The Spooky Echoes of '87; A famed Wall Street strategist says he's haunted by today's parallels to the bust 20 years ago, even knowing history is no guide.

Byline: Barton Biggs (Biggs, the famed Wall Street strategist, is now a hedge-fund manager at Traxis Partners.)

I'm still bullish about stocks, but there is one spooky memory that perches in my mind like the canary in the coal mine. It relates to the U.S. stock market in 1987, and the October crash that shook the world. Then, as now, the American stock market drove the world, and a bust here caused a bust there. Even as I write this, I can't help but think of an old Russian saying, "Ignore the past and you will lose an eye; dwell on the past and you will lose both of them." So keep that in mind as you read on.

Still, the historical similarities are eerie. By 1986 and 1987, stock prices had made a strong recovery from the stagflation and the extended, painful bear market of the 1970s to 1982. Both the U.S. bull market and the economy had been rising for almost five years, and were starting to look long in the tooth, while inflation and interest rates had been declining, and price-earnings ratios had been rising.

In addition, there was talk of trouble brewing in the American savings-and-loan industry, just as today there is fear of the subprime-mortgage market. Back then, a wild, speculative bubble was building in Japan, very similar to what is going on in China today. The Japanese market was selling at close to 70 times earnings and every mama-san was trading stocks. There was much talk of the shrinking supply of stocks as buybacks and private equity were reducing the number of shares outstanding, and much chatter about the flood of liquidity that was lifting stocks. Sound familiar?

By 1986 and early 1987, many investors, still scarred by memories of the bear market, were suffering from severe acrophobia. Respected economists and market gurus were warning that stocks were getting expensive, that inflation and interest rates would soon be rising, and that unsound and speculative financial practices were rampant. They railed against programmed trading, options, the newfangled hedge funds and something called portfolio insurance. They were right to fret, but they were too early, which in investing can be the same as being wrong. In other words, the general dyspeptic mood then was similar to today's.

Portfolio insurance was particularly dangerous because it was really just automatic selling (to cap losses) disguised as a sophisticated strategy. Portfolio insurance meant that a decline in the market would feed on itself because selling would beget lower prices, which in turn would beget more selling. In 1987, when interest ...