Catching up on stuff said during Powell's March 2025 press conference.

 

Beware the Ides of March

Against best practices during our Cool Zone era, I'm going to make a firm prediction about what is going to happen to the stock market in 2025:

 In 2025 we will see a sharp sell off of stocks in March.  The stock market will hobble along through the spring and summer with a full reckoning with the many tentacled tech bubble 2.0 in the fall (probably October, maybe September).

As market predictions go, this is pretty precise.  What gives me the confidence to issue such a detailed prophesy like I'm fuckin' Muad'dib over here?  A reasonable grasp of the financial history of the US.  The US financial system is a bubble machine and it produces bubbles with remarkable uniformity.

Let’s start with the crown jewel of American financial disasters, the stock market crash of 1929.  Here, I defer to the man who wrote the book on it, John Kenneth Galbraith:

On Monday, March 25, the first market day following the unseemly Saturday meeting [of the federal Reserve Board], the tension became unbearable. Although, or rather, because Washington was still silent, people began to sell.  Speculative favorites--Commercial Solvents, Wright Aero, American Railway--dropped 10 or 12 points or more,  the Times industrial average was off 9.5 points for the day ... On the next day, Tuesday, March 26, everything was much worse.  The Federal Reserve Board was still maintaining its by now demoralizing silence.  A wave of fear swept the market and amazing 8,246,740 shares changed hasn on the New York Stock Exchange, far above any pervious record.  Prices seemed to drop vertically.  At the low for the day 20- and 30- point loses were common place.  The Times industrials at one time were 15 points below the previous day's close. (The Great Crash of 1929, p35-36)

Galbraith goes on to describe an intervention in the form of reassuring words from Charles E. Mitchell.  As head of the First National City Bank (which later became Citibank) Mitchell offered to loan money as needed to prevent more stock liquidations.  Mitchell soothed the animal spirits of the market enough for the bubble to continue going through the spring and summer of 1929.  Make a note of this, it will come up again later: A financial panic in March, followed by an intervention that keeps the system running through the spring and summer.

And then?  Well, Galbraith is a better writer than I am so I'll let him explain it.  After signs of market weakness throughout October 1929,

Thursday, October 24, is the first of the days which---history such as it is on the subject---identifies with the panic of 1929.  Measured by disorder, fright, and confusion, it deserves to be so regarded.  That day 12,894,650 shares changes hands many of them at prices which shattered the dreams and hopes of those who had owned them.  Of all the mysteries of the stock exchange there is none so impenetrable as why there should be a buyer for everyone who seeks to sell.  October 24, 1929, showed that what is mysterious is not inevitable. Often there were no buyers, and only after wide vertical declines could anyone be induced to bid. (p99)

Anyway,  I encourage you all to read Galbraith's "The Great Crash" to get a more full sense of the future-past we are about to stumble into.  This pattern is remarkably close to the pattern of financial crash in 1907.  After the Bank of England took measures that turned a gold inflow into the US into a gold outflow:

The effect showed up first in the financial markets.  Severe price declines occurred on the stock exchange early in March 1907.  Union Pacific stock, which had been extensively used as collateral in finance bill operations, fell by 30 per cent within less than two weeks.  Despite every action taken by the Treasury, and a temporary reversal in stock prices, the boom had come to an end, the National Bureau [of Economic Research] dating the cycle peak in May 1907

...

The contraction is sharply divided into two parts by the banking panic that occurred in October 1907.  From May to September, the contraction showed no obvious signs of severity.  Prices continued to rise; production in various lines flattened out but did not decline seriously, and freight car loadings behaved similarly; bank clearings held fairly stead, and there was no drastic rise in the liabilities of commercial failures.  The one significant change change was the reversal noted earlier in gold movements from new imports to net exports.  In October came the banking panic, culminating in the restriction of payments by the banking system, i.e., in a concerted refusal, as in 1983, by the banking system to convert deposits into currency or specie at the request of depositors. (Friedman and Schwartz, Monetary History of the US, p156-157)

So what explains the similarity of the seasonal pattern?  I honestly don't have a clear understanding of why March panics presage October collapses.  The October collapses are easier to explain.  Here, I defer to Charles Kindleberger:

Periods of financial stringency and crisis and panic (in the United States) occurred in the autumn when western banks drew large sums of money from the East to pay for shipments of cereals.’3Credit demand peaked in the autumn when the grain dealers needed money to pay the farmers. Sprague noted that the crisis of 1873 came in September because of the early harvest, that the outbreak of a crisis invariably came as a surprise to the business community and that the crisis of 1873 was not an exception. The seasonal tightness of money was well known and hence the puzzle is why it would have come as a surprise. The ‘excessive tightness’ of money from September 1872 to May 1873 caused the railroads to borrow short-term funds rather than issue bonds, which could have been seen as a sign of distress, and then the seasonal tightness precipitated the crash

Distress may be continuous or it may oscillate in its own rhythm. The crash of the Union Generale in January 1882 was preceded by three separate tense periods, in July, October, and December 1881. The panic of October 1907 was anticipated (although Sprague indicated its exact timing was not foreseeable) and preceded by a ‘rich man’s panic’ in March when Union Pacific stock, the security most widely used as collateral for finance bill operations, dropped 50 points. Markets recovered from this blow and from the failure of an offering of New York City bonds in June (only $2 million was tendered for an offering of $29 million of 4 percent bonds) and from the collapse of the copper market in July, and from the $29 million fine levied against the Standard Oil Company for antitrust law violations in August—only to succumb to the failure of the Knickerbocker Trust Company in October In 1929 distress lasted from June to the last week in October  (Manias, Panics, andCrashes, p101-102)

Okay, so in old timey times financial collapse were dictated by the agricultural liquidity cycle, even as the economy increasing industrialized.  What does that have to do with 2025?  The last great agricultural business cycle was the Great Depression, and by the time that mess was all cleared up in 1946, agriculture was reduced to only about 10% of GDP.  Agriculture continued to shrink in importance to the US economy to today when it makes up only about 2% of GDP.  Surely this does not generate enough liquidity pressure on the banking system to generate this seasonal pattern.  That is true, but let me remind you of how the first tech bubble popped:

 The Nasdaq reached its peak on March 9th 2000, then had a sharp sell off.  It was flat but volatile through the summer and reached a local peak on Sept 1st.  The subsequent collapse was much more gradual than I remember.  The Nasdaq did not hit a nadir until October 7 2002.  Here we see a very similar pattern of stock market collapse to that described in 1907 and 1929.  

Those of you following until now and anticipating I'm going to turn to 2008 are probably thinking of the bankruptcy of  Bear Steans as the March shock and the bankruptcy of Lehman Brothers as the October shock.  Yeah, that's what I think, too.  But the 2008 financial crisis is different in some ways that should be pointed out.  Unlike the other collapses above, which are mostly stock market crashes (plus a bank panic in 1907), this was a crisis in mortgage markets. Stocks don't behave in the March/October pattern as clearly. A graph of the S&P 500 (picked because in includes Lehman Brothers stock) is mostly a line straight down starting in October of 2007, which is the right month but not the right year, with a slight bump up in spring 2008.  

S&P 500 2006-2010

But the stock market was responding to business conditions.  The recession is officially dated from December 2007 and this adds too much noise to the stock market collapse to divine what is driving it in any detail.   Anyway, a collapse that had been in motion since the start of the year got notably more rapid in the fall of 2008.  So, this is very different from a stock market perspective.  However, the collapse of Bear Sterns in particular helps underscore the idea that "You can remain insolvent a lot longer than you can remain illiquid." that I think is the core of these March/October dynamics in other financial crisis. 

The two overleveraged subsidiaries that eventually brought Bear Stearns declared bankruptcy in June of 2007.  Bear Stearns was sued that summer for misleading investors and in November the writing down of securities would result in historically rare losses and the firms credit rating was downgraded.  But still, Bear Stearns was able to postpone the reckoning until early March 2008, when suddenly investors rapidly withdrew money in a classic bank run by institutional investors.

The figure below shows the seasonal response of Lehman Brothers to the Bear Stearns collapse.  A big warning, a spike in CDS spreads with a sharp sell off of stocks in spring, followed by a more gradual, slow motion collapse. It looks to me like the government intervention to push an orderly sale of Bear Stearns to JP Morgan Chase gave Lehman Brothers breathing room. Not pictured is the catastrophic collapse in September 2008.  

Here, I quote liberally from Wiggins, Pointek and Metrick, 2019:

 

After the demise of Bear Stearns, Lehman began casting around for a long-term strategy that would secure the firm’s future and allay the market’s fears. It considered several options, including increasing equity, spinning off “toxic” assets (generally real-estate-related assets) into a separate publicly held corporation, and discussing a sale of the firm, or a capital infusion, with the Korea Development Bank. Lehman was successful in raising $6 billion in equity in June 2008, despite a reported second quarter loss of $2.8 billion, its first since it went public, which was caused in part by a $3.7 billion write-down on its portfolio of mortgage-related assets and leveraged loans. But this was not enough to quell the rumors. 

A solution failed to materialize, and on September 10, 2008, Lehman announced that it expected $5.6 billion dollars in write-downs on its toxic assets and an expected loss of $3.93 billion for its third quarter. It also announced that it planned to spin off $50 billion of its toxic assets into a publicly traded corporation in order to separate them from the remaining “healthy” firm. 

The news did not have the positive effect that Lehman desired. The rating agency Moody’s Investors Service announced that it planned to lower Lehman’s debt ratings if a “strategic transaction with a strong financial partner” did not occur soon. Even though Lehman continued to desperately seek such a partner, with the intercession of the U.S. Treasury and other government agencies as described below in Regulator Nonaction, ultimately it failed to secure a firm commitment within the next week. As a result, it was unable to fund its operations for opening on September 15, compelling it to file for Chapter 11 bankruptcy protection. (See Lehman Brothers press release dated September 10, 2008 and Lehman Brothers press release dated September 15, 2008.) (Wiggins, Pointek and Metrick, 2019)

Now, shoehorning 2008 into my seasonal theory makes it clear that I can’t offer a causal mechanism for why this seasonality continues to happen.  Finance bros come home from the Hamptons in September?  The 2008 example highlights the seasonality of financial reporting.  Maybe policy interventions follow this seasonal pattern by coincidence? IDK. The soothsayer didn't need to know it would be 60 senators with knives to issue her warning to Caesar.  Though, in all fairness, less poetry and more specificity probably would have been more convincing.   

Now, I feel pretty confident about my prediction.  But, I maybe am a year or two ahead of myself.  However, let’s assess the state of the country’s economy.  The rats are eating at the federal government's COBOL code.  There is also a growing chorus of voices who point out it is impossible for AI to supply the expected return on investment.  As if to confirm these voices AI ads featured prominently in this years Super Bowl.

As well, as a rough estimate, post-WWII recessions occur within 12-18 months of when the Fed tightens the hardest.  That is, when the Fed Funds reaches it peak.  The Fed Funds rate reached 5.25% in July of 2023. To the extent similar pressures from the cycle of debt refinance and the drying up of liquidity exists as they have, we are overdue for downward pressure on stock prices.  Liquidity will dry up and earnings will be disappointing.  Spring 2025 is likely time for the pressure to start popping out the weaker rivets of our boiler of a financial system.  The financial system will hiss and bulge through the summer with the catastrophic failure and spectacular explosion coming in the fall.

The economic dynamics after the stock market crash, I think, are much harder to soothsay thanks to the liminality of the structural shift that powers a Cool Zone. I think a financial crash will be inevitable, but how effectively policy makers will handle the crash remains a big unknown. Will the 2025 collapse look more like 2001, which was associated with a mild real economy recession?  Or will it be the catastrophe of 2008? 

This unknown is mostly about how the Fed and federal government with respond. I think no matter this impending economic crises be used to continue the redistribution American wealth upwards.  The open question for the federal government will be what policy mix emerges.  There will be push and pull between the Hooverite wring of the Republican Party and Trump who gleefully and proudly sent signed checks to almost all Americans during Covid.  Even then, to the extent that there is competent counter-cyclical policy it will likely be to keep Americans in their treats enough so they don't notice the slowly boiling water around them. 

How this crisis plays out for the Fed is also, I think, very up in the air.  The Bernake playbook for dealing with crises has proven a remarkable success in 2008 and during Covid.  Its main success, though, was in insulating the wealthy from the consequences of their speculative activity.  Not only were the wealthy protected but they are thriving. The share of the top 1% is about 2 percentage points higher that it was in 2007 on its way back up to 1929 levels. 

Will the Bernanke playbook be enough to maintain the stability of the system in a way that permanently entrenches modern neoliberalism?  Or, will the zero lower bound go the way of the gold standard?  The economic historian Peter Temin described the inability of policy makers to see past the "gold standard orthodoxy" as the root cause of the severity of the Depression.  As also with the chronic inflation at the end of the New Deal Order, will the neoliberal policy regime simply not be able to imagine the solutions to the crisis it finds itself in and so the crisis will drag on and worsen until the political system catches up to provide solutions.  

But that's all a conversation to have later. See you when I blast social media with this post in the fall.

 

 

 

 

Strikes in the 20th Century, Macro Data.

This blog post was tipped off by a throwaway comment by JW Mason about a graph that made the rounds on "lefty Facebook" (for lack of a better term) that showed declining strike activity from the immediate post WWII era until today.  His comment was that the graph did not have much information because the graph only showed work stoppages that affected 1000 or more workers.

This version  I stole from Doug Henwood:

Since I need to pay attention to this stuff anyway,  I figured double checking Josh's skepticism would be a useful exercise, though I apologize to the reader that my interest is really mostly just in the immediate post-WWII period.

For the most part, I think that Henwood's graph captures the overall trend fine.  We actually have richer data than what is available at the BLS thanks to the Historical Statistics of the United States, Millennial  Edition (HS).

Here is my graph:

Figure 1

HS has two series, one that is just the "1000+" data set Henwood used.  The other series comes form a more comprehensive attempt to estimate strike activity by the BLS that was discontinued in 1981.  The more comprehensive data set goes back to 1881.  I started my series at 1916 because there are holes in the series before 1916. My series is the number of workers "made idle" by strikes or lockouts, not the number of strikes/lockouts.  To account for a growing workforce I also scaled my data by total workers employed, another series I got from HS.  This is different than Henwood's graph which just  captures the number of strikes/lockouts each year.  The information conveyed is essentially the same.

There are two things I wanted to get out of the graph.  First, to speak to Josh's point: as you can see, the 1000+ measure shows the trend in strike activity adequately, though it obviously underestimates it (by about 600k workers idle on average for the period we have overlapping data).  

The other thing is more for my own benefit.  You can see the new measure of strike activity captures the basic pattern shown in Henwood's graph.  However,  if you extend the series back before 1950 you can capture the moments where labor dramatically assets itself in the US.  The two big strike activity peaks are in the years immediately after WWI (1919) and WWII (1946).  In both cases, once the mixture of wartime cooperation and wartime control evaporated simmering issues over earnings exploded.  I think it is different specific issues about earnings that is driving the two strike explosions, but I don't feel like I can adequately address those subtleties here.

What is really interesting about that graph is that you can see the effect of the New Deal labor reforms.  Post WWI strike activity is dramatic for a couple of years and then disappears through the 1920s.  While strike activity does not reach the 1946 peak, strike activity remains a a sustained, elevated level for at least a decade or two after the war.  Of course, the graph also shows the gradual decline of the New Deal labor period.

The HS also have data on strikes in different industries.  This graph shows strike activity in manufacturing and non-manufacturing:

Figure 2

I have added a measure of how important manufacturing is to the economy because I think it is important to interpreting Figure 2.  You can see that in the 1960s workers idle due to non-manufacturing strikes/lockouts starts to dominates manufacturing strikes/lockouts.  This seems largely driven by the shrinking importance of manufacturing  to the economy.  The other thing that is interesting about this graph is that up until the early 1950s the two series move together.  Then, say, after the Korean War the series are no longer tightly tethered.

Finally, we have a little more detail about strikes in "non-manufacturing" industries:

Figure 3

I want to apologize for this graph.  This is an instance of my not being able to edit and the result is an ugly graph.  First and foremost, you should notice right away that wholesale and retail workers do not strike very much.  Construction workers seem to have a higher 'ambient" level of strike activity, but I only really see one big spike for that industry (1952).  Most of the variation in non-manufacturing comes from mining and the unfortunately too broad category that covers transportation, communication, electric and gas industries).  it is striking how mining strike activity drops off dramatically after the Korean War, with a diminished revival in the 70s.  

Anyway, I don't have many new conclusions to draw about the decline of labor.  I would say what I find interesting here offers some interesting contours to the story we are all familiar with.  First,  I see inflation as a primary "macro" driving force of strike activity.  You see it in the decade after WWII and you see it more weakly in response to the inflation of the late 60s/70s.  The other thing I think you see here is the role played by the way secular changed in production on union strike activity.  For instance, the too broad category of "transportation, communication, electric and gas" covers up the fact that in 1946 the spike in that category was driven by a railroad strike, while the 70-71 spike is best characterized by a postal strike in 1970 and a strike by workers of the Bell System in 1971. 

Econometrics Independent Study

Econometrics Independent Study Spring 2017 NJCU

This is where I will dump course material for our Econometrics.

Here is the Syllabus


Class Slides:

1.  Probability Review and textbook figures
2.  Statistics Review and textbook figures
3.  OLS with one variable
4.  Hypothesis testing and dummy variables
5.  Multiple regressions
6.  Hypothesis Testing with multiple regressions
7. In Class Stata Introduction

Homework:

Homework #1 Due 2/28
Homework #1 data file
Homework #1 ANSWERS

Homework #2 Due 3/15
(Use homework #1 data file.)

Midterm  Due 4/20

Some more QE graphs

Fed end's "taper"/QE3 Oct 29, 2014

East Asian Financial Crisis Links

IMF summary:
http://www.imf.org/external/pubs/ft/fandd/1998/06/imfstaff.htm

Radelet and Sachs
http://www.nber.org/papers/w6680.pdf

Robert McCauley Capital flows in East Asia since the 1997 crisis.
http://www.bis.org/publ/qtrpdf/r_qt0306e.pdf

Charles Hill The Asian Financial Crisis
http://www.wright.edu/~tdung/asiancrisis-hill.htm

Changes in Housing CPI 2000-2015