The original Blade Runner* is one of the best sci-fi films of all-time and one of our all-time favorites.
Released in 1982 and set in 2019(!), the plot revolves around a young Harrison Ford playing Rick Deckard, a futuristic police officer whose job as a "blade runner" is to hunt down bioengineered androids called replicants and retire (i.e. kill) them. Replicants look, feel and behave exactly like real human beings, but the only way Deckard can tell the difference is by administering the "Voight-Kampff" test, which analyzes replicants' physical responses to a series of probing emotional questions.
Deckard's test reminds us of our recent questioning, as we try to determine the difference between today's capital market and macroeconomic environment and the one in October 2007. Is today's market a "replicant" of 2007? This is a popular question given how long this bull market has been running. If you recall, we just passed the 30th anniversary of "Black Monday," but it was also almost exactly 10 years ago today that the U.S. equity market peaked right before the onset of the global financial crisis and a big (almost 60%) equity drawdown:
One glaringly important difference between today and 10 years ago is the underlying plumbing of the financial system. If you knew what "questions" to ask and where to look back in 2007, you could have seen problems developing.
The Federal Reserve Bank of Chicago publishes a weekly index of 105 measures of financial activity in money markets, debt and equity markets, along with the traditional and "shadow" banking systems. In a normal business cycle, the Fed increases short-term interest rates and financial conditions eventually tighten and restrict business activity. Think about it like this: when financial conditions tighten, it is more difficult to get consumer or business loans or credit and then more difficult for the economy to grow. When business activity slows down enough and starts to decline, a recession results.
In October 2007 the index started to tighten dramatically. As fears increased and permeated throughout the system, financial conditions tightened even more dramatically, culminating in an unprecedented freeze in the financial system — or the global financial crisis:
Fast forward to today, the question of what is going on with financial conditions is incredibly important once again because the Fed has been raising interest rates. However, the answer may surprise you. Financial conditions are still very loose and support continued business activity:
Financial conditions are just one example of many high-powered, leading economic indicators we question and monitor to tell the difference between today's environment and 2007. So far, all seem to suggest little in the way of problems — today's market does not seem to be a "replicant!"
But for those of you that have seen the Blade Runner film know that Deckard had a particularly difficult time discerning between humans and the Nexus-6 replicant, the latest and most advanced version. He had to conduct a much longer than normal test to make a conclusion. We would expect our analysis to be more difficult this time around as well!
* The sequel to the original film, Blade Runner 2049, is in theaters now and is one of the most beautifully shot films of the year and a must-see. Roger Deakins, the film's cinematographer, is a national treasure and responsible for the look and feel of many amazing films, including The Big Lewbowski, The Shawshank Redemption, and No Country for Old Men … need we say more?