Yardeni, a major bull, believes that the global sell-off resembles the 1987 crash but is due to technical anomalies rather than a recession

Intelligent Finance APP noticed that Ed Yardeni, the long-time bull on Wall Street and president of Yardeni Research, said that the current global stock market sell-off has similarities to the 1987 crash, when investors were worried but the economy avoided a downturn.

Yardeni said, "So far, it reminds me of 1987," "Our stock market crashed - basically all in one day - which means we are in or about to enter a recession. But that didn't happen at all. This is actually related to internal market factors."

One of the reasons for the current stock market plunge is the unwinding of bets on investing in other assets using the almost zero financing cost of the yen. The Bank of Japan raised interest rates last week and promised to consider further action, weakening these so-called arbitrage trades. Traders also noted that bets on large US tech companies were unwound.

Yardeni said, "I think, in terms of internal market dynamics, the current situation is similar to 1987. This sell-off is largely related to unwinding arbitrage trades."

In history, then-Fed Chairman Alan Greenspan lowered interest rates and injected liquidity into the financial system. Yardeni said he expects monetary policymakers to react to the current situation, but did not predict an emergency rate adjustment.

Credit Risk

Yardeni said, "This is evolving into a global financial panic, and I think we can expect central banks around the world to respond to this." Earlier, the US stock market cut its losses during midday on Wall Street on Monday.

At the close, the S&P 500 fell by about 3%, having earlier fallen by about 4.3%. The Nikkei index in Japan plummeted by over 12%. US Treasury yields also surged at one point, before giving back gains.

Yardeni said the policymakers' first reaction may be to "reduce concerns about the US economy" and resist the possibility of the Fed starting a easing cycle with a 50 basis point rate cut. "But you know, in a few days, like the futures sell-off on Friday and this morning, I think the Fed will enter a mode of providing liquidity - which likely means a 50 basis point rate cut."

The danger is that a market crash can self-exacerbate and evolve into a credit crunch, Yardeni said. "It can be imagined that this unwinding of arbitrage trades will evolve into some kind of financial crisis, leading to an economic recession," he said, emphasizing that this is not his expectation.

"The labor market conditions are still good," he said, despite the weaker-than-expected US jobs report released last Friday. Data for July showed a significant slowdown in job growth, an unexpected rise in the unemployment rate, raising concerns that the Fed may be lagging behind the situation in terms of rate cuts, with rates at their highest level in over two decades.

"The US economy is still growing, I think the service sector is performing well," he said. "In conclusion, I think this will be more of a market technical anomaly than a recession."

Yardeni is famous for creating the term "bond vigilantes" in the 1980s, referring to investors who, out of concern for the fiscal trajectory, influence policymakers' discussions by raising interest rates