We've been here before, remember?

It was bound to happen. I mean analysts making historical comparisons. Of course, it's part of their job to make sense of what's going on.

In the past 18 months, markets the world over have witnessed one of the rapid upward movements in recent times, including the Dow Jones average surpassing the 14,000 mark for the first time. It had taken just 57 trading days for the index to move from 13,000 to 14,000. The bull run seemed to be well-set, with global economic growth continuing to be robust, and the IMF even revising up its forecasts.

One week of bloodbath in the global stock markets - still wobbling in fact - and research is being devoted to check out past events for similarities. In this case, does today's turmoil resemble the liquidity crisis of 1998?

This week's offering from BNP Paribas is one such example. It says that July 2007 and July 1998 were "strikingly similar" in terms of Fed funds, credit spreads, Fed policy and the S&P 500's implied volatility levels.

Moreover, widening credit spreads this month, the open market repurchases by the Fed, the fall in the S&P 500 and associated increase in implied volatility have "mirrored" what took place in 1998.

And now the comparative numbers. In 1998, the S&P 500 fell 20 per cent from "peak to trough daily closing levels", while this year so far the fall has been 8.2 per cent. In 1998, the VIX (volatility index) rose from 16.2 per cent to 45.7 per cent from counterpart trough to peak. This year its rise has been from 15.2 per cent to 28.3 per cent.

In both years, as credit spreads began to widen, the Fed responded via open market repurchases to keep Fed funds at its target rate.

This year the Fed has spent billions of dollars for repurchases already, including $38 billion in mortgage-backed securities on August 10.

Outlook

So what's the upshot? On the outlook the report says: if 1998 continues to be a guide, the S&P 500 could go down 10 per cent before any Fed action soothes equity markets.

Also, it refers to the bank's own report last March, claiming that a late February tumble was a "mid-cycle correction which will be followed by higher returns and higher volatility over the next three to 12 months."

Now it says, "Assuming that the US economy does not enter into a recession, we continue to believe that this is the case. However we do believe that the downside risk remains high over the subsequent one to three months."

No special comfort there. The numbers (in the fall in S&P 500) are not quite there yet. But given the market volatility and fears of more banks revealing their real exposure to the subprime sector, a certain, grim parity might be found.

With banks raising lending rates, consumer spending is bound to be impacted and that would mean the economy slowing down. Some economists are already airing the "R" word (that is: 'recession').

As an entity with exposure to the subprime sector to the extent that it suspended three funds last week, BNP Paribas might have hoped for the best.

Cynics might have believed that their analysts wouldn't come up with a dire prediction like a recession being imminent. But the warning signals are there, and bright enough.

If 1998 continuesto be a guide, the S&P 500 could go down 10 per cent before any Fed action soothes equity markets.