Of late, we've seen a number of comparisons between the current market and 2000, and many of them have been spot-on. Helene Meisler, for example, has made some great chart-based ones. Still, I cannot help but compare the Federal Reserve's presence then and today's situation -- because the central bank is still the master of the game board.
Back in the 2000-to-2003 period, the Fed was very hawkish and concerned about asset bubbles -- see Greenspan's 1996 "Irrational Exuberance" speech. The system was flooded with liquidity due to the "Y2K" scare, though that liquidity was removed after that scare turned out to be nonsense. Stock prices were sky-high, there was potential for inflation and the economy was full of excesses.
Amid all this, the Fed was raising interest rates in order to fight off inflationary trends that could have permeated the economy and caused a vicious inflation cycle. Recall that, before the recession hit, the fed funds rate was at 6.5%.
In any case, growth was strong, and that may have been caused by inflation. What we were left with was a prolonged recession and bear market that lasted the usual 18 months. The U.S. was at or near full employment, so many folks had jobs -- though the pink slips were beginning to be delivered. So, given the backdrop, Fed policy was reactionary and rather normal.
Ben Bernanke, not yet Fed chairman, was then on the Federal Open Market Committee. At the time, he was very concerned about inflationary trends and was quite outspoken about it. Still, it's interesting to note that 2002 was when Bernanke first mentioned the flood of liquidity that would be needed in the event of a deflationary spiral. This was part of a speech given at the 90th birthday party of famed economist Milton Friedman -- and, in it, Bernanke referenced Friedman's 1969 concept of a "helicopter drop" of money into the economy.
So, while Bernanke gets credit for doing it, Friedman gets credit for being the first one to mention it.
Fast-forward to today, and we have a Fed fighting deflationary forces; a major, relatively recent financial crisis behind us that is permanently embedded in memory; a structurally broken jobs market; and, for now, super accommodative Fed policy that includes bond-buying and zero interest rates. Growth is low, steady and without inflation.
The point here is this: While the charts tell us great information, we must also know the state of Fed policy in any given period. This is the one trigger, it seems, that will move money into and out of markets.