‘Bubble’ Revisionism
The WSJ previews forthcoming research re-evaluating the so-called tech bubble of the 1990s:
The traditional history of the dot-com bubble has been told many times: Too many companies rushed into the market in defiance of all known business fundamentals, and when the crash came, all but a tiny fraction of them just as quickly imploded and went away.
That received wisdom, though, is now getting a going-over by economists, business historians and others, some of whom are coming to new conclusions about what precisely went wrong during the bubble years, normally dated from the Netscape IPO in August 1995 to March 2000, when Nasdaq peaked at above 5100.
A recent paper suggests that rather than having too many entrants, the period of the Web bubble may have had too few; at least, too few of the right kind.
And while most people recall the colossal flops of the period (Webvan, pets.com, etoys and the rest) the survival rates of the era’s companies turns out to be on a par, if not slightly higher, than those in several other major industries in their formative years.
The paper is being published in a coming issue of the Journal of Financial Economics. As noteworthy as the findings are, even more interesting is the process that led to them. The work is an outgrowth of the Business Plan Archive at the University of Maryland. Its goal is to become a kind of Smithsonian Institution of the Internet bubble, saving for posterity every business plan, PowerPoint presentation and venture-capital term sheet—the more frothy and half-baked, the better—that it can get its hands on….
The study suggests, though, that the dimensions of that crash might be misunderstood. Nearly half of the companies they studied were still in business in 2004. Prof. Kirsch says that most people believe just a few percent made it through.
The study found that the attrition rate for dot-com companies was roughly 20% a year, which is no different from what occurred during many other industries, such as automobiles, during their early boom periods.
posted on 09 November 2006 by skirchner in Economics, Financial Markets
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Future Fund or Future Eater? The Opportunity Cost of Commonwealth Revenue Hoarding
I have an article in the Spring issue of Policy magazine on the federal government’s Future Fund, which extends some of the arguments I have made here on the subject.
posted on 18 October 2006 by skirchner in Economics, Financial Markets
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The US Consumer: Not Dead Yet
Jim Cramer notes that reports of the death of the US consumer are greatly (and frequently) exaggerated:
As a former obituary writer, I know that you must call the funeral parlor to make sure a person’s dead before you pronounce him so in the newspaper. So would it be too much to ask if economists, analysts and hedge-fund managers did the same before pronouncing the American consumer dead? In 25 years of trading stocks, I’ve read the consumer’s obituary more times than I care to imagine; each time the facts have proven the obit premature. For the last year, though, the negative-pundit nexus has unleashed a fusillade of consumer death notices…
It’s time for these permanently pessimistic pundits to accept the market’s judgment. If I’d ever written a premature obituary, I’d have been fired before the delivery boy could toss the papers from his bike. But these saturnine soothsayers just get to repronounce a new slaying on the next piece of data that hits the wires. Perhaps, at last, after these sparkling reports right on the heels of a year’s worth of death notices, we should at last recognize who’s worth listening to—and, especially, who’s worth ignoring.
Speaking of permanently pessimistic pundits, only Nouriel Roubini could attempt to put a bearish spin on the September non-farm payrolls release, which was better than expected in level terms and foreshadowed a massive 810k upward benchmark revision to the level of employment.
posted on 09 October 2006 by skirchner in Economics, Financial Markets
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‘These Western People Didn’t Know What They Were Talking About’
A Bloomberg story hints that the recent departure of Morgan Stanley Sinophile and ‘bubble’ drone Andy Xie may have had something to do with an internal email he wrote attacking Singapore as the host of the recent IMF and World Bank annual meetings. According to Bloomberg:
He questioned why Singapore was chosen to host the conference and said delegates “were competing with each other to praise Singapore as the success story of globalization.”
“Actually, Singapore’s success came mostly from being the money laundering center for corrupt Indonesian businessmen and government officials,” said Xie, who was based in Hong Kong before leaving Morgan Stanley on Sept. 29. “Indonesia has no money. So Singapore isn’t doing well.”…
“I tried to find out why Singapore was chosen to host the conference,” Xie wrote in the e-mail. “Nobody knew. Some said that probably no one else wanted it. Some guessed that Singapore did a good selling job. I thought it was a strange choice because Singapore was so far from any action or the hot topic of China and India. Mumbai or Shanghai would be a lot more appropriate.”
At a dinner party hosted by Singapore Prime Minister Lee Hsien Loong, “people fawned him like a prince,” Xie wrote. “These Western people didn’t know what they were talking about,” he wrote.
One could say the same about Andy.
posted on 06 October 2006 by skirchner in Economics, Financial Markets
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Doomsday Cultists Caught on Tape: Reconciling Equity & Bond Market Divergence
‘Chairman’ Roubini, interviewed on CBS. As Brad Setser suggests, Nouriel is not quite as outrageous on television as he is on his blog, where he is describing the current rally in US equities to new all time highs on the Dow as a ‘delusional sucker’s rally.’ When analysts start describing markets as irrational, it’s usually a good indication that the market is in the process of invalidating their macro view.
Rather than assuming that millions of equity investors are delusional, James Hamilton attempts to reconcile the apparent divergence in equity and bond markets:
stock prices reflect both expectations of future profits as well as current interest rates. A lower real interest rate means that the present value of future earnings has increased even if the earnings themselves are no higher, because future flows are discounted less. Furthermore, the stock market has always exhibited an aversion to inflation as well. Hence, even if investors’ forecasts of future profits had not improved, one might still expect to see stocks appreciate as a direct result of a lower real interest rate and lower expected inflation. In other words, part of the stock market rally could be viewed as the logical companion of that for bonds. But the magnitude of the stock market surge seems too large to attribute to this alone, and certainly is grossly inconsistent with the assertion that investors believe the U.S. is about to enter a recession…
Current fed funds futures and option markets are betting that the fed funds rate will be down to 5% by next spring. And yet, in public statements the Fed seems to be communicating that, if it makes any changes, it is more likely to be toward higher rather than lower rates.
Well, here’s a story that I believe could reconcile everything. The housing slowdown is significant, real, and upon us now, but this is as bad as it’s going to get. Inflation numbers will begin to look better, allowing the Fed some breathing room to bring rates down slightly, averting a complete meltdown in housing. We get slower real economic growth, the biggest burden of which is borne by homebuilders. But the benefits of taming inflation bring some cheer to the rest of Wall Street and perhaps Main Street.
In other words, markets seem to believe that Bernanke is going to pull off the soft landing after all—slower real growth for sure, lower inflation, but no recession.
Fed Vice Chair Kohn envisages a similar scenario.
posted on 05 October 2006 by skirchner in Economics, Financial Markets
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Are Australian Economists Really Cowed by Political Pressure?
Ross Gittins launches another one of his regular martyrdom operations:
except for people in privileged positions like mine, economists do have to be brave to stand up to the Howard Government with its behind-the-scenes bullying.
This is all a little bit precious, not least because it was a practice for which the former Labor Treasurer and Prime Minister, Paul Keating, was equally notorious, which is to say that none of this is anything new (and therefore hardly newsworthy). While there may be some economists at certain investment banks touting for government business who have to worry about such political pressure, that is a conflict of interest within the bank, not a problem with political pressure as such. If CEOs or their economists cave in to political pressure, it says more about them than it does about the government.
There was one occasion when I was working for Standard & Poor’s when I managed to get a phone call from the Prime Minister’s office, the Treasurer’s office and the office of the leader of the Opposition, all on the same day. Far from feeling any political pressure, I took considerable comfort from the fact that both sides of politics had been more or less equally annoyed. What was undoubtedly intended as political pressure was if anything useful feedback!
posted on 18 September 2006 by skirchner in Economics, Financial Markets
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The Sleeper Awakes! (with apologies to H G Wells)
At least someone thinks Doomsday Cult Central is worth getting out of bed for:
I’ve taken a job at RGE Monitor, where I’m going to be setting up a new economics blog which I’m rather excited about. Launching soon – all ideas and suggestions gratefully received! (Not just on economics: any tips for how to get up every morning? I haven’t done it since December 2000, and I was woefully bad at it then…)
posted on 13 September 2006 by skirchner in Economics, Financial Markets
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Yet More Friends the ‘Austrian School’ Could Do Without
We have previously noted the increased prominence that bowlderised versions of Austrian business cycle theory (ABCT) have assumed in popular discourse on macroeconomics and financial markets. Much of the appeal in ABCT rests in its seeming ability to provide a causal mechanism for what many people like to label as ‘bubbles’ in financial markets. Without this underlying causal mechanism, the notion of a ‘bubble’ is little more than a tautology invoked by people who can’t understand why economies and financial markets fail to adhere to their preconceived and often mistaken notions of appropriate behaviour
An article in the FT provides further evidence of the growing reliance on ABCT as a device to make sense of the economy and financial markets:
The investment theme of the autumn will instead be the vindication of the Austrian economists and their theories about the nature of the business cycle…
The aspect of Austrian economics that will be central to investment decision-making this autumn is the role of central banking in generating unsustainable investment booms and subsequent busts.
Yet there is little evidence to support ABCT as even a stylised account of business cycle and financial market dynamics, at least under current central bank operating procedures in the major industrialised countries, which have been dominated by interest rate and inflation targeting for at least the last 10 years.
The Taylor rule and related literature shows that it is much easier to explain monetary policy with reference to the economy than it is to explain the economy with reference to monetary policy. This is just another way of saying that monetary policy for the most part responds endogenously to economic developments and the exogenous component of monetary policy is very small. Anyone who has tried to motivate a role for official interest rates in standard economic models (the sort of empirical work that few Austrians are prepared to undertake) knows what a problematic exercise this can be.
This makes the claim that, but for the supposed monetary policy errors of central banks, the amplitude of business and asset price cycles would be greatly reduced extremely implausible, at least under contemporary interest rate/inflation targeting regimes. Indeed, we know that under the gold standard, the preferred monetary regime for many Austrians, volatility was more pronounced, with inflexibility in prices and exchange rates simply forcing any adjustment on to the real side of the economy.
The increased prominence of ABCT in popular discourse actually has profoundly anti-market implications, because it leads people to believe that there is something wrong with macroeconomic and financial market outcomes that are in fact largely market-determined and have very little to do with either monetary policy or ‘bubbles.’
posted on 06 September 2006 by skirchner in Economics, Financial Markets
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Endogenous Fed Policy: Why You Can’t Profit from Nouriel Roubini
Those who have argued that rising commodity prices, particularly gold, are symptomatic of easy Fed policy face the embarrassment of explaining why commodity prices have fallen rather than surged in response to the recent Fed pause. As usual, James Hamilton has already said what I wanted to say on this:
What brought commodity prices and long-term nominal yields down is the same thing that induced the Fed to pause, namely, the recognition that the magnitude of the incipient economic slowdown is more significant than many were anticipating a few months ago. To be sure, many other factors influence the price of any given commodity, and some commodities, such as silver, lead, and nickel, are up rather than down over the last two months. But other things equal, slower growth of real economic activity is bearish for any commodity, and as the reality of the slowdown has sunk in, commodity prices have responded, one by one.
This reinforces a point we have made on many occasions previously, that monetary policy is more often than not an endogenous response to economic developments rather than a driver of them.
It is worth noting that the CRB index is now at risk of breaking its multi-year uptrend from the 2001 lows. If you think this sounds bearish, you’re right. But what commodity prices and Treasury yields are telling us is that an economic slowdown is already largely discounted. It’s the slowdowns that are not priced in that you have to worry about. While Nouriel Roubini likes to portray himself as an out-of-consensus contrarian, the reality is that the market already largely agrees with him. Or to invert Glenn Reynolds, the permabears are a herd, not a pack.
posted on 31 August 2006 by skirchner in Economics, Financial Markets
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Shiller Runs with the Housing Herd
Robert Shiller and Karl Case argue that:
Deterioration in that intangible housing market psychology is the most uncertain factor in the outlook today.
Yet in the same op-ed, Shiller and Case provide evidence from trading in their own house price indices on the Chicago Merc that suggests a downturn in house prices is already discounted:
The U.S. now has a futures market based on home prices. The market that opened in May at the Chicago Mercantile Exchange is now showing backwardation in all 10 metropolitan areas trading. The backwardation can be expressed as implying a rate of decline of 5% a year for the S&P/Case-Shiller Composite Index by May 2007. Since the margin requirement is only about 2.5%, an investor who is sure that prices cannot actually fall by next May has, on that assumption, a sure return of at least 200% from buying a futures contract, and even more if prices rise at all. But there can’t really be so much “money on the table.” It must be that people really no longer see it as a sure thing that prices won’t start falling across the metro areas.
Not much uncertainty there. Shiller and Case also can’t help but invoke these notorious contrarian indicators:
the air is now full of talk of a bust. The covers of the New Yorker, the Economist, The Wall Street Journal and virtually every news magazine and newspaper in America has heralded the bursting of the “housing bubble.”
While Nouriel Roubini likes to portray himself as an out-of-consensus contrarian, both he and Shiller are just running with the herd in calling for a recession on the back of a housing sector downturn. Yet recessions are rarely caused by events that are well anticipated, which is why they are almost never heralded on the front pages of newspapers until they are already well underway. Based on the NBER business cycle reference dates, the 2001 recession in the US was all but over by the time it hit the front page. The expansion began in November 2001, yet as late as the September terrorist attacks, there was still debate about whether or not the US was in recession.
posted on 30 August 2006 by skirchner in Economics, Financial Markets
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What China Really Does with its Foreign Exchange Reserves
SHANGHAI, Aug 29 (Reuters) - Beijing is expected to inject a large amount of capital into China Reinsurance (Group) Co., the country’s biggest reinsurer, to help it compete with foreign rivals, sources close to the situation said on Tuesday.
Central Huijin, the investment arm of the central bank, has submitted a proposal for the capital injection to the State Council, China’s cabinet. The plan could win approval before the end of this year, the sources said.
After approval, the central bank and China’s foreign exchange regulator would authorise Central Huijin to use part of the country’s more than $940 billion in foreign exchange reserves as capital for China Reinsurance, the sources said.
The size of the proposed injection is unclear, but one financial source close to the State Council said it was unlikely to exceed 10 billion yuan ($1.25 billion).
posted on 29 August 2006 by skirchner in Economics, Financial Markets
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Eeyore or Jack Ass? Bears of Very Little Brain
Nouriel Roubini pronounces himself a member of the ‘Shrill Order of the Reality-Based Reputable Eeyores.’
As I recall my Pooh, Eeyore’s pessimism was rarely validated and had a lot to do with having a pin stuck in his butt, which I guess might also explain the shrill tone.
posted on 28 August 2006 by skirchner in Economics, Financial Markets
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What Nouriel Roubini Won’t Tell You About the US Economy, Part II
More of the stuff that hits the cutting room floor at Doomsday Cult Central, from my associates at Action Economics:
A surprising array of major U.S. macro indicators continue to defy expectations of a slowdown, beyond pocketed weakness in the housing. Indeed, even here, construction activity remains solid despite housing due to robust business and public sector growth. Consumers are spending, factories are humming, profits are booming, and trade is turning the corner. Even the labor market clearly remains tight, despite the seemingly meaningful yet notably isolated restraint in monthly payroll growth.
The most important discrepancy between expectations and outcomes has come from the consumer, where nearly all economists projected some pull-back this year, even though spending strength has remained unwavering. As is evident below, nominal consumer spending growth was solid in both Q1 and Q2, and has actually gained steam in Q3. The “real” spending figures were hit in Q2 from soaring gasoline prices, but the hit was temporary. Since consumption accounts for 2/3rds of GDP, this steady growth is providing an important driver of economic growth.
posted on 23 August 2006 by skirchner in Economics, Financial Markets
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RBA Governor Macfarlane Protests Too Much
In his appearance before the House Economics Committee on Friday, RBA Governor Macfarlane complained that some of his remarks before a previous Committee hearing had been taken out of context. In an interview in today’s SMH, Macfarlane also complains about the way the issue of interest rates was handled during the last federal election campaign, saying that:
we thought that the independence of the Reserve Bank was already so well established that that argument would not be a plausible argument.
Yet in the same interview, Macfarlane takes pride in his almost non-existent public profile during his 10 years as Governor:
He went the length of his term without giving an on-the-record interview to any Australian media outlet, or appearing once on TV or radio, a matter of considerable pride to him. “I’ve never been able to see how that could possibly be in the interests of the Reserve Bank. As far as I could see it would probably trivialise things. You have to be honest and forthright but you don’t have to be constantly pontificating. You’re not an economic commentator.”
He says there is a difference between transparency and self-promotion, “and I don’t think it would be a good idea to go into self-promotion”. There is an implied rebuke here to others, such as Greenspan, who have allowed their own personality cults to overshadow their institutions.
The comparison with the Fed is appropriate, because it shows what an absurd argument it is to suggest that the Governor of the Reserve Bank should not be an active participant in economic debate. The Fed Chairman, the Federal Reserve Board Governors and Federal Reserve Bank Presidents who serve on the Federal Open Market Committee have high public profiles, routinely speak out on a wide range of economic issues and are often critical of the government on issues such as fiscal policy.
Macfarlane was understandably reluctant not to have the Bank drawn into partisan political debate and it would certainly be inappropriate for the Bank to have adjudicated on competing claims about interest rates during the last federal election. Yet it is the Bank’s more general absence from public debate that makes it more likely that issues surrounding the determination of official interest rates will be misrepresented.
While Macfarlane would see himself as upholding the independence of the Bank, the fact that he felt unable to speak out as Governor for fear of coming into conflict with the Treasurer speaks volumes about the nature of the RBA’s independence. For all the hype surrounding the August 1996 Joint Statement on the Conduct of Monetary Policy, it amounted to little more than a codification of existing practice and left the statutory basis for RBA independence unchanged. A central bank governor who feels unable to publicly criticise the government of the day is lacking independence, not upholding it.
It should also be said that Macfarlane’s public reticence also extended to his areas of direct responsibility. In his appearance before the House Economics Committee on Friday, Macfarlane sounded positively put upon when asked to express an opinion on the direction of interest rates, having studiously avoided any discussion of the issue in his prepared statement. While Macfarlane did then venture an opinion, it was one the Bank did not bother to include in its Statement on Monetary Policy only two week’s previously. This was a repeat performance of the February hearings, when Macfarlane also offered a view on the direction of interest rates that was more explicit than the preceding SOMP. What this shows is that Bank often has a view on the direction of interest rates that it is not willing to share with the public, except on an ad hoc basis in response to questions from a Committee before which the Governor appears only twice per year.
Macfarlane can hardly complain about the course of public debate when he was so obviously unwilling to participate in it.
posted on 19 August 2006 by skirchner in Economics, Financial Markets
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‘Bubble Man’ Revisited
Late last year, I had occasion to review Peter Hartcher’s Bubble Man. For some reason, the book is only now receiving critical scrutiny in the US. Daniel Drezner reviews the book in the WaPo, although notes on his blog that:
It was difficult, in the space allotted, to list all the reasons I thought this book sucked eggs.
Dan also links to Steven Mufson’s review in The Washington Monthly:
By overemphasizing the damage done in the market and economic downturn in 2000-2001, Hartcher skews the answer to the question of whether Greenspan or any other Fed chairman ought to use the powers of his office to protect investors from bubbles given the Fed’s other, arguably bigger, responsibilities. The hot economy of the late 1990s had real benefits for many workers, especially those lower down on the income scale who didn’t have any stock portfolios. And while a disproportionate chunk of economic gains flowed to America’s wealthy, some job gains among middle- and lower-class Americans were real and a surprising number survived the recession.
posted on 14 August 2006 by skirchner in Economics, Financial Markets
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