Mark Twain is credited with having said that “history doesn’t repeat itself, but it does rhyme.” Whether it is a repeat or a rhyme, what shocks me today is that we could be witnessing a recurrence of events that looks eerily similar to what we saw in the build-up to the housing bubble. Even more disturbing is that so few recognize it, while those that do, dismiss it. If it were a play, it would be a tragedy. It has the same cast of characters, but in slightly different costumes, yet the story line is very much the same.
We have an abundance of liquidity, or credit, combined with interest rates that have been too low for too long. As a result, investors have been incentivized to invest on a leveraged basis. They have inflated an asset class that has created a wealth effect. This wealth has fueled consumer spending and economic growth, but at an ever slowing rate. This is primarily because the real income necessary to sustain and increase the rate of spending and growth has either stagnated or declined. Now the asset class that has been artificially inflated has peaked in value, and it has started to decline. This is the end of the first act. That is where we found ourselves in 2007, and that is where I believe we are today. We know how the second act ended back in 2008, but the storyline of 2016 has yet to play out.
There are several nuances between what happened leading up to the financial crisis and what is happening today that make it slightly less than obvious that this is a repeat performance….
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