Are You a Croaker?

Ever since I read the Autobiography of Benjamin Franklin, I've tried NOT to be a "croaker".  I've given up on trying to predict the future.  Instead, I think that today is the best time in history to be alive and I feel good about the future.  Tough times come and go, but if you sit and wait for the worst, you might miss out on prosperity.

Here's an example from over 200 years ago.  

There are croakers in every country, always boding its ruin. Such a one then lived in Philadelphia-a person of note, an elderly man, with a wise look and a very grave manner of speaking; his name was Samuel Mickle. This gentleman, a stranger to me, stopt one day at my door, and asked me if I was the young man who had lately opened a new printing-house. Being answered in the affirmative, he said he was sorry for me, because it was an expensive undertaking, and the expense would be lost; for Philadelphia was a sinking place, the people already half bankrupts, or near being so; all appearances to the contrary, such as new buildings and the rise of rents, being to his certain knowledge fallacious, for they were, in fact, among the things that would soon ruin us. And he gave me such a detail of misfortunes now existing, or that were soon to exist, that he left me half melancholy. Had I known him before I engaged in this business, probably I never should have done it. This man continued to live in this decaying place, and to declaim in the same strain, refusing for many years to buy a house there, because all was going to destruction; and at last I had the pleasure of seeing him give five times as much for one as he might have bought it for when he first began his croaking.

GDP and the Price of Crude Oil

I read that Gross Domestic Product (GDP) lags the price of crude oil.  When the price goes up, then GDP goes down.  I decided to look into this and produced the chart below of actual and predicted GDP as a function of time. Since the lag is about 6 months, the predictions extend 6 months into the future. Note that the prediction shows a significant drop in GDP by September 2011 (Which agrees with many analysts).

This is a Google Document, so I'll try and update as new data is available.



I scaled the Oil Prices to 2010 dollars using the CPI data. Then, I used the following simple formula:

GDP_Predicted(date) = a * OilPrice(date - lag) + b

I know that there are many other factors driving GDP, but there seems to be an apparent correlation here. Time will tell whether the predictions show any validity. I probably should have learned my lesson on trying to predict financial futures, since my Stock Predictions failed about 7 months ago (most likely due to Bernanke's QE2).

Data Sources
GDP www.bea.gov
Oil prices www.eia.doe.gov
CPI www.bls.gov

1929 to 2008: Market Oscillations

The stock market seems to be going up and down. This agrees with Ben Bernanke's "Financial Accelerator" model, which indicates that when the market starts to move, it typically overshoots where it should be and then bounces back. It is a little like the spring in the animation on the right.

If we use the "mass on a spring" model, there is a clear formula for the frequency at which the mass goes up and down. The time between up (or down) cycles is proportional to the mass on the spring (The bigger the mass, the slower it moves).

If we think of the "mass" of the market, a good measure would be Market Capitalization. I had a hard time finding this value for 1929, so I decided to use GDP instead. To convert to 2008 dollars, I divided by CPI (consumer price index) to factor out inflation.

Date	GDP ($billion)	CPI	Sqrt(m)	Ratio to 1929
1929	104	17.13	2.46	1.00
2008	14200	207.34	8.28	3.4

What this means is that 3.4 days today is equal to 1 day in 1929 (in terms of market momentum). So here's a plot of the stock market with 1929 scaled by value (using recent market highs) and by time (using here 2.8 days). The similarity is scary.

HomeLAND Equity Line of Credit

This is the typical path to financial ruin.

1. You open checking account.
   
2. You get tired of bouncing checks.
   
3. You get a credit card.
   
4. You max out your credit card(s).
   
5. All of your extra money goes to making debt payments.
   
6. You get a HELOC (Home Equity Line of Credit). It's a large quantity of "free" money to pay off your debt and get some extra stuff you've been wanting.
   
7. There's no turning back now.
   

So what is the U.S. Congress doing?

1. They pass bills to spend money.
   
2. They get tired of being restricted by the Federal budget.
   
3. They pass more spending bills anyways.
   
4. The Republicans block the bills based on silly ideologies.
   
5. They get a HELOC (HomeLAND Equity Line of Credit) in the form of an economic stimulus package. They now have "free" money to spend on their pet programs (give condoms to the poor, chase the global warming windmill, etc.).
   
6. There's no turning back (unless our U.S. Senators get wise).
   

1929 to 2008 Stock Market Crash Comparison - Using Google Spreadsheet

This is the same as a previous posting, but instead I'm using Google Spreadsheets to see if it will be easier to update the data.

The Dow Jones Industrial average (^DJI) is scaled from 1929 by 14000/400. Day "zero" corresponds to October 24, 1929 and Oct 7, 2008.

Update: August. 1, 2015:  I learned an important lesson from this post.  I can't and shouldn't try to predict the future.

Update: Feb. 12, 2010: Scale Time Axis for 1929 (see Market Oscillations)


Added Sept. 23, 2010, 100-day moving average and 1987 Crash data.
Update May 3, 2013, New chart type

1929 to 2008 Stock Market Crash Comparison

Click Here for an updated version of this blog

It seems everyone is comparing our current financial crisis to the Great Depression. I thought I would compare this stock market "crash" to the one in 1929. Basically I found the day that stocks (Dow Jones Industrial) dropped to 80% of a recent high (October 24, 1929 and Oct 7, 2008). These are day 0. The bottom axis is relative to these days so that we get a good overlay.

The 100 day view shows that the two track closely. The 3 year view shows that this might take a while. (Click on images to see larger graph).

Updated December 5, 2008. Now using two axes to display actual dollar values.
An alternate viewpoint here