Maybe we’ll get 1893, 1929, 1968 and 2008 analogs mixed into a heady cocktail of surprises.
One of the favorite parlor games of financial analysts and seers is to make predictions about what will happen in the coming year based on past analogs such as the presidential election cycle, bond yield inversions, the Federal Reserve cutting interest rates and so on.
Part of the parlor game is to dig up obscure metrics and parse the percentage of the time that the analog worked in the past, a classic confusion of correlation and causation: just because financial condition X occurred when a team from the old AFL wins the Super Bowl doesn’t mean the Super Bowl caused financial condition X to occur.
In other words, all analogs are worthless unless the claim is that the current causal conditions are so close to previous causal conditions that the current conditions will generate the same results. This test eliminates correlations that have weak causal links (for example, the presidential election cycle) and focuses our attention on claims of direct causation: for example, the Fed cutting rates will boost stocks because lowering interest rates will crank up sales and profits, which will push corporate equities’ valuations higher.
I would argue that current conditions are so extreme that none of the usual analogs will play out as predicted. Consider the state of the banking sector, and the Federal Reserve’s unprecedented transfer of tens of billions of dollars to banks keeping reserves at the Fed. A policy of subsidizing banks at such a scale is without precedent.
Next, consider federal debt, which is expanding at rates which are unprecedented in peacetime. Where’s the analog for adding trillions in debt as inflation demands elevated bond yields cannot go back down to near-zero? There is none.