"Black Monday" redux? Global rally makes some sweat
NEW YORK (Reuters) - The 20th anniversary of the stock market's brutal 1987 crash has triggered explosive debate about whether today's raging, yet dubious, bull market in world stocks is headed for the same fate.
Who can blame them, right?
After all, investors know all too well that there is a persistent common thread in each and every financial crisis over the last 20 years: All collapses have been caused by excesses.
Many economists and investors call them "bubbles."
Just look at the current examples:
* MSCI's main index of world stocks is up 14 percent in 2007 and has notched double-digit gains in three of the past four years.
* China's Shanghai Composite Index .SSEC has more than doubled this year on top of a 130 percent gain in 2006.
* MSCI's index of Asia-Pacific stocks excluding Japan .MIAPJ0000PUS has risen more than 40 percent so far this year, and is up 260 percent since the end of 2002.
In the United States, where stocks earlier this month completed the fifth year of a bull market, the bubble is of a different variety.
Here, it happens to be in the housing and credit markets, whose deterioration continues to threaten world financial markets and rattle nerves.
"All asset bubbles formed and imploded for the same reason: naive extrapolation," said Jeffrey Gundlach, chief investment officer of TCW Group in Los Angeles, which manages assets worth $160 billion, commenting in a recent letter to clients.
THE VOICE OF EXPERIENCE
"Choose your crash," Gundlach said. "Some of us witnessed the collapse in precious metals in 1980. More folks probably can recall the emerging market debt crisis of 1998. All but the most inexperienced among us lived through the tech stock and corporate bond debacles which opened this decade."
Of course, Gundlach is referring to American homeowners who in this cycle took advantage of rock-bottom interest rates, buying a slice of the property boom.
That was aided by Alan Greenspan's Federal Reserve, which slashed benchmark interest rates to 1 percent in 2003 to pump the economy back to life after the 2001 dot-com bubble burst, and kept them there for a year. Continued...
