM!

Is the “wham!” coming next week? I don’t know, but it certainly feels like the calm before the storm, because the news has been bigger than the reactions suggest.

Currencies and 1987

Remember the fateful day in 1987? Judging by the profile of most of our readers, probably not, but you may have read about it. So let’s review. Market gyrates. Currencies are exhibiting massive dislocations. Government officials step in (over a weekend) to talk one currency down. Globally, everyone believes that an Asian country will buy up the US (remember the movie Gung Ho?), that US manufacturing is done, and that US workers are fat and lazy. We have the largest housing crisis imaginable looming with the S&L crisis. Yikes! Sounds eerily similar. For those of you who looked into Boom Bust http://www.amazon.com/Boom-Bust-Prices-Banking-Depression/dp/085683243X/ref=sr_1_1?ie=UTF8&s=books&qid=1255459441&sr=8-1 the 18-20 year cycle with mid-cycle slumps should come as no surprise.

And so, while I’m not convinced by this rally in equities at all, I’m equally unconvinced by the decline of the dollar. There is a big disconnect between bonds holding up, declining dollar, rising gold, rising equities, and the macro picture (jobs, real estate, govn’t spending). Some market is sending the wrong signal…I just don’t know which one yet.