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Entry for June 13, 2007

Below is a nice piece written by Tony Crescenzi that discusses the reason we are not seeing a repeat of 1987.

Five Reasons This Is Not 1987

With respect to the rise in market interest rates, some like to compare the recent period to 1987 and the impact that rising market interest rates had on stock prices. This is a mistake for many reasons.

Probably the most important points are these:
1. Yields were significantly higher, with the 10-year at 9.6% at the end of September 1987 and 10.2% in October.
2. The yield increase that occurred at that time was far more sizable, with the increase in the 10-year’s yield increasing 2 percentage points.
3. The U.S. banking sector is stronger today than then.
4. Inflation is lower; the CPI was at +4.4% and headed higher in September 1987.
5. The derivatives market has grown to $400 trillion.

The derivatives market provides opportunities to hedge risks in ways that were not possible in 1987, particularly interest rate risks.