In addition to being a generational talent, Taylor Swift is a great economist,” said Carolyn Sloane, a labor economist at the University of Chicago. “Taylor has great ideas, is able to scale her ideas and seems to be pretty risk-seeking…
Swift herself got a mention in the Federal Reserve Bank of Philadelphia’s June Beige Book for spurring growth in the city’s economy, while Fed Chair Jerome Powell indicated that spending on cultural phenomena like the Eras concerts, Beyonce’s Renaissance World Tour and the Barbie movie is on the radar of policymakers as they debate further interest-rate hikes and determine how the American consumer is faring. – Bloomberg
The following exchange took place between President Reagan and reporters after the market close on Black Monday, October 19, 1987. Leaving to visit the First Lady in the hospital, President Reagan spoke just after the market lost over 20 percent of its value on the day.
Q: What about the market? Tomorrow will it go down again? President Reagan: I don’t know. You tell me.
Q: Is the market your fault? President Reagan: Is it my fault? For what, taking cookies to my wife?
Q: Reaganomics?
President Reagan: I just told you. Good Lord, we reduced the deficit over last year by $70 billion. And all the other things I’ve told you about the economy are as solid as I told you. So, no, I have no more knowledge of why it took place than you have.
Thirty-three years ago today, now infamously known as Black Monday, my grandfather, M. Peter McPherson, was Deputy Secretary of the U.S. Treasury and acting Secretary that day, while Treasury Secretary James Baker was in the air traveling to Europe. McPherson was the most senior Treasury official left in Washington to handle the crisis.
The stock market had already peaked in August after an almost 100 percent rally in the prior two years. By late August, the DJIA had gained 44 percent in a matter of seven months, raising concerns of an asset bubble, and had become very volatile as interest rates had been rising rapidly since bottoming in September of the prior year.
Similar to 1929, where the stock market peaked in early September, the markets had already begun to unravel, foreshadowing the record losses that would develop that Monday in October.
As the markets around the world began to crash, my grandfather convened with the U.S. Treasury’s Undersecretary of Domestic Finance and the Department Chief of Staff to discuss the government’s appropriate response. The Dow Jones eventually closed 508 points down, or a 22.61 percent, almost double the historic Crash of 1929, where the Dow fell 12.8 percent in one day.
Government Kicks Into Action
According to my grandfather, the situation demanded that his team put together a plan to calm the markets. The economy was doing fine, and there were no signs of recession. Real GDP growth came in at 3.5 percent in 1987.
Jitters about the U.S. trade deficit, rising interest rates, and the path of the U.S. dollar during the Plaza Accord are oft-cited as the fundamental reasons that triggered the crash, but nobody knows for sure. Trees don’t grow to the sky, and neither do markets. Stocks markets do what stocks markets do, keep their own schedule, and march to their own drummer.
The team’s conclusion at Treasury that day was the market was under severe strain for technical reasons and complicated by the new computerized program trading related to portfolio insurance. Nevertheless, the steep losses were causing significant dislocations in the financial markets.
Many large firms were under heavy liquidity pressure and were dangerously close to not making their margin calls and on the brink of failure.
My grandfather and his team placed a call to the then-new Federal Reserve Chairman, Alan Greenspan, only two months into the job, to encourage the issuance of a Fed statement that it would do whatever it takes to provide the liquidity to keep markets functioning.
It wasn’t the time to think about the policy’s broader economic implications, such as the potential moral hazard, as the plane was on fire and going down and desperately needed a rescue plan.
It was also clear Greenspan had been thinking along similar lines.
Fed officials drafted much longer statements for release, but Greenspan reasoned that a short, clear message would do the most to stabilize markets.
It is also important to point out that when Secretary Baker arrived in Europe late that day, he immediately began communicating with key finance ministers, such as those from Germany, Japan, France, and the UK to coordinate a global response to the financial crisis.
October 20
Greenspan issued his statement the next morning, October 20,
“The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.” – FRB
In typical Greenspan fashion, the statement was vague in methodology yet resolute in purpose.
The market opened down and continued falling, there were no buyers and it appeared, at one point, the global financial system was headed for a complete meltdown.
“Tuesday was the most dangerous day we had in 50 years,” says Felix Rohatyn, a general partner in Lazard Freres & Co. “I think we came within an hour” of a disintegration of the stock market, he says. “The fact we didn’t have a meltdown doesn’t mean we didn’t have a breakdown. – WSJ
Then at about 12:38 pm, with many stocks not trading and pressure growing to close the markets a miracle seemed to happen.
With the closing of the Big Board seemingly imminent and the market in disarray, with virtually all options and futures trading halted, something happened that some later described as a miracle: In the space of about five or six minutes, the Major Market Index futures contract, the only viable surrogate for the Dow Jones Industrial Average and the only major index still trading, staged the most powerful rally in its history. The MMI rose on the Chicago Board of Trade from a discount of nearly 60 points to a premium of about 12 points. Because each point represents about five in the industrial average, the rally was the equivalent of a lightning-like 360-point rise in the Dow. Some believe that this extraordinary move set the stage for the salvation of the world’s markets. – WSJ
The rest, as they say, is history.
My grandfather felt that the Treasury’s phone call contributed to Greenspan’s thinking and as he made the decision to issue a statement to calm the market. The statement was the most critical event in stabilizing the markets and preventing substantial economic damage to the U.S. and the global economy.
My grandfather spoke about how the simplicity of the message prevented speculation while instilling confidence. Not unlike ECB President Mario Draghi’s, “whatever it takes” July 2012 speech, which saved the Euro currency, the European banking system, and ultimately the European Union during their debt crisis in 2011-12.
The Birth Of Stock Market Moral Hazard
Some argue, including one of the regular authors on this website, the Fed’s response to Black Monday ushered in a new era of faux investor confidence and the moral hazard that the central bank will always backstop falling markets. Thus, forever distorting market risk and real price discovery and contributing to the current boom-bust asset market cycle the global economy now experiences and will be extremely difficult to reverse.
Global Macro Monitor (GMM) often argues, which is not necessarily my own opinion, what was supposed to be a one-off market intervention in 1987 has now become the norm, which monetary policymakers will find it impossible to extract itself from, ultimately resulting in a major market and economic dislocation. We shall see.
President Reagan’s Confidence And Sense of Calm
During the crisis, President Reagan, whose administration my grandfather served several key roles in, was an excellent communicator and never once conveyed a sense of panic in October 1987.
Though not having a financial background, President Reagan did have a degree in economics and understood the nature of markets and how they coveted a sense of calm and leadership from the government during such a crisis.
The following video is President Reagan speaking to the press at the White House on Black Monday as he is preparing to board Marine One to visit the First Lady in the hospital.
Skip to the dialogue, which starts 5:40 minutes in.
Note President Reagan’s incredibly calm demeanor and sense of confidence after the most massive stock market crash in U.S. history.
Economies worldwide have thus far managed to steer clear of a recession, but the ongoing sustained decline in the global manufacturing sector paints a more complex picture. This phenomenon is succinctly explained by the above statement from Best Buy’s CEO.
[the] consumer electronics industry… remains challenged due to the pull-forward of demand in prior years and the various macroeconomic factors that we are all too familiar with…Our industry continues to experience lower consumer demand due to the pandemic pull-forward of tech purchases and the shift back into services spend outside the home like travel and entertainment… – Best Buy Earning Release & Conference Call, Aug 30th.
On a global scale, consumers are still transitioning from the significant surge in durable goods purchases during the COVID era to services. Furthermore, consumers face various macroeconomic challenges, including elevated inflation rates, mounting interest rates, a tightening monetary policy, and slowing economic growth.
Moreover, the growing weakness of the global consumer is another driving force behind the prolonged downturn in the consumer electronics industry. We anticipate that this sector will face challenges until mid-2024 when central banks begin to reverse their restrictive monetary policies and initiate interest rate cuts to stimulate demand.
It’s worth noting, however, that many non-cyclical sectors are thriving within the electronics industry thanks to ongoing secular growth trends. These include electric vehicles, healthcare technology, renewable energy infrastructure, and cloud computing. These sectors are faring considerably better in the current economic landscape
Swift’s “Eras” tour, along with the record-breaking box office sales of the “Barbie” movie, has significantly boosted spending on services and helped the U.S. economy steer clear of a recession.
Salmon also observes that “among the 69 markets monitored by Moody’s for hotel performance, those that featured a stop on the ‘Eras’ tour witnessed a notable upswing in revenue per available room compared to the same month in the previous year.”
He further posits the U.S. economy during the summer was driven by a novel equation:
Taylor Swift + Barbie = Goldilocks
The equation alludes to an economy characterized as “Goldilocks,” where conditions are neither excessively hot nor excessively cold, which fairly portrays the current economic climate in the United States.
Undoubtedly, the Swiftie/Barbie economy was reflected in the latest ISM services PMI, which unexpectedly jumped to 54.5 in August 2023, indicating the most robust growth in the services sector in six months. The price component came in quite hot, putting a dent in Goldilocks theme, however.
Manufacturing vs. Services
Manufacturing of durable goods typically dominates economic headlines, owing to its tangible nature and the availability of extensive historical data. For instance, the straightforward process of tallying durable goods production on an assembly line starkly contrasts the intricate challenge of quantifying services. While dentists can quantify filled teeth, measuring the output of customer service reps or auto mechanics performing a range of tasks is far from straightforward. Services like housekeeping, investment advice, teaching, and writing present complexities in output measurement.
Nonetheless, it’s essential to recognize that services constitute the lion’s share of economic activity, contributing over 70 percent of GDP in OECD nations. As we are currently observing, services play a pivotal role in driving economic growth and often serve as a vital counterbalance to a weakened manufacturing sector.
The service sector in the United States continues to display relative robustness. Conversely, the Eurozone recently experienced its first contraction in the services Purchasing Managers Index (PMI) since the preceding December. This contraction rate is the swiftest since February 2021, with all four major Eurozone economies reporting declines.
Recognizing that factories are driven primarily by actual unit sales, not the nominal dollar spending figures is crucial.
The Ratio of Consumption of Durables to Services chart further underscores this trend, revealing that in July, .26 units of durables were consumed for every unit of services, a decline from the peak of .30 but still an increase from the pre-COVID level of .20. When considering nominal consumption of durables, which accounts for prices, it currently stands at $.18 for every $1.00 spent on services. This marks a decrease from the peak of $.22 for every dollar of services consumed but is an improvement from the pre-pandemic figure of $.15.
The chart also highlights that the consumer preference mix between durables and services, as depicted by the ratio, requires further adjustment to return to its long-term trendline.
Price Trends
Both charts above implicitly depict the shifting dynamics in relative prices between durables and services, a trend further illustrated in our chart, Implicit Price Deflator Index: Durables vs. Services.
Notably, the price of services exhibits a persistent upward trajectory, while the extended downward trend in durable prices saw a reversal during the pandemic and continues to seek their equilibrium levels
To underscore the contrasting trajectory of durable and service prices, we’ve assembled a table comparing the inflation rates of computers and televisions with those of medical services and college tuition. The findings are remarkable: there has been an almost 90 percent price reduction for durables and a corresponding 100 percent increase for services since 2005.
Upshot
Our analysis concludes that the ongoing shift in consumer preferences toward favoring services over durables has yet to run its course fully.
More importantly, a critical factor in revitalizing the manufacturing sector is reversing the macroeconomic headwinds confronting global consumers, a topic we delve into further in our country-specific outlooks below.
Global Macro Monitor 