Asset prices shares

This site offers updated information relating to the book Irrational Exuberance by Robert J. Shiller

Mr Greenspan was not certain that the equity market was indeed a bubble. But by September, he was explicitly referring to it in such terms: "I recognise that there is a stock market bubble problem at this point," he said at the September 24, 1996 meeting - the day the Dow closed at 5874.03.

Three years ago, at the height of the stock bubble, Paul Volcker, Mr Greenspan's predecessor as Fed chairman, issued a famous warning: that the world economy was dependent on the US economy, which was dependent on the stock market, which was dependent on fifty stocks, half of which had never reported any earnings. (FT.com site; Jul 19, 2002)

A stock market bubble exists when the value of stocks has more impact on the economy than the economy has on the value of stocks
John Makin November, 2000

The root cause of this recession was the bursting of one of the biggest financial bubbles in history.
It is wishful thinking to believe that such a binge can be followed by one of the mildest recessions in history—and a resumption of rapid growth.
The Economist January 2002

Gerhard Stenberg, chef för Handelsbankens kapitalförvaltning i Göteborg, hoppar av i protest mot börshysterin efter nästan 30 års arbete i aktiemarknaden. 98-05-20
Han tror att en börskrasch är oundviklig och vill inte ta ansvar för att rekommendera placeringar i aktier för närvarande. "Kurserna är på tok för höga och måste ned med minst 30 procent.
Vi står inför ett kraftigt fall i börskurserna i hela världen. Det kommer att bli en rejäl smäll".

Stock Market	World Economy
Hong Kong Hang Seng 1993-1998	WE 1974-2002
Dow Jones 1970-1997
Dow Jones 1994-1999
Dow Jones 1991-2001
S&P p/e 1930-2000
FTSE dividend yields och P/E-ratios 1987-1999
Nikkei 1984-01
Tokyo Nikkei 1986-1995
Stockholmsbörsen 1979-1997
Stockholmsbörsen 1999-2000
Frankfurt-börsen DAX 1989-1997
Dow Jones fyra största krascher

Over two days this week, Gerrit Zalm, the Netherlands finance minister, and Nicolas Sarkozy, his French colleague, have set up a live experiment that will assure full employment for future graduate students of comparative economics.
Financial Times editorial 23/9 2004

The intriguing question facing eurozone policy makers is whether the two ministers, with their very different budgetary prescriptions for 2005, can boost employment more broadly in their economies while bringing their deficits below the limit of 3 per cent of gross domestic product set by the EU's stability and growth pact.

The policies could not be more different. Mr Zalm, with determined rigour, has brushed aside street protests to present a hair-shirt, supply-side budget which combines belt-tightening for consumers and corporate tax breaks for business. He hopes the deficit will fall to 2.6 per cent next year from 3 per cent in 2004 and structural reforms will attract investment, creating growth and jobs in the medium term.

Mr Sarkozy's budget, by contrast, appears largely pain-free. Buoyed by a recovery in government revenues, the French finance minister forecast that the public finances next year would show a deficit of 2.9 per cent - meeting EU rules for the first time since 2001.

Against this background, it is difficult not to sympathise with Jean-Claude Trichet, the European Central Bank president, who warned again yesterday of the need for further budget consolidation and the dangers of loosening the stability pact's sanctions against excessive deficits.

What is the relationship between Weimar Germany and Wall St. of the late 90s?
On the surface, what could be more different?
Stock market booms are the best of times while hyperinflation is a nightmare.
Robert Blumen, Ludwig von Mises Institute

During the year ending in July, real disposable income grew at a 1.8 percent rate while real consumer spending grew at a 3.5 percent rate.
John Makin, AEI

Hans Tson Söderström: Tur att vi har vår flytande krona
Det är inte särskilt höga odds på tipset att efter det amerikanska presidentvalet följer en kraftig finanspolitisk åtstramning. I värsta fall blir den förknippad med stigande räntor och en fallande dollar. I så fall uppstår en svårbermästrad situation för ECB och EU:s finansministrar
Kolumn i DI 10/9 2004

Stand by for a pensions bail-out
A re-run of the S & L disaster
John Plender Financial Times 13/9 2004

In the light of United Airlines' proposal to stop contributing to its pension funds, comparisons are increasingly being made between today's overstretched US pension fund system and the savings and loans crisis of the 1980s. Not without justice, although the problem in pensions will be more of a slow-burn affair since pension funds, unlike S & Ls, are unleveraged.

The nub of it is that private defined benefit schemes in the US have a $400bn funding gap. Meantime, the Pensions Benefit Guarantee Corporation (PBGC), the agency that insures private pensions for 44m workers and retirees, had an $11.2bn deficit at the end of 2003. It also has $85bn in exposure to companies with junk bond ratings, which implies a high risk of default.

The position can only worsen given the degree of moral hazard built into the system, whereby the premiums paid to the PBGC do not adequately reflect the risks. One measure of this, highlighted by Bradley Belt, executive director of the PBGC, is the fantastic bargain United Airlines has enjoyed at the insurer's expense. It has paid little more than $50m in premiums since the agency's inception in 1974. Yet if its pension plans terminate, the PBGC would be hit by a claim of $6.4bn.

The agency is thus in a position not unlike that of the International Monetary Fund. Its mere existence encourages morally hazardous behaviour and everyone expects it to act as a financier of last resort for the whole system. Yet it lacks the resources to do more than a marginal firefighting job in the event of a systemic crisis. And the potential for systemic crisis increases all the time because the weaker players in the system are encouraged, as in the S & L fiasco, to speculate their way out of trouble.

"Risk för global kris"
Morgan Stanleys chefsekonom varnar för sammanbrott i världsekonomin
DN 9/9 2004 Reporter Johan Schück

När andra talar om ljusare tider, så menar han /Stephen Roach/ att skenet bedrar och att problemen bara skjuts på framtiden.

- De amerikanska konsumenterna håller igång ekonomin genom att skuldsätta sig allt djupare, uppmuntrde av skattesänkningar och rekordlåga räntor.

Numera är det inte privat kapital, utan pengar från centralbankerna i Ostasien /läs: Kina och Japan/ som täcker det amerikanska /bytesbalans/underskottet.

Roach tar tillbaka sitt råd från tidigare i år om en kraftig amerikansk räntehöjning: ekonomin är inte längre tillräckligt stark, det rätta tillfället har gått förlorat, menar han.

The risks ahead for the world economy
Fred Bergsten The Economist print edition Sep 9th 2004
Fred Bergsten is director of the Institute for International Economics in Washington. His book, “The United States and the World Economy: Foreign Economic Policy for the Next Administration” is forthcoming.
Very Important Article

Bubbles are getting blown out of all proportion
The financial press is full of grim prognostications of economic damnation postponed but not avoided.
The monetary moralists preaching inevitable doom for the US economy because the Fed dared to stabilise the economy after the bubble's collapse are simply wrong
Adam Posen Financial Times 8/9 2004
The writer is a senior fellow at the Institute for International Economics
Chart sources: Author’s calculations from Adam Posen ‘It Takes More Than A Bubble to Become Japan’ (Reserve Bank of Australia 2003)

Like the hellfire preachers of yesterday, today's economic pundits are taking a stern line on excess. Economies that enjoyed asset price booms, notably the US, are damned to pay for their wanton ways. Central banks that attempted to offset the negative effects of a bubble's burst, notably the US Federal Reserve, are merely postponing the day of judgment and, if anything, compounding their sin by blowing up other bubbles - in housing, or in government bonds, or both. The financial press is full of grim prognostications of economic damnation postponed but not avoided.

This is all pernicious (pernicious \pur-NISH-us\, adjective: Highly injurious; deadly; destructive; exceedingly harmful/nonsense). Pernicious because it discourages central banks from responsibly doing their job of stabilising the real economy, as the Fed correctly did in 2001-03.
Nonsense because there is no evidence to support these claims. Bubbles have only rarely caused the lasting damage that these commentators assert as unavoidable destiny; when they have, it has been because central banks have failed to respond to the bubbles' aftermath.

The outdated but apparently still widely attractive monetarist image of liquidity as toothpaste - if you squeeze the tube in one place, it bulges somewhere else - does not stand up empirically.

This cross-national evidence is consistent with economic historians' assessments of the US experience. Among the many booms, panics and busts in the 19th and 20th centuries, only those accompanied by banking problems had negative consequences lasting beyond a few quarters. Bubbles can pop with limited macroeconomic impact, and usually do.

As for the second contention, the moral hazard story of “the Greenspan put” - in which investors believe the Fed will step in to protect them if the market crashes, and so act recklessly - is a cute story, but that is all it is. Investors do not decide whether or not to risk their money based on whether the central bank cut rates in the aftermath of the last bubble.

In fact the evidence is that, if anything, investors have less risk tolerance for extended periods after bubbles, whether or not the central bank cuts rates. Only two of the 15 big industrial economies (Finland and Italy) have had recurring bubbles since 1970 - all the rest had to wait through a long period of fading memories and turnover in financial services personnel before a second asset price boom emerged (if one ever did).

Deflation did not emerge in Japan until the end of 1997, many years after the bubble had burst. It was a consequence of years of failure by the Bank of Japan to respond adequately to slowing growth, the Ministry of Finance's decision to raise taxes in a recession and the corporate sector's inability to face up to bad loans, a problem that was allowed to grow to vast proportions. After the bubble burst, the BoJ's unwillingness to stimulate the economy unless government and business “got the rot out” served only to encourage more wasteful government spending, greater declines in corporate and bank capital and constant renewal of bad loans.

Thankfully, the Fed, as its aggressive rate cuts in 2001-03 show, has learnt these lessons. The monetary moralists preaching inevitable doom for the US economy because the Fed dared to stabilise the economy after the bubble's collapse are simply wrong.

All reasonable people agree that today, with rising inflation, burgeoning Federal deficits and the possibility of a stagflationary oil shock, interest rates should be on an upward path in the US. But the Fed is right to wait for the data to come in to determine the pace of that increase.

America on the comfortable path to ruin
These two facts - the rest of the world's surplus output and the US goal of full employment - explain the global macro-economic picture
Martin Wolf, Financial Times, August 18 2004

From 1996 to 2003 US real demand has grown faster than real gross domestic product in every year (see chart). When demand has grown slowly, as in 2001, output has grown even more slowly. Thus, the US authorities had to generate faster growth of demand than of potential output, with the difference spilling over on to the rest of the world via growing current account deficits.

Was the fiscal slide inevitable? No, but it could have been avoided only if the US had been prepared to accept a slump. Yet no US administration would have tolerated this outcome.

For the same reason, the desire of both presidential candidates to reduce the fiscal deficit in coming years is meaningless without change in the external position. The point is powerfully made in the latest in a series of papers authored by Wynne Godley and associates for the Levy Economics Institute and the Cambridge Endowment for Research in Finance. click here

Let us be blunt about it. The US is now on the comfortable path to ruin. It is being driven along a road of ever rising deficits and debt, both external and fiscal, that risk destroying the country's credit and the global role of its currency. It is also, not coincidentally, likely to generate an unmanageable increase in US protectionism.

Worse, the longer the process continues, the bigger the ultimate shock to the dollar and levels of domestic real spending will have to be. Unless trends change, 10 years from now the US will have fiscal debt and external liabilities that are both over 100 per cent of GDP. It will have lost control over its economic fate.

The essence of the needed changes is quite clear: a further substantial devaluation of the dollar, together with a sizeable rise in domestic demand, relative to potential output, in almost all other important economies of the world.

See also FT leader: Dollar stands on a precipice
Financial Times; Jan 02, 2003
As the late Herbert Stein, former chairman of the US council of economic advisers, once said:
"If something cannot go on forever, it will stop."

The combination of an ever-rising US current account deficit with a strong dollar must cease. Indeed, it already is doing so. The currency weakened in 2002. It is rather likely to weaken further in 2003. The present course of the US economy is unsustainable.

Net US liabilities to the rest of the world are some 25 per cent of gross domestic product - in the neighbourhood of $2,500bn (£1,562bn). In the first three quarters of 2002, the current account deficit ran at close to five per cent of GDP. As recently as 1997, however, the deficit was only 1.5 per cent of GDP. It is bigger this year than two years ago, despite last year's economic slowdown. Since the beginning of 1997, trend growth of exports of goods and services, at constant prices, has been 2.2 per cent a year, of GDP 3 per cent and of imports 7.4 per cent. Even under quite conservative assumptions, the current account deficit could, on current trends, be over 7 per cent of GDP by 2007. By that year, US net external liabilities would, at current exchange rates, be close to 65 per cent of GDP. If the dollar is to remain strong, despite these deficits, the rest of the world must accumulate net claims on the US economy at $500bn a year, and rising, for the indefinite future. This is hard to imagine.

Already, there has been a steep decline in net private foreign purchases of US assets, from $978bn in 2000 to an annual rate of just $560bn in the first three quarters of 2002. Net foreign direct investment has collapsed, from $308bn in 2000 to an annualised $14bn in 2002. This decline in private foreign purchases of US assets has been offset by a big increase in foreign government net purchases of US assets, from $38bn in 2000 to an annualised rate of $136bn in 2002. There has also been a steep fall in US private purchases of foreign assets, from $605bn in 2000 to an annual rate of just $380bn in 2002. If foreign governments stopped propping up the dollar and US investors invested abroad, as before, the dollar would tumble. Other currencies must rise if the dollar is to fall. But the two biggest economies after the US - the eurozone and Japan - are highly dependent on export demand, at least for the moment, while no big economy offers obviously superior returns to those available in the US. Moreover, other governments, particularly in Asia, are desperately unwilling to see their currencies rise against the dollar. The most potent of all large-scale purchaser of dollars is Japan. Its vast foreign reserves, already $395bn at the end of 2001, rose to $461bn by October 2002. With the finance minister talking of a yen exchange rate below Y150 to the dollar and pressure on the Bank of Japan to expand the money supply, further purchases are probable. If the dollar is to fall, the important currency against which this is likely to happen is the euro, since it belongs to the one large entity whose authorities will refuse to buy dollar assets in large quantities. The dollar has already fallen 16 per cent against the euro since the end of January 2002. This slide could easily continue in 2003. This is a tale of irresistible force meeting immovable objects. The force is the growing pile of US liabilities. The objects are the low real returns in other big economies and the unwillingness of many governments to tolerate currency appreciation. In the short term, the objects may win. In the long run, the force will be stronger. The dollar must fall. The longer it remains high, the bigger its fall will be.

Greenspan is running out of buttons to push
Peter Hartcher, Financial Times, August 10 2004
The writer is international editor at The Sydney Morning Herald and a visiting fellow at the Lowy Institute for International Policy. He is author of a forthcoming book on Alan Greenspan and Wall Street, entitled Bubble Man

The US economy has grown reasonably fast since the second half of 2003 and the general expectation seems to be that satisfactory growth will continue more or less indefinitely.
The expansion may, indeed, continue through 2004 and for some time beyond. But... it will certainly not happen without a cut in domestic absorption of goods and services by the US which would impart a deflationary impulse to the rest of the world
Wynne Godley et al, The Levy Economics Institute, July 2004

The US economy has grown reasonably fast since the second half of 2003 and the general expectation seems to be that satisfactory growth will continue more or less indefinitely.

But with the government and external deficits both so large and the private sector so heavily indebted, satisfactory growth in the medium term cannot be achieved without a large, sustained and discontinuous increase in net export demand. It is doubtful whether this will happen spontaneously and it certainly will not happen without a cut in domestic absorption of goods and services by the US which would impart a deflationary impulse to the rest of the world.

There are big medium-term risks ahead
Global macroeconomic imbalances, the impact of a rising Asia, protectionism and vulnerability to terrorist outrages
Martin Wolf 20/7 2004

The US current account deficit has risen from about 1.5 per cent of gross domestic product to over 5 per cent today. During the recent US slowdown, the current account deficit has, remarkably, continued to rise. This is the opposite of what one would normally expect and of experience in the early 1990s.

A net creditor for most of the 20th century, the US has seen its net liability position move from a rough balance in 1988 to minus 24 per cent last year.
Yet, despite a current account deficit of 4.9 per cent of GDP in 2003, net liabilities to the rest of the world fell as a share of GDP. The tumbling dollar reduced net liabilities by more than the current account deficit increased them.

On average, according to the International Monetary Fund's latest World Economic Outlook, real domestic demand will have grown at 3.8 per cent a year in the US between 1996 and 2005, while real output will have grown at 3.5 per cent.

The UK has an even bigger discrepancy, at half a percentage point a year. Meanwhile, the eurozone's demand will have grown at a pitiable rate of 1.8 per cent, with output growth of only 2 per cent, and Japan's demand will have grown at a still lower 1.2 per cent, with output growth at 1.5 per cent.

In 2004, according to the Organisation for Economic Co-operation and Development, the Anglosphere (the US, UK and Australia, but not Canada in this case) will run a combined current account deficit of $636bn, with the US deficit alone accounting for $555bn.

Asia's current account surplus was recorded at $322bn.

The Asset Economy
The income-driven impetus of yesteryear has increasingly given way to asset-driven wealth effects. For consumers, businesses, policymakers, and investors, the asset economy turns many of the old macro rules inside out
Stephen Roach Morgan Stanley 21/6 2004

The equity bubble of the late 1990s was a transforming event in many ways for the US economy. But there is one lasting implication that stands out above all - an important transition in the character of the American growth dynamic.

The income-driven impetus of yesteryear has increasingly given way to asset-driven wealth effects. For consumers, businesses, policymakers, and investors, the asset economy turns many of the old macro rules inside out. In the end, it could well pose the most profound challenge of all to sustainable recovery in the United States.

The threat of extreme events
Kenneth Rogoff, formerly chief economist of the International Monetary Fund believes there is a high risk of a housing slump in the US
Samuel Brittan Financial Times June 18 2004

Kenneth Rogoff, formerly chief economist of the International Monetary Fund, in the May issue of the Central Banker puts his finger on a weakness of official assurances by saying "people tend to resist thinking about low probability extreme events".

There are also dangers that are highly likely, but the timing of which is uncertain.

Mr Rogoff cites the US current account deficit of 5 per cent of gross domestic product, which he, like many others, regards as unsustainable. Suppose, however, this suddenly reverts to balance. For instance, a steep collapse in US house prices could lead to a sharp rise in private savings. Indeed, he believes there is a high risk of a housing slump in the US even though the boom there has not gone as far there as it has in the UK or Australia.

A future correction would need to be accompanied, according to the former IMF economic director, by a drop in the the dollar of over 40 per cent in the short run and in the long run of about 12-14 per cent.

Short-term real interest rates in the Group of Seven countries are still negative. In the US, they are minus 1 per cent. In core euro countries, they are around zero. This compares with a normal historical level of, say, 2 or 3 per cent.

There is also a gap of over 2½ percentage points between prevailing international nominal short-term rates and the rates on 10-year government bonds (an upwardly sloping yield curve). Monetary policy is, in the awful US financial jargon, "behind the curve".

America’s vaunted economic “flexibility” is a mirage: it is fundamentally a product of financial engineering and endless debt creation, which has persistently created the image of a dynamic economy, successfully withstanding one shock after another, from the fall out of the Asian financial crisis of the late 1990s or the devastating terrorist attacks of September 11, 2001.

Beware bursting of the money bubble
David Hale Financial Times May 30 2004 19:30

The financial markets have been hit by shocks from the Middle East over the past few weeks. But the real risk to world markets is that the speculative bubbles and "carry trades" that have developed as a consequence of American monetary policy over the past year will unravel as the US Federal Reserve moves to increase interest rates.

During the Nasdaq bubble of 1998-2000, US interest rates ranged between 4 per cent and 6 per cent. Since June 2003, they have stood at 1 per cent. The advent of such low money market yields has unleashed speculative capital flows to asset classes that played no role in the technology bubble of four years ago.

Warren Buffett
"Vi tror att dollarn kommer att tappa i värde i förhållande till andra större valutor"
Inför närmare 20.000 aktieägare på Berkshire Hathaways årsmöte i Omaha, Nebraska meddelade han därför sin intention att göra slut på investmentbolagets ansenliga kassa på 36 miljarder dollar, motsvarande 274 miljarder kronor, så snabbt som möjligt.
DI 3/5 2004

Warren Buffett, känd som en av de mest inflytelserika investerarna i världen, har alltsedan 2002 varit öppet skeptisk till dollarinvesteringar. Han gillar inte alls den räntepolitik som den amerikanska centralbanken för utan förspråkar i stället räntehöjningar.

73-åringen befarar nu att det redan gigantiska handelsunderskottet i landet kommer att öka ytterligare. Inför närmare 20.000 aktieägare på Berkshire Hathaways årsmöte i Omaha, Nebraska meddelade han därför sin intention att göra slut på investmentbolagets ansenliga kassa på 36 miljarder dollar, motsvarande 274 miljarder kronor, så snabbt som möjligt. "Vi tror att dollarn kommer att tappa i värde i förhållande till andra större valutor", sade Buffett, enligt norska Dagens Naeringsliv.

Remember inflation? Remember fretting about accelerating consumer prices and higher interest rates? Those days may soon be back.

John Makin, resident scholar at the American Enterprise Institute in Washington:
The blissful combination of higher growth and lower inflation that has characterized the U.S. economy since last spring is the inverse of stagflation, the nightmare scenario that followed the oil shock of 1973-74 Still lower inflation is a distinct possibility.
John Makin AEI 29/1 2004
- We are nearing the end of a benign, unusual period of faster growth and lower inflation and moving into a period of slower growth and higher inflation
IHT 15/4 2004

On Wednesday, the government reported that U.S. consumer prices shot up more sharply than expected in March, rising 0.5 percent from a month earlier. Excluding food and energy prices, the rise was still 0.4 percent, the biggest monthly increase in two years. These early signs of a return to creeping price increases — just a few months after the U.S. Federal Reserve pronounced the risks of inflation and of deflation ‘‘almost equal’’ — may put the central bank in a tight spot as pressure grows to raise interest rates sooner than it might like.

‘‘We are nearing the end of a benign, unusual period of faster growth and lower inflation and moving into a period of slower growth and higher inflation,’’ said John Makin, resident scholar at the American Enterprise Institute in Washington. ‘‘The resulting whiff of stagflation may force the Fed to raise U.S. interest rates while growth is slowing.’’

Those with a memory of what happens when a bubble bursts know that, if history is any guide, the bear market that began in 2000 is not over - not by a long shot.
By Maggie Mahar Financial Times April 11 2004 19:36
The writer is the author of Bull! A History of the Boom, 1982-1999 (HarperBusiness) What drove the Breakneck Market - and What Every Investor Needs to Know About Financial Cycles
amazon.com

How can one conclude that they are wrong? Because the US market has not yet "reverted to a mean". Past experience suggests that when a bubble collapses, a market cannot lay down a firm foundation for the next boom until the pendulum has swung back to its mean, or average price.

Historically, at its mean, the S&P 500 has traded at 17 to 18 times the previous year's earnings, and roughly 14 times estimates for the current year, while yielding dividends of about 4 per cent. When a bear market scrapes bottom, the pendulum inevitably swings too far in the other direction: price-earnings ratios usually sink below 10, while the yield rises to at least 5 per cent.

Today, the S&P 500 fetches approximately 29 times last year's earnings and roughly 18 times estimated earnings for 2004, assuming you believe analysts' estimates. As for dividends, the average stock on the S&P yields less than 2 per cent.

Meanwhile, the underlying economy deteriorates in what could be the prelude to a second fall in equity prices. Debt builds, the dollar declines, capital investment remains sluggish and, despite increased productivity, real wages barely budge. Sceptics argue that a recovery built on debt and consumer spending is no recovery at all.

So the crash of 1929 was followed by a 50 per cent rally. But then came the crash of 1930-1932. When it was all over, the market had fallen some 86 per cent from its pre-crash peak.

Similarly, the go-go market of the 1960s first sold off in 1970 when the Dow plummeted from a high of nearly 1,000 to a low of 631. Investors assumed that this was a nadir and, sure enough, late in 1970, the benchmark index began to climb. The bear market rally of the early 1970s ran for a little more than two years, reaching a climax early in 1973, with the Dow making a new high of 1,071. Many thought that a new bull market had begun. Within weeks, the the crash of 1973-1974 began. When it bottomed, the Dow had sunk to 577 - seven points below where it had traded in 1958.

An entire generation was driven out of the stock market. It would be another eight years before a new bull market began.

The jobs picture is even worse than it seems
And despite what the experts say, inflation is out there, and we’re feeling it already.
Bill Fleckenstein, CNBC 15/3 2004

Using the seasonally adjusted total unemployment rate of 5.6% and adding to it "discouraged" workers, the rate grows to 5.9%. Factor in other groups of people who are underutilized in the work force, you can ratchet the number all the way up to 9.6%. And, for the sake of comprehensiveness, if you use the non-seasonally adjusted numbers, that rate would swell to 10.9%. So, those are the numbers, and I'll leave readers to draw their own conclusions.

What's particularly scary is how pathetic job growth has been, despite all the interest-rate cuts (nominal rates are near zero, and real rates are essentially below zero), the two Bush tax cuts and now the refunds from the last cut. Despite it all, we still can't get enough jobs created.

The failure of the US economic recovery, now more than two years old, to produce meaningful job growth has generated much talk about its political consequences.
It could undermine President George W. Bush's re-election prospects, and it certainly seems to be contributing to the national alarm about outsourcing, trade and overseas investment.
But the bigger concern is that it may be starting to threaten the strength and even the sustainability of the recovery itself.
Financial Times editorial 9/3 2004

With last Friday's dismal news from the Labour Department that just 21,000 net new jobs were added in February, total non-farm payrolls remain almost 2.5m below their pre-recession peak. For comparison, in the early 1990s at the same stage of the cycle, in what was also called a jobless recovery, non-farm payrolls had already surpassed their previous peak.

This weakness is, of course, the reflection of the economy's stellar productivity performance; while US employment has remained at a standstill for the past year, gross domestic product is up by more than 5 per cent.

If employment does not begin to show strength soon, consumers are likely to retrench, weakening aggregate demand. To avoid that, either productivity growth must, improbably, collapse, or output must accelerate.

A more plausible gentle slowdown in output per hour would need to be accompanied by stronger demand and output elsewhere.

The American consumer has been surprisingly steadfast for the past three years. Figures last week from the Federal Reserve showed why: household net worth reached an all-time high at the end of last year as modest equity increases were augmented again by gains in housing wealth. But even if the Fed stays on hold for the rest of this year - as looks increasingly likely and sensible - it has scant room to provide the stimulus that lowered mortgage rates and helped raise house prices in the past three years.

The US has had a jobless expansion for more than two years. It will soon start to test the limits of its durability.

Varning för global bubbla
I botten på problematiken ligger att Fed har hållit styrräntan på en rekordlåg nivå efter att it-bubblan sprack 2000
Cecilia Skingsley, Dagens Industri 8/3 2004

Berkshire Hathaway, the insurance and holding company run by legendary investor
Warren Buffett, amassed a record cash pile of $36bn in 2003 as the world's second-richest man
once again shied away from rising stock markets
Financial Times 8/3 2004

"Our capital is underutilised now...It's a painful condition to be in - but not as painful as doing something stupid," added Mr Buffett. The chairman's caution has been largely justified in the past, particularly during the technology bubble in 1999, which was the last time that Berkshire shares underperformed against the S&P 500 and the year after its previous cash peak.

Mr Buffett also highlighted a number of risks to the US economy that add to last year's warnings on derivatives, mutual funds and corporate governance.

In particular, he singled out the weak dollar as a cause for concern and revealed that Berkshire Hathaway had $12bn invested in foreign currencies to balance its exposure to the falling greenback. "Prevailing exchange rates will not lead to a material letup in our trade deficit. So whether foreign investors like it or not they will continue to be flooded with dollars," said Mr Buffett. "The consequences of this are anybody's guess. They could, however, be troublesome - and reach, in fact, well beyond currency markets."

Last week, Alan Greenspan was a study in contradiction.
On Monday, he extolled the virtues of the levered-up homeowner to a credit union conference. The next day, in a speech to the Senate Banking Committee, he was singing a different tune altogether. Fannie Mae and Freddie Mac, the giant providers of mortgage capital, he warned, "are expanding at a pace beyond that consistent with systemic safety," and that "preventative actions are required sooner, rather than later."
The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of
CNBC on MSN Money - 1/3 2004

The next day, in a speech to the Senate Banking Committee, he was singing a different tune altogether. Fannie Mae and Freddie Mac, the giant providers of mortgage capital, he warned, "are expanding at a pace beyond that consistent with systemic safety," and that "preventative actions are required sooner, rather than later."

For a Federal Reserve chairman who has demonstrated that he couldn't identify reckless behavior if it ran him over, it was rather surprising to hear him chide Fannie and Freddie for their recklessness. (I should state, however, it’s an opinion I tend to share.)

Before quoting from the above, I would just note that Greenspan's latest comments reminded me of a speech he gave on March 6, 2000, which I have dubbed "An Ode to Technology." In the speech, he waxed on about the wonders of technology and how it had brought us a new era and all that other stuff. Folks may not remember that date, but it was four days before the Nasdaq Composite hit its all-time high of 5,048.62.

Despite the recovery over the past year ago, the composite is still down nearly 60% from the March 2000 peak.

This is not the first time Easy Al has been way off. On March 7, 2000, I wrote a column called “Alan Greenspan: Friend or Foe” that chronicled some of his prior quotes, speeches and the like. It includes his Jan. 7, 1973, utterance (right before the recession that ranks as our worst, at least until we get through the one we're in but haven't completed): "It is very rare that you can be as unqualifiedly bullish as you can be now." http://www.fleckensteincapital.com/old_raps/friend_or_foe.htm

Remarks by Chairman Alan Greenspan
The revolution in information technology
Before the Boston College Conference on the New Economy, Boston, Massachusetts
March 6, 2000

Since last spring, the United States has experienced the apparent happy paradox of sharply higher growth but lower inflation. However, listening to the persistent complaints about higher U.S. budget deficits and the uneasy murmurs about the need for the Federal Reserve to start tightening monetary policy--not to mention grave concerns about a weaker dollar (another way to boost aggregate demand)--it is easy to see that many economists and policymakers are clueless about recognizing the type of cycle we are in and how to respond to it.

The blissful combination of higher growth and lower inflation that has characterized the U.S. economy since last spring is the inverse of stagflation, the nightmare scenario that followed the oil shock of 1973-74, when higher oil prices produced lower output, lower growth, and higher inflation. The current cycle is fundamentally benign--more output at lower prices--but if policymakers fail to recognize it as such and ignore falling prices because output growth is strong, a global recession could occur.

A little reflection provides a straightforward explanation of the current cycle. The old bugaboo, stagflation, reflects a backward shift of aggregate supply to less output at each price level along a negatively sloped aggregate demand schedule. Output falls, and prices rise. In the inverted circumstance we see today, an outward shift of aggregate supply--that is, more output at each price level-a-long a negatively sloped aggregate demand schedule occurs, and the result is more output at lower prices.

Both types of supply shifts are confusing to policymakers and analysts because most of the time growth and inflation levels are positively correlated, with higher growth tied to higher inflation and lower growth to lower inflation. That is because aggregate demand shifts are typically larger than shifts in aggregate supply. An outward shift in aggregate demand results in a new intersection with a positively sloped aggregate supply schedule at a higher price level and a higher level of output, and a drop in aggregate demand has the opposite effects.

During the second half of 2003, when high levels of U.S. policy stimulus boosted demand growth, U.S. inflation and interest rates actually fell. The Fed's favorite measure of U.S. inflation--the year-over-year core PCE deflator--fell steadily, from 1.8 percent in 2002 to a cycle low of 0.8 percent in November of 2003. Now the core PCE (short for "personal consumption expenditures") deflator at 0.8 percent is below the 1 percent level designated by Fed governor Ben Bernanke as the minimum comfort level. Bernanke pointed this out in his talk before the American Economic Association in early January.

Interest rates on U.S. ten-year notes have been remarkably stable since peaking in August at 4.5 percent, following a sharp sell-off tied to a perceived change in Fed policy with respect to purchases of long-term notes and bonds. In fact, prior to August, two-thirds of the rise in ten-year yields resulted from a rise in expected real yields (based on TIPS pricing), from a low of 1.5 percent early in June to nearly 2.5 percent in August--an extraordinary and unprecedented move in real interest rates.

If there still is aggregate excess capacity in the U.S. economy, as suggested by the concurrence of low real interest rates and falling inflation, what can we expect to see in the future? Still lower inflation is a distinct possibility.

Asia will not rethink currencies soon
Martin Wolf, Financial Times, 18/2 2004

Japan and Asian emerging market economies have one thing in common: they are desperate to keep their currencies down against the US dollar. They would far rather lend the US the money with which to buy their exports than endanger their competitiveness or become reliant on fickle foreign finance. Does this behaviour make sense? Is it likely to change soon? The answer to these questions is: Yes and, in all probability, No.

The Europeans, in particular, long for the Asians to share in the adjustment to the weakening US dollar. This passionate desire is not surprising. According to the February Consensus Forecasts, the current account surplus of the Asia-Pacific region was $234bn last year, against only $35bn for the eurozone. This makes it puzzling, at first glance, that it is the euro, not the Asian currencies, that is soaring.

Asian emerging market economies have learnt from the experience of 1997 and 1998 a lesson that is rather different from that drawn by orthodox economists. The latter believe that the crisis showed the danger of adjustable pegs. It would be better, goes the argument, to choose between irrevocably fixed exchange rates (or, better still, dollarisation) and freely floating rates.

The directly affected countries drew a different conclusion. Polonius advised his son to be neither a lender nor a borrower. The Asians decided instead that it was far better to be a lender than a borrower.

The chief explanation for this is what economists have come to call "original sin", by which they mean the reluctance of international capital markets to lend in the currencies of emerging economies. If such economies become substantial net debtors in foreign currency, they become vulnerable to mass bankruptcy or public sector insolvency if their currency tumbles. Yet just such a collapse becomes likely as foreign currency indebtedness grows. The solution then is to prevent the country from becoming a net debtor in the first place.

The conclusion is that Asian exchange-rate policy is perfectly rational. So when might it change? The answer lies in what Prof McKinnon calls "conflicted virtue". As the stock of foreign currency accumulates, speculation on an appreciation rises, making it ever more costly to hold the currency down. In addition, foreigners start complaining about the trade surpluses, arguing that they are the unfair result of currency undervaluation.

Whatever Europeans may desire, the prognosis is that Asia will continue to run huge current account surpluses and interfere in exchange markets. Its governments will not lightly abandon policies that they believe work well for the convenience of any outsiders.

"Det mest sannolika", skriver han, "är att vi får se ett börsras utan like följt av ett sammanbrott för dollarn, en händelsekedja som kan tänkas göra slut på USA:s imperieställning".
Carl Johan Gardell, SvD Kultur 17/2 2004

Emmanuel Todd - Låtsasimperiet. Om det amerikanska systemets sönderfall.
(Après l"empire. Essai sur la décomposition du système américain) Övers: Pär Svensson 216 S.
Bokförlaget DN. CA 247:-

Under det sista århundradet före vår tideräknings början förvandlades romarriket från en regional stormakt i Italien till ett Medelhavsimperium som sträckte sig från dagens Irak till de brittiska öarna. Inflödet av tributer från erövrade provinser slog ut det italienska näringslivet. Tillverkningsindustrin blomstrade i periferin där efterfrågan stegrades och produktionskostnaderna var låga. Imperiets kärnområden blev ett svart hål - eller en keynesiansk konjunkturstimulator - med en stormrik samhällselit som konsumerade det överskott som den då kända västvärlden producerade. Relativt obetydliga störningar - som krig eller skördekatastrofer - riskerade till slut att utlösa en veritabel statskollaps. Under senromersk tid var det mäktiga imperiet, precis som USA i dag, en koloss på lerfötter.

Ovanstående reflexioner har hämtats från boken Låtsasimperiet, publicerad på franska 2002, som i dagarna kommit ut på svenska. Författare är den franske antropologen, demografen och historikern Emmanuel Todd som sedan 70-talet skrivit flera internationellt uppmärksammade böcker.

The power and influence of the United States is being overestimated, claims French historian and demographer Emmanuel Todd. "There will be no American Empire." "The world is too large and dynamic to be controlled by one power." According to Todd, whose 1976 book predicted the fall of the Soviet Union, there is no question: the decline of America the Superpower has already begun.

After the Empire, The Breakdown of the American Order, Emmanuel Todd
Translated by C. Jon Delogu Foreword by Michael Lind
$29.95 November, 2003 cloth 192 pages ISBN: 0-231-13102-X Columbia University Press

"A powerful antidote to hysterical exaggeration of American power and potential by American triumphalists and anti-American polemicists alike. A best-seller in Europe, Todd´s book should be read by all thoughtful Americans for its provocative and well-informed analysis of their nation and its prospects." –from the foreword by Michael Lind

"The most effective and most talked about of the new anti-American texts." –Adam Gopnik The New Yorker

US government will run up a budget deficit of nearly $500bn in 2004 - the largest in US history in absolute terms, 5% of GDP
BBC 27/1 2004
Highly recommended - good links

The non-partisan Congressional Budget Office says the US government will run up a budget deficit of nearly $500bn in 2004 - the largest in US history in absolute terms, and, at 5% of GDP, the largest since 1993 as a percentage of the economy.

The budget deficit is now one quarter of total Federal spending, and 80% of the total receipts from Federal income taxes.

It is equal to $1,600 per US citizen this year, and the accumulated deficit over ten years would be nearly $20,000 per person.

SINCE September 11th 2001, it has become obvious to all that the world is a risky place. Even before that atrocity, the world had seemed far from safe to many, especially those concerned with business and finance.
The end of the dotcom craze and the bursting of the stockmarket bubble had already created huge uncertainty. But those are only the most recent examples of unexpected events that can make a mockery of people's plans.
The Economist Survey 22/1 2004

The dogs of Davos don't bark at the real dangers
continuing overoptimism about Europe, a Democrat in the White House, inflation
Anatole Kaletsky, The Times January 22, 2004

This “view from Davos” is certainly a valuable guide, but not quite in the way intended. Rather than pointing to where the world is going in the next 12 months, the annual consensus established in Davos shows what will not happen.

Last year, the message was one of profound gloom — the war in Iraq would engulf the world in years of violence, the global economy would slide into depression and stock- markets would suffer another collapse. In the event, of course, the opposite occurred. Looking back, a similar pattern emerges over the years: the view from Davos is usually a contrary indicator, at least of the short-term trends. In 2002, Davos expected another terrorist attack even worse than that of September 11. In 2001, the consensus anticipated a Thirties-style depression, triggered by the collapse of technology shares. In 1999, there was the global peril of the millennium bug.

The view from Davos is not always gloomy, although the rich and powerful are often very insecure about the future, presumably because their happiness is so bound up with their power and their fortunes, which can quickly evaporate. In 2000, the consensus was manically enthusiastic, celebrating the limitless wealth created by the internet. In 1998, there was equally misguided jubilation about the launch of the euro and the new economic superpower it would create.

My aim is not to suggest that the participants at Davos are purblind or foolish, although it is true that success as a businessman or politician requires such fanatical concentration on a single company or political project that it is easy to miss the wood for the trees.

This, however, is not the main reason why the Davos consensus is so often misguided. There is another problem — the very fact that these elites are so powerful and so rich. Between them, they control most of the world’s economic output and almost all of its military might. If they all focus on one opportunity or one danger, then the chances are that this particular opportunity has already been largely exploited or this danger warded off.

It is when no consensus exists among the world’s rich and powerful — for example, on climate change or Israeli expansionism, or the Saudi support for Islamic terror — that the dangers fester and grow. When a subject is not even mentioned at Davos it has maximum capacity to surprise and therefore to change the world, for good or ill.

Last year, I was struck by three huge economic issues which Davos completely ignored.

As I wrote here last year, the rise of the euro and its devastating effect on Europe hardly even got a mention.

I was also amazed that “nobody even bothered to talk about the possibility that Wall Street would rebound” rather than collapsing.

Finally, it surprised me that Davos paid so little attention to the rise of the Asian consumer and the shift in global growth leadership from America to Asia, especially China. In the event, all three of these issues turned out to be crucial for understanding the world in 2003.

So today it seems worth asking: what are the Davos dogs not barking at this year?

The easiest one to spot is the continuing overoptimism about Europe. While last year’s indifference to exchange rates has given way to a recognition that the euro is now dangerously overvalued, nobody seems to be drawing the obvious conclusion. The European economy will remain completely stagnant this year because the sharpest rise of the euro has been very recent and will not have its full impact until the end of 2004 and beyond. Unless the euro falls very soon and very abruptly, Europe will have no chance of sharing in this year’s global economic recovery. Geopolitically this means that the EU, like Japan in the 1990s, will be condemned to political paralysis and irrelevance for much of the decade ahead. The Davos elite’s outdated view of Europe as potential superpower looks like a big mistake.

A second case of rearview thinking concerns the US economy and the presidential election. Nobody in Davos seems seriously to believe that America might oust President Bush and put a Democrat in the White House. The surprise result in the Iowa Democratic Party caucuses has increased the chances of Wesley Clark, who I believe is the most plausible Democrat contender. Yet the confidence in an easy Bush victory seems to extend even to people who personally hate him. This is hard to reconcile with the opinion polls, which show the race as a dead heat. Perhaps the faith in Bush simply reflects the near-universal optimism about the US economy this year.

But what Davos ignores is that America’s economic problem in the years ahead will probably be too much growth, not too little. A booming and over-stimulated US economy will present the next occupant of the White House with a daunting challenge: to clean up the mess made by Bush not only in Iraq but also in the US Government’s budget. The only way to do this will be to create a national consensus for unpopular measures to raise taxes. But will any politician be able to do this, especially after what is likely to be one of the dirtiest election campaigns in US history?

The third, and most important, subject that is not being discussed at Davos is inflation. Will 2004 be the year when the world moves from price stability into an era of accelerating inflation reminiscent of the 1960s? In America, the combination of very loose money, rapidly growing budget deficits, devaluation, protectionism and military spending has always been a recipe for inflation in the past. Rising oil, gold and commodity prices all point in this direction, as does the global boom in property prices and the new bubble in stockmarkets now being created by the US Federal Reserve.

Yet despite all these warning signs, the Davos consensus sees economic weakness, not inflation, as the main economic peril in the year ahead. This is exactly the situation in which inflation is likely to start. The people supposed to control inflation — central bankers, politicians and bond investors — are part of the global elite represented at Davos. So if Davos ignores inflation, the same will be true of the Federal Reserve and the other anti-inflationary vigilantes. Thus nothing will be done to pre-empt an inflationary spiral before it takes off.

The same is true of the other dangers overlooked at Davos. If the Davos elite is caught napping by European stagnation or by US political turmoil or by the rising euro, the central banks and governments and other guardians of global stability will also be taken unawares and will fail to ward off these dangers. That is why the Davos consensus is genuinely important — and why it so often turns out to be wrong.

Stephen Roach, chief economist at Morgan Stanley, is more pessimistic.
By keeping interest rates unnaturally low and greatly increasing fiscal spending, U.S. policymakers have fueled the creation of a series of bubbles in asset markets
International Herald Tribune 22/1 2004

Roach has been consistently bearish as the global economy weathered the dot-com stock collapse three years ago, followed by a recession in the United States and elsewhere and a less-than-scintillating recovery over the last year.

By keeping interest rates unnaturally low and greatly increasing fiscal spending, he said, U.S. policymakers have fueled the creation of a series of bubbles in asset markets. A new one might be forming now in technology stocks, he added.

By opening the fiscal and monetary taps, Washington policymakers have also inflated the current account deficit, the broadest measure of trade in goods and services. The current account shortfall has been cited by many economists as a cause of the falling dollar; the United States requires net inflows of close to $2 billion a day just to finance the current account, because it imports far more goods and services than it exports.

Greed, fraud, credulity and the bull market
By Philip Coggan Financial Times; Oct 23, 2003
BULL! A HISTORY OF THE BOOM, 1982-1999
What drove the breakneck market and what every investor needs to know about financial cycles
By Maggie Mahar
Harper Business, £16.85

The bull market ofthe 1980s and 1990s was one of the most powerful in history. It incorpo rated all the classic features of abubble: easy credit, mass participation, fraud and a naive belief in a "new era" that would justify the euphoria.

Much analysis has focused on the final excess, the dotcom bubble and its idiocies. But in the history of the bull market, this was just the cherry on the cake. There was a lot more to the rise in share prices than profitless e-tailers.

Maggie Mahar, one-time English professor at Yale turned financial journalist, has attempted a more comprehensive look at the period. It is an entertaining romp, complete with pen portraits of the heroes - bears such as Gail Dudack and David Tice - and villains. The latter are clearly more numerous, ranging from the anchors of the financial TV network CNBC to the senators who in 1993 blocked an accounting standard that aimed to spell out the true cost of executive options. On this evidence at least, we must hope that Senator Joseph Lieberman does not win the Democratic nomination for president. For anyone who was involved in the bull market, the book does not provide any great new revelations. It is the incidental detail that keeps the story motoring, such as the abusive phone calls received by internet analyst Henry Blodget when whenever he dared question the credentials of one of his client's favoured stocks. Blodget, made a scapegoat for the sins of the analysts' community, emerges as a fairly sympathetic figure, a man clearly out of his depth.

All the main issues are covered, from dodgy accounting, the explosion in mutual funds, the belief in the new economy and the cheerleading role played by investment bank analysts. But if there is a flaw in the book, it is that it focuses almost entirely on the US and on the personalities in that market. While the US was undoubtedly the home of the great bull market, a proper history of the phenomenon would have to include Europe, where in the late 1990s, the equity culture appeared to sweep the continent.

Risk management for the masses
Mar 20th 2003 From The Economist print edition
Robert Shiller is professor of economics at the International Centre for Finance, Yale University, and the author of “Irrational Exuberance” (Princeton University Press, 2000).

His new book, “The New Financial Order: Risk in the 21st Century” (to be published by Princeton University Press on April 2nd; $29.95 and £19.95), on which this article is based, lays out a vision for the future of finance, insurance and social welfare.

Warren Buffett, the influential investor, warned derivatives were “financial weapons of mass destruction” and that they were “potentially lethal” to the economic system.
In his letter to shareholders of Berkshire Hathaway, Mr Buffett said he and Charlie Munger, the investment and insurance company’s vice chairman, viewed derivatives and derivative trading as “time bombs”.
Financial Times 4/3 2003

BBC 12 September, 2002
US economic guru Alan Greenspan has warned lawmakers that their inability to balance the federal budget threatens the country's economic stability. Mr Greenspan, chairman of the US Federal Reserve, urged Congress and the administration of President George W Bush to restrain the urge to cut taxes while raising levels of public spending. ...more

Uttagen ur aktiefonder nådde en ny rekordnivå under juli månad i USA, då investerare plockade ut omkring 50 miljarder dollar netto.

Senast i september i fjol, efter terrorattackerna i USA, rapporterades rekordstora uttag ur aktiefonderna. De uppgick nettouttagen till 30 miljarder dollar. Det kan också jämföras med juni månad i år då uttagen var cirka 18 miljarder dollar netto.

The dilemma facing policymakers was neatly encapsulated by the European Central Bank (ECB), whose main governing body met on July 4th to decide what to do about interest rates.

The ECB continues to be worried about inflation: it has often failed to hit its inflation target (no bad thing say those economists who believe the target is too tight), and Wim Duisenberg, the bank’s president, admitted that “the risks to price stability remain tilted to the upside.” Yet the ECB left rates unchanged because, said Mr Duisenberg “the uncertainties were too large to come to a decisive decision.”

Since, in theory, at least—and in public—the ECB insists that its only target is inflation (and not, unlike America’s Federal Reserve, economic growth as well), the principal uncertainty for Mr Duisenberg and his colleagues is the possible inflationary impact of recent currency swings.

By themselves, falling stockmarkets do not usually cause recessions. It is now generally accepted that the blame for the Great Depression in 1930s America does not lie with the Wall Street crash of 1929 but the unreasonably tight monetary policy which followed it.

Nearly a year ago, Graham Turner warned that the US economy was driven by a huge bubble of artificially inflated profits. Writing for BBC News Online, he explains why the Enron, WorldCom and Xerox scandals are just the tip of the iceberg.

Den starka dollarn är bara en bubbla - den enda som inte spruckit än.
USA:s ekonomi växer troligen långsammare än omvärldens de närmaste åren. Risken för ett nytt bakslag, en så kallad "double dip", är över 40 procent.
Det budskapet levererade Steve Roach, chefsekonom på den amerikanska investmentbanken Morgan Stanley, när han gästade Sverige i förra veckan. "

Vi har levt över våra tillgångar och kommit undan med det", säger han. "Jag är här för att tacka er å hela det amerikanska folkets vägnar, för att ni pumpade in pengar i USA och hjälpte oss att blåsa upp en spekulationsbubbla."
Mer av Roach

Terrible twins?
Economic parallels between America and Japan
America's economy looks awfully like Japan's after its bubble burst
Jun 13th 2002 From The Economist print edition

The recovery myths
The world economy is coping with the aftermath of two huge asset-price bubbles: the Japanese of the 1980s; and the US-led worldwide bubble of the second half of the 1990s.
Adjustment to the end of the first is not yet over. Adjustment to the end of the second has, contrary to conventional wisdom, hardly begun.
By Martin Wolf, Financial Times June 11 2002

- Det exklusiva svenska fondbolaget Brummer & Partners har värvat en riktig pessimist som USA-chef, eller "bear" (björn) som det heter på Wall Street.
DI 2002-06-10

"Jag vet att jag har det ryktet, men jag vill hellre kalla mig realist", säger Douglas "Doug" Cliggott.

Sin pessimistiska syn på aktiemarknaden har Cliggott som sagt tagit med sig från J P Morgan.

"Kurserna är fortfarande höga, P/e-talen för de breda aktieindexen i USA är extremt höga", säger han.

"Förväntningarna om vinsttillväxt är uppblåsta och under de nästkommande två till fem månaderna är det hög sannolikhet för att förväntningarna kommer att skruvas ned. Det sätter press på börsen."

Capitalism and its troubles
SURVEY: INTERNATIONAL FINANCE
May 16th 2002 From The Economist print edition

CAPITALISM has had a rotten time lately. Not as rotten as in 1917, when those revolutionary shots in St Petersburg launched a form of anti-capitalism that ended (except in Cuba and North Korea) only just over a decade ago.

Nor, with luck, as rotten as in 1929, when a stockmarket crash on Wall Street set off the global Great Depression.

But rotten, nonetheless. Nobody knows for sure yet, but 2001 might come to be seen as the year when two decades of mostly unbroken progress for capitalism gave way to something more ambiguous and uncertain.

Analysts sense day of reckoning for dollar:
A fall in capital inflows to the US has alarm bells ringing
Christopher Swann Financial Times; Apr 27, 2002

The key problem for the US currency is that investors do not need to sell US assets for the dollar to fall. All that is necessary is that they fail to buy. The bloated US current account deficit, running at about 4 per cent of gross domestic product, means that the US needs to attract a net inflow of around Dollars 1.5bn (Pounds 1.04bn) every day in order to stop the dollar falling. The latest figures from the US Treasury provide strong indications that capital inflows are finally drying up. In January the net inflow into US equities and fixed income was just Dollars 9.5bn. This is weak even compared with the Dollars 17.8bn the US attracted in September.

There are two theories about Wall Street's role in the bubble years of the new economy. Either investment analysts were swept up, like everybody else, in the prospect of extraordinary gains in efficiency that the Internet would bring, so justifying ever higher share prices.

New York's attorney-general, Eliot Spitzer, is a promoter of the second theory. On April 8th he delivered an affidavit to the state's supreme court that paints Merrill Lynch's share-buying recommendations for Internet companies during 2000 as little more than a pretext to stuff gullible buyers with the shares of rotten businesses. (Big customers, meanwhile, were whispered the truth.)

2 067 miljarder kronor.
Så mycket har Stockholms börsen minskat i värde sedan IT-bubblan sprack den 6 mars för knappt två år sedan. Summan är drygt 100 miljarder kronor högre än Sveriges BNP för 2001.
Den motsvarar nuvärdet på sex Ericsson eller 20 Telia. Märkligt nog är det just Ericsson som stått för två tredjedelar av detta ras. Sedan den 6 mars 2000 har telejätten dalat i värde från 1 790 miljarder kronor till 360 miljarder kronor i dag.

Chairman Alan Greenspan January 11, 2002
Although the quantitative magnitude and precise timing of the wealth effect remain uncertain, the steep decline in stock prices since March 2000 has, no doubt, curbed the growth of household spending. Although stock prices recently have retraced a portion of their earlier losses, the restraining effects from the net decline in equity values presumably have not, as yet, fully played out.
Future wealth effects will depend importantly on whether corporate earnings improve to the extent currently embedded in share prices.

As The Implosion Begins . . .?
Prospects and Policies for the U.S. Economy: A Strategic View1 Wynne Godley and Alex Izurieta Jerome Levy Economics Institute, July 2001 (rev. August 2, 2001)

The great bear - Stock markets have been in decline since early 2000.
Philip Coggan, Financial Times, September 21 2001
This is now one of the worst bear markets in history. In early trading on Friday, the Dow Jones Industrial Average had fallen 31 per cent from its January 2000 peak, one of the worst 10 declines the US market has experienced since the first world war.

Två tredjedelar av hela börsvärdet på
Stockholmsbörsen försvann på två och ett halvt år
DI-ledare 30/12 2002

År 2002 uppenbarades att vi just har varit med om en av historiens största finansbubblor. Och Sverige drabbades hårdast, två tredjedelar av hela börsvärdet på Stockholmsbörsen försvann på två och ett halvt år.

Det behövs en uppgång på 200 procent för att komma tillbaka till nivån från mars 2000 något som kan ta decennier. Att Frankfurt ligger nästan lika illa till är en klen tröst.

Bara två av den moderna historiens finanskriser har varit värre, New York 1929 och Tokyo 1989. I det första fallet tog det 25 år för börsindex att komma tillbaka och i det andra fallet pågår raset fortfarande efter 13 år. Tokyoindex ligger i dag 73 procent under 1989. Börsbubblor är inget att ta lätt på.

Fyra av det sena 1900-talets största hjältar i svenskt näringsliv - Percy Barnevik, Lars Ramqvist, Jan Stenbeck och Jan Carendi - har fått se sina livsverk radikalt omvärderade.

Wallenberg, den finansfamilj som dominerat scenen i Sverige i 70 år, är nu på sin höjd den främsta bland jämlikar. Betyget över Peter Wallenbergs insats får skrivas ned.

Investors förlorade pengar överskuggas av de 100 miljarder kronor som statens AP-fonder lyckades bränna på kort tid genom att kasta in den statliga sparreserven i pyspunkan.

Det sena 1990-talets it-entreprenörer liknar mest - så här efteråt - bondfångare. En del var naiva och andra smarta. Frågan är i vilken av kategorierna namn som Mandators Lars O Petterson, Icon Medialabs Johan Staël von Holstein, Sprays Jonas Svensson, Mirror Images Alexander Wik, Ledstiernans Jan Carlzon, Connectas Christer Jacobsson, Framfabs Jonas Birgersson och Emerging Technologies Kjell Spångberg ska sorteras. Det som förenar är att it-bubblan löste deras försörjningsproblem.

Socialdemokratin, som tog över hegemonin i svensk politik efter Kreugerkraschen, har nu hjälpt till att blåsa upp två nya bubblor, först en i fastigheter och finans år 1989 och därefter den senaste i it och telekom år 2000.

In the developed world it appears that financial crises no longer derail economies. Even in Japan, which has experienced four years of price deflation and where the banking system has been in crisis for over a decade, the output loss has been minor. And now the collapse of a phenomenal stock market bubble in the US has defied historical precedent by spawning only a modest recession and no banking crisis at all.

There are many possible explanations for the failure of this financial dog to bark. Much more of the risk-taking was happening outside the banking system than in the 1980s. Banks appear better capitalised as a result of the Basle capital regime. Most important, policymakers in the US have been acutely aware of the risks of deflation and swift in their monetary and fiscal response to the bursting of the bubble. Thursday's cut in UK interest rates likewise suggests that the risks in UK policy are not being taken on the side of deflation.

So now the politicians and central bankers are intensively managing the business cycle, can we stop worrying about the impact of financial instability on economic growth? Not in the emerging markets, where financial crises in Asia, Latin America and Russia have inflicted devastating losses of output and employment. And there is one important snag in the developed world, especially in the English-speaking economies.

The existence of a monetary and fiscal safety net creates moral hazard. That is, companies, financial institutions and private individuals engage in balance sheet adventuring - an evocative phrase used by the economist Hyman Minsky, whose thinking on financial instability and the business cycle is particularly relevant in the post-bubble world.

Financial crises serve a purpose. In cycles that have been characterised by debt-financed and unremunerative over-investment, the discipline of bankruptcy ensures that debt is written down to realistic values and capacity is brought into line with demand to pave the way for an upturn. But the adjustment is painful.

If financial crises are eliminated, the business cycle is extended. Asset prices continue to rise, generating wealth effects that encourage people to run down savings and borrow on the strength of the rising value of their collateral. As the Montreal-based Bank Credit Analyst points out, the failure to correct balance sheet excesses in the downturn means that each new US expansion begins from progressively lower levels of liquidity.

US household debt has gone from less than 40 per cent of gross domestic product in 1960 to close to 80 per cent in 2002. The comparable rise for the non-financial corporate sector has been from 26 per cent to 46 per cent. The greater the balance sheet excesses, the more painful the corrective process will ultimately be. So with each new cycle, say the BCA editors, the stakes become higher, pushing the economy closer to a deflationary end-point. An end is inescapable since debt cannot rise faster than incomes for ever.

The denouement of the debt drama is sparked by deteriorating credit quality, which exposes the vulnerability of a banking system that hitherto appeared well capitalised. The risk is of a 1930s-style deflation and liquidity trap, as banks stop lending and the private sector tries to restore its balance sheet. It was on such grounds that Peter Warburton, the British economist, warned in a recent book - Debt and Delusion, Penguin Books - of an explosion that would shock the western financial system rigid.

Yet there is a problem with timing. Governments have become used to managing the cycle and deferring the debt problem. For their part, private individuals in the US and UK continue to be happy to borrow for home ownership without fully grasping the extent of the repayment burden in a low inflation era.

Many feel a high level of debt is affordable on the basis of a one-off fall in interest rates to very low levels. Yet there is no such thing as a one-off fall in interest rates. Throughout history interest rates have gone up as well as down. And the debt will not go away.

So while Mr Warburton, like Noah, builds his ark, a question remains. If debt continues to accumulate over the next economic cycle, will central bankers and governments be able to confront an apocalyptic financial crisis by simply muddling through?

Greenspan's fight
Low interest rates is not enough
By Martin Wolf
Financial Times, November 12 2002

Last week, the Federal Reserve decided to blow, once again, into the flapping sails of the US economy. The puncturing of the bubble economy continues to create fierce headwinds. Further interest rate cuts - perhaps more unorthodox measures - remain likely.

The last time the Fed Funds rate was as low as this was July 1961. The decisions to cut the rate from 6.5 per cent in late 2000 to the lowest rate for more than 40 years underlines the devastating impact of asset price bubbles on economic stability.

The aggressive easing of monetary policy is not the only stimulant on offer to the economy. The rate of just over 4 per cent on 10-year Treasuries is the lowest since 1963. Moreover, according to the Congressional Budget Office, the fiscal stimulus this year is worth 2.4 per cent of gross domestic product, the biggest since records began in the early 1960s.

If not for these huge fiscal and monetary boosts, a deep recession would surely have occurred. They have also returned the economy to reasonable growth this year, at 3 per cent over the 12 months to the third quarter. This is much stronger growth than in other leading industrial countries, except Canada.

The remarkable productivity record of the US economy is now a two-edged sword. Over the year to the third quarter, output per hour in the non-farm business sector grew 5.4 per cent. As Alan Greenspan, chairman of the Fed, has noted: "Over the past seven years, output per hour has been growing at at an annual rate of more than 2? per cent, on average, compared with a rate of roughly 1? per cent during the preceding two decades."* This suggests trend growth in the economy is in the neighbourhood of 3? per cent.

If this productivity performance is sustained, economic growth of less than 3? per cent means rising excess capacity and downward pressure on profitability, wages and prices. Worse, given that there is substantial excess capacity today, still faster growth is needed first, to bring the economy back to more normal levels.

The current account deficit has reached 5 per cent of GDP. Absent a miraculous turnaround in demand in the big economies outside the US, the only way this could shrink, in the short run, would be via a huge US recession. Far more likely is a continuing rise in the deficit, with 7 or 8 per cent of GDP readily imaginable in the not too distant future. This is how the US is stimulating demand in parasitic economies elsewhere.

For a long time, consumer spending grew faster than disposable income, as the household saving rate fell and borrowing increased. In the second quarter of 1992, the household saving rate was 8.9 per cent of disposable income. It had fallen to 0.8 per cent by the end of last year. It is on its way back up this year, as stock market wealth has fallen, unemployment risen and uncertainties increased. The financial balance of the household sector went from close to plus 5 per cent of GDP in 1992 to minus 2 per cent in the last quarter of 1999. It has still to recover.

Bubble, bubble default trouble
By John Plender
Financial Times, October 3 2002 20:15

The most damaging bubbles are those in which stock market exuberance is accompanied by lending euphoria. This was true of the 1920s and of the 1980s Japanese bubble.

What makes the combination so destructive is the pro-cyclical nature of credit expansion, which causes asset prices, incomes and profits to rise in a boom that feeds on itself. It then becomes viciously self-feeding in the downturn, courtesy of the regulators, since banks' capital adequacy requirements go up instead of down when credit quality deteriorates.

John Plender Financial Times; Jul 15, 2002
So you think this bear market is rough?
It is positively limp-wristed when compared with the depths of the mid-1970s.

The surprising fact is not that /US stock/ markets have fallen, but that they remain so overvalued.
Martin Wolf: The bubble will keep deflating
Financial Times 2002-06-19

This shows the Standard & Poor's composite index (deflated by consumer prices) since the 1880s. On this logarithmic scale, the steeper the slope the faster the rate of growth. There have been several bull markets: the fastest rise was in the 1920s, but the longest and cumulatively biggest was in the 1980s and 1990s. A line across each successive peak, up to and including 1968, rises at a compound rate of just under 1? per cent a year. It can also take decades to regain a previous peak.

Above all, in the mid-1990s the market shot far above the peak-to-peak trend. At its highest, it was almost twice as high. Even today, the peak-to-peak trend suggests a value on the S&P 500 of below 900.

The implication is that the market's level remains historically abnormal. Can this be justified? To answer this question, one has to consider fundamental value.

There exist three analytically serious methods for valuing markets, all of which are, properly applied and measured, equivalent:
Tobin's Q, or the valuation ratio, which relates the market's value to the replacement cost of net corporate assets;
the cyclically adjusted ratio of stock market prices to earnings; and
the dividend discount model, which compares the real return to shareholders (measured as the current payout plus its likely real rate of growth) to the equilibrium risk-free real interest rate plus the equity risk premium.

The often-used relationship between nominal interest rates and equity yields is, in comparison with these methods, a joke, as I have argued in a previous column ("A poor defence for share prices", October 24 2001). It conflates changes in real interest rates, which are relevant, with changes in inflation, which may not be.

Nobody is behaving as if the expected real return on - and cost of - capital is far lower than ever before. If this were true, surveys would suggest lower expected returns from markets than before: the opposite is the case. In addition, companies would sustain investment as returns fell: the recent investment "bust" suggests just the opposite.

Either this has been a bubble the scale of which is making deflation slow and painful, or the long-run real return on - and cost of - capital in the US is lower than before. If it is the former, markets remain very expensive. If it is the latter, everyone expects historically low returns.

Terrible twins?
Economic parallels between America and Japan
America's economy looks awfully like Japan's after its bubble burst
Jun 13th 2002 From The Economist print edition

The similarities between America's financial bubble in the 1990s and Japan's in the 1980s have been well rehearsed. In both cases, share prices and capital spending soared; households and companies went on a borrowing binge. Japan, like America a decade later, enjoyed a spurt in productivity growth, suggesting to some that it had a superior economic model.

Yet the conventional wisdom now is that the economies have taken divergent paths since their bubbles burst. Thanks to resilient consumer spending, America is widely tipped to enjoy robust growth this year and next. Meanwhile, Japan is expected to languish in perpetual recession.

The recovery myths
The world economy is coping with the aftermath of two huge asset-price bubbles: the Japanese of the 1980s; and the US-led worldwide bubble of the second half of the 1990s.
Adjustment to the end of the first is not yet over. Adjustment to the end of the second has, contrary to conventional wisdom, hardly begun.
By Martin Wolf, Financial Times June 11 2002

According to that wisdom, the world's largest economy is leading the rest of the world into a durable, if restrained, recovery after a surprisingly brief and shallow recession. Yet this may turn out to be no more than a fairy story for frightened children. Recent falls in the stock market and the US dollar suggest the children are unconvinced. At its closing price of 1,031 on Monday, the Standard & Poor's 500 was only 7 per cent above its post-September 11 low and 33 per cent below the peak reached in March 2000. Similarly, on a trade-weighted effective basis, the dollar had lost 6 per cent of its value since its peak on January 25 2002.

To understand the risks ahead, it is necessary to analyse where the world economy now is in its post-bubble adjustment. Between 1996 and 2000, the US economy generated 40 per cent of global incremental real demand (at market exchange rates). While US real domestic demand rose 26 per cent over those years (a compound rate of 4.7 per cent a year), output grew by 22 per cent (a compound rate of 4.1 per cent). The difference was the rise in the US current account deficit, to 4.5 per cent of gross domestic product in 2000.

This expansion was unsustainable and, last year, came to an end. Symptoms of excess were, as Brian Reading of London-based Lombard Street Research argues (Monthly International Review 115, April 2002), too much investment, too little saving and too big a current account deficit. Behind these three phenomena was belief in the miracle of the "new economy", as demonstrated by asoaring stock market, huge capital inflows and a surging dollar.

Over the past year and a half, the US economy and, given the global role of the US, the world economy, has begun its post- bubble adjustment. Yet what is remarkable about this period is how modest that adjustment has been.

On June 7, the price/earnings ratio for the overall stock market was still close to double its long-run average. Measures of underlying value suggest that the market is still more generously valued than at any period in the past hundred years, apart from the peak of the recent bubble and in 1929. On a trade-weighted basis, the US dollar is 35 per cent higher than in May 1995. Estimates of the real exchange rate suggest the dollar remains almost as high as in 1985.

Last year, business fixed investment in the US was only 3.2 per cent below its level in 2000. This year, it is forecast by Goldman Sachs to be down only another 7 per cent. The resilience of consumption has been astounding. Supported by rising house prices and low interest rates, real consumer expenditure rose 3.1 per cent last year and is forecast by Goldman Sachs to grow another 3.2 per cent this year. The personal sector's financial deficit is still close to 4 per cent of GDP, against a historic postwar surplus averaging just under 2 per cent of GDP. The US current account has also barely adjusted. Last year, it was 4.1 per cent of GDP.

Alan Greenspan's Federal Reserve has, in effect, restricted the post-bubble adjustment almost entirely to the corporate sector. It has propped up asset prices and supported household borrowing and spending. The big question today is whether it has durably averted or temporarily postponed that adjustment.

The answer is that, however unpredictable its timing and speed, it is highly implausible that adjustment can be averted for ever. That would imply a continuation of extraordinarily low household saving. It would also mean an explosive rise in the current account deficit. If the US were to continue to grow faster than most of the rest of the world, the deficit could reach 5 per cent of GDP next year. Under plausible assumptions, net claims by foreigners on the US would also rise from 20 per cent of GDP to 50 per cent of GDP, or more, five years from now.

This looks inconceivable. A more natural outcome would be a weakening dollar, weak domestic demand and an improving external balance. That change could, in turn, be triggered by a diminished willingness of foreigners to purchase US assets. The vulnerability is evident. As a gigantic net borrower from the rest of the world, the US depends on foreigners to sustain the value of its corporate assets and its currency. As London-based Smithers & Co says, domestic corporate cash flow is now weak and US households have been persistent net sellers of the stock market. This is, in part, to finance the purchase of other assets, especially houses. If foreigners fail to fill the gap, stock prices, as well as the dollar, must fall.

Further asset price adjustment is thus likely. If it coincided with weakening household demand and if the adjustments, particularly in the dollar, were slow and limited, it would also be helpful for the US. If, for example, the trend rate of economic growth were to be 3? per cent a year and domestic demand were to grow at, say, 2? per cent, there could be a steady contraction in the current account deficit at half a percentage point of GDP a year.

Instead of adding demand to the rest of the world, the US would then be subtracting from it. The question is where this would be offset. The eurozone has, alas, generated growth in domestic demand of more than three per cent in only two years - 1997 and 1998 - since 1993. Growth in demand averaged only a little over 2 per cent between 1993 and 2001. Over these years, Japanese growth in demand averaged 1.2 per cent.

With Japan's room for manoeuvre limited, much would depend on the ability of the eurozone to generate faster growth in demand. Without aggressive action by the European Central Bank, that seems depressingly unlikely. It is at least as plausible that weaker export growth and a strengthening currency would undermine investment and consumption in the eurozone.

First, there may be no significant further adjustment in the behaviour of the US consumer or in US asset prices. In that case, the US would generate strong additional demand for the rest of the world and even more un- balanced household and national balance sheets. This would be a Gadarene rush for the cliff. But that cliff may only be reached years from now.

Second, there may be smooth adjustment in US household behaviour and the dollar. The latter would help offset weak demand at home by forcing adjustment on the rest of the world. This scenario would be most beneficial for the US but decidedly problematic for the rest of the world.

Third, there may be brutal adjustment in the near future, with a vicious downward spiral in US and world equity prices, higher long-term interest rates, an exodus of capital and dollar weakness. This would force a strong reduction in investment and consumption in the US and an unpleasant adjustment on the rest of the world. This would be the world of the double dip.

None of these alternatives can be ruled out. But the second is preferable, for both the US and the world. If the dollar were now set on a gradual decline, that would be altogether helpful. Unfortunately, this scenario is too rosy to be plausible. The true choice may be between going over a high cliff some years from now or going over a rather lower cliff quite soon.

The consensus view is not necessarily wrong. There may be a US-led recovery in the next year or two. But it is too short-sighted. The post-bubble adjustment can only have been postponed. It would be better if adjustment continued at a moderate pace right now.

Även om den amerikanska ekonomin permanent skulle bibehålla den starka produktivitetstillväxten från slutet av 1990- talet så skulle inte det rättfärdiga de "urvuxna" p/e-talen för amerikanska aktier. Det sa chefen för Federal Reserve i St Louis, William Poole.

Under det sena 1990-talet upplevde den amerikanska ekonomin en kraftig produktivitetstillväxt, enligt flertalet ekonomer drivet av införandet av ny digital teknik och av ett fördjupande av den generella kapitalbasen i ekonomin. William Poole varnade dock för att historien visar att tekniska innovationer "inte har bestående effekt på företagens intjäningsförmåga, som slutligen ofrånkomligt måste konvergera med den generella tillväxttakten i ekonomin."

Det genomsnittliga p/e-talet i S&P-500-indexet är 26,0 baserat på prognoserna på resultaten 2002, enligt Standard & Poor's. Enligt William Poole skulle även ett genomsnittligt p/e-tal på 20 "vara en generös nivå givet att det historiskt genomsnittliga p/e-tal har legat på 15."

Beträffande Nasdaq-100 indexet sade William Poole att p/e-tal på 100 är "svårt att förklara utan någon form av ny-era-tänkande." Ett fenomen som Fed-ledamoten beskrev som "ett försök att rationalisera högt värderade aktiemarknader."

IT IS somewhere to live; but a home is also, for many folk, a valuable asset. No wonder people love talking about house prices over the dinner table. In this economic recovery, however, homes have done much more than shelter people from wind and rain. They have helped to shelter the whole world economy from deep recession.

Many economists were worried last year that the wealth loss from falling share prices would force consumers to cut their spending. Even after the recent recovery, American stocks are still worth 25% less than two years ago. Yet, as falling share prices made some households feel poorer, rising house prices have made many more feel richer. Over the past year average house prices in America have risen by 9%, their fastest-ever in real terms.

Although American households as a whole have more of their wealth in equities than in housing, a relatively few rich people hold the bulk of the shares. For most people, housing is by far their largest form of wealth. Two-thirds of Americans own their homes, and gains in the value of those assets have encouraged them to keep spending.

John H. Makin, American Enterprise Institute
By the end of 2001, American debt service burdens relative to disposable income were at forty-year highs

Between September and December of last year, real consumer spending rose at an 8.1 percent annual rate, above the smoothed quarter-over-quarter rate of 5.3 percent reported in the GDP statistics, while real disposable income fell at a 7.2 percent annual rate. The rush to buy homes and automobiles on favorable terms was financed largely on credit rather than through a surge in incomes.

Indeed, by the end of 2001, American debt service burdens relative to disposable income were at forty-year highs, though still sustainable provided that the economy bounces back.

At the end of last year, American households and investors believed in a quick recovery of the U.S. economy and increased spending at a rate that will be sustainable only if that recovery fully comes to pass.

Sophisticated investors sneer at the division of their profession into "value" and "growth" schools, seeing it as the kind of simplistic generalisation beloved of lazy journalists.

But last year, one of the simplest valuation measures available - dividend yield - was the key to successful UK investment performance. Value stocks, as represented by the highest yielders in the FTSE 350, outperformed the low-yielding growth stocks by 23 percentage points. According to the statisticians at CAPS, that followed a 30-point outperformance by value in 2000.

After all the fuss about "sophisticated" market measures such as EV/Ebitda (enterprise value/earnings before interest, tax, depreciation and amortisation), it may seem odd that something as rough and ready as the dividend yield could have been so useful.

But that may simply reflect the extremes to which the market's obsession with growth had driven valuations in the late 1990s. At the peak, according to Credit Suisse First Boston, the price-earnings ratios of the most highly rated stocks were 6.5 times those of the lowest-rated. That compares with a ratio of less than 3 for much of the 1990s.

All that we have seen, therefore, is a correction of the insane valuations witnessed during the technology bubble.

But the odd thing is that growth investors do not seem in the least bit abashed by their battering over the past two years. As soon as the market began to bounce in late September, they piled into the TMT (technology, media and telecommunications) stocks all over again. Because earnings have fallen as fast as share prices over the past two years, valuations in the technology sector are still up in the stratosphere. According to Thomson Financial, the historic price-earnings ratio on the sector is about 100.

So why are investors, having been once bitten by the technology bug, not twice shy? One answer, according to Bart Dowling, director of global asset allocation at Merrill Lynch, is that investors are not entirely rational.

His statistical analysis shows that investors are much more influenced by recent returns than they are by long-run performance. In the late 1990s, the returns from owning technology stocks were phenomenal. Any fund manager who was underweight in the sector underperformed the indices and was in danger of losing clients.

The passion for growth stocks may be reinforced by the feeling that overall returns from equities are likely to be low in future years. An annual return of 7 per cent or so simply looks unappetising to most investors. Growth stocks offer stronger meat.

Value stocks, in contrast, are seen as working just once in the cycle (as an economy emerges from recession) but are not serious long-term investments.

Academic evidence, however, suggests that, over the long term, value strategies such as buying companies with low price-to-book ratios tend to outperform the market. Remarkably few fund managers have attempted to exploit such apparent anomalies.

This may simply be a function of the lack of respect with which the fund management community holds academics. They did not believe the academics when they said the markets were efficient and that most active fund management is a waste of time; they do not believe them now when they are told to concentrate on value stocks.

Where are we now in the cycle? It is tempting to think, after two fantastic years for value, that it is time to switch back into growth. But bubble valuations have not entirely disappeared, even if one dismisses the price/earnings ratio of the technology sector as a statistical fluke (on the grounds that the sector has virtually no earnings). Other measures such as price-to-sales still leave the market looking more expensive than it was in the early 1990s.

The doom-mongers (including The Economist) who predicted a deeper downturn have, many argue, been proved wrong. Perhaps. But what the optimists have lost sight of is that America's recession was caused neither by the events of September 11th nor, like every previous post-war recession, by tightening by the Federal Reserve in response to rising inflation.

The root cause of this recession was the bursting of one of the biggest financial bubbles in history. It is wishful thinking to believe that such a binge can be followed by one of the mildest recessions in history—and a resumption of rapid growth.

Remember fiscal policy?
How to use fiscal policy in a recession
The Economist Jan 17th 2002

When it works, monetary policy is fine. But sometimes it does not work. Problems arise, especially, under the circumstances that most interested Keynes when he first developed his thinking on deficit spending as a cure for recession—that is, at times of low, or even negative, inflation.

America sails serenely through a perfect storm
Gerard Baker, Financial Times, Jan 24 2002

The US has gone through its own elemental sequence of shocks in the past three years that ought to have left it in a slump at least as bad as anything it has experienced in the postwar period.

Beginning at the end of 1998, it was hit with the financial damage from the Asian and Russian financial crises, followed by rising interest rates, a steep increase in energy prices, the bursting of the dotcom bubble, the sharp fall in the equity market, the steepest drop in capital spending in decades, the most destructive terrorist attack in history and a hot war all over the world which, for the first time in more than a century, poses a clear risk to US security at home.

For good measure, on the political front, it had the impeachment of a president and an election that failed to produce a winner until the courts ruled five weeks after polling day.

It has been, to use the current cliche, the perfect storm of economic and political shocks. And yet, here we are, almost before we have come to grips with recession, staring at the growing probability that a recovery is under way.

Output began falling last March. If it stops falling in the current quarter - and then climbs again - the entire decline in GDP will be less than 1 per cent. In other words, if the current trends take hold, it is possible that, having enjoyed the longest expansion in its history, the US is now climbing out of the shortest and shallowest recession on record.

The US has not eliminated imbalances that built up in the late 1990s. Levels of corporate and personal sector debt remain high and could act as a drag on growth. The extent to which the capital-spending binge of the latter stages of the expansion created an investment overhang is still unclear, with capacity utilisation rates remaining low. Corporate profits are weak and could act as a further constraint on an investment recovery. Stock market valuations still look presumptuous and vertiginous. Above all, perhaps, the durability of the productivity miracle that seemed to be behind the rapid growth of the late 1990s is uncertain, although output per hour has held up remarkably well during the downturn so far.

But consumption has remained robust in the past year and consumers' balance sheets have been improved by falling interest rates, rising house prices and last year's tax rebate.

If recovery does take hold, there will be plenty of candidates for the credit: the Federal Reserve, certainly, for cutting interest rates more aggressively than at any time in living memory; Congress, probably, for shrewdly ignoring the initial request of the Bush administration not to pass an immediate fiscal stimulus and for providing tax rebates at just the point when they were most needed. The Bush administration's original tax cut proposals - until last April - were all long-term and it opposed the idea of rebates last summer.

Luck has played a part too, of course. Falling oil prices have raised consumers' spending power. Inflation has all but disappeared. There have been no more terrorist attacks so far.

If we see a recovery as 2002 unfolds, it is possible it will not be a particularly robust one. Unemployment may still rise, especially if the productivity gains are maintained. And in any case, since consumption did not fall all that much last year, it may not stage its traditional rally into the recovery. Corporate profits will probably stay weak, and an overvalued equity market may still hover over the economy's prospects. But in the face of a whirlwind of adversity over the past two years, it would be remarkable if there is any recovery at all.

To listen to much of the commentary on the US at present, you would think there was something rotten in the very foundations of America's economic structure. The Enron collapse, and the evident greed, corruption and negligence that went with it, certainly point up the need for reforms to the system of checks and balances in American capitalism.

But in condemning and setting right the weaknesses, it would be wise, too, to pause for a while, look at what has happened to the US economy in the past few years, and, quietly, marvel.

The 1990s’ Boom Went Bust. What’s Next?
Milton Friedman
Wall Street Journal 2002-01-22

To an economist, the 1990s bear an uncanny resemblance to two earlier decades: the 1920s in the United States and the 1980s in Japan. In all three decades, technological change produced extraordinary economic growth, leading to talk of a “new era” and triggering a bull market in stocks that terminated in a market collapse-widely regarded as the bursting of a speculative bubble.

The 1920s were followed by the Great Depression in the U.S., the 1980s by stagnation and recurrent recession in Japan.

What will the 1990s bring? And what role has monetary policy played in these episodes?

Economic growth during the first 10 years of each episode was remarkably similar. Real gross domestic product grew an average of 3.3% per year in the U.S. from 1919 to 1929; 3.7% in Japan from 1980 to 1990; and 3.2% in the U.S. from 1990 to 2000 -- clearly, remarkable similarity.

In the two earlier episodes, what followed was very different-a major catastrophe in the U.S., stagnation in Japan.

From the peak in 1929 to the trough in 1933, U.S. GDP fell by more than a third, and had not returned to the 1929 peak by the next cyclical peak in 1937. In Japan, GDP fell below the initial peak level by trivial amounts for a few quarters, plateaued for about two years, and then resumed slow but highly erratic growth.

In the U.S., unemployment reached 25% at the trough of the depression in 1933. During the rest of the decade, 1934 to 1939, unemployment averaged 18%. In Japan, reported unemployment never exceeded single digits. This number understates the severity of the situation, thanks both to different methods of recording and different national cultures bearing on employment. Nonetheless, it seems clear that an estimate comparable to U.S. figures would never have reached anything like 25%.

The three bull markets in stocks likewise display remarkable similarity, even extending to the early stages of the current decline. In the six years prior to the stock market peak, the indexes rose 333% in the U.S. from 1923 to 1929, 387% in Japan from 1983 to 1989, and 320% in the U.S. from 1994 to 2000.

The subsequent decline was decidedly less in Japan in the 1990s than in the U.S. in the 1930s -- 55% compared to 80% from the peak to the initial trough. However, the Japanese index remained flat throughout the 1990s. and more recently has fallen sharply again, while the U.S. index rose rapidly from its 1933 trough.

The quantity of money rose fairly steadily in all three of the decades preceding the stock market peak, but at a much higher rate in the Japanese decade -- 9.1% per year from 1980 to 1990, compared with 3.9% per year from 1919 to 1929 and 4.1% per year from 1990 to 2000 in the U.S. The higher rate in Japan may explain why the Japanese bubble was so much more sweeping than its counterparts in the two U.S. episodes.

The behavior in the following years differed much more sharply. The U.S. quantity of money fell by more than a third from the cyclical peak in 1929 to the trough in 1933. The Japanese quantity of money fell by two-tenths of one percent in the first year after the cyclical peak, and then rose by 2.5% per year in the next two years. In the current episode, the quantity of money in the U.S. has already risen by more than 11% during the first five quarters after the cyclical peak.

These differences in monetary growth are a major reason why the contraction in the United States from 1929 to 1933 was so much more more severe than the flat economic growth or modest contraction in Japan. They also suggest that the current reaction in the U.S. will be far less severe than in either of the earlier episodes.

The evidence linking the behavior of the stock of money with the behavior of the economy goes well beyond these three episodes. Every great depression has been accompanied or preceded by a monetary collapse-banking difficulties plus a decline in the quantity of money-just as every great inflation has been accompanied or preceded by sharp increases in the quantity of money.

Central bankers, like other students of money, have learned this lesson, which is part of the reason that there has been no repeat of the Great Depression in the post-World-War II period despite repeated scares. The Federal Reserve under Alan Greenspan is currently applying that lesson, which is reason to believe that the current recession will be mild and that expansion will soon resume.

What the future brings will depend of course on how monetary policy evolves. While the current rate of monetary growth of more than 10% is sustainable and perhaps even desirable as a defense against economic contraction and in reaction to the events of Sept. 11, continuation of anything like that rate of monetary growth will ensure that inflation rears its ugly head once again.

However, the Fed preempted on the downturn and I suspect it will again preempt on the upturn, so as to avoid such an outcome.

Hur stor är risken att USA glider in i samma långvariga stagnation efter IT-kraschen 2000 som efter börskraschen 1929 eller hamnar i samma decennielånga bekymmer som Japan efter deras krasch 1990?

Det finns alltför många otrevliga likheter mellan USAs 1920-tal, Japans 1980-tal och de senaste årens händelser.

Om historien håller på att upprepa sig måste man skrota alla proffsprognoser om en konjunkturvändning i år, likaså är finansmarknaderna på tok för optimistiska om 2002.

Amerikanskt 1920-tal, japanskt 1980-tal och amerikanskt 1990-tal kännetecknades av extrema uppgångar i tillgångspriser. Danske Bank har tittat närmare på perioderna och konstaterar att Dow Jones steg med 135 procent från 1927 till kraschen i september 1929.

Tokyobörsen steg med dryga 140 procent 1986 till 1990. Den uppgång 1990-talet bjöd på var ännu större: Standard & Poor's 500 klev upp 230 procent från januari 1995 till mars 2000. Värst var Nasdaqbörsen som steg med mer än 500 procent mellan 1995 och mars 2000.

Andra likheter mellan tidsperioderna är den kraftiga tillväxten i investeringar och konsumtion. Optimismen om framtiden flödade. På 1990-talet gav den långvariga konjunkturuppgången upphov till begreppet "ny ekonomi".

IT och telekommunikation utmålades som nyckeln till framtiden. Det glada 1920-talets version av IT- upphetsningen var bilen. Antalet bilar mångdubblades mellan 1920 och 1929 och symboliserade framtidsanda och dåtidens teknologiska under.

Japan slog på 1980-talet igenom som Det Ekonomiska Undret. Japanska företag ansågs allmänt vara mer effektiva än sina europeiska och amerikanska konkurrenter.

Produktivitetsutvecklingen var imponerande i båda USA och Japan under uppgångsfaserna och de ackompanjerades av investeringsplaner som bågnade av framtidstro.

Tillgångsprisernas påverkan på konjunkturförloppet har kommit mer i fokus både i centralbankernas beslutsfattande och den ekonomiska forskningen. Den grundläggande tanken är att hushåll försöker sprida ut sin konsumtion ganska jämnt över livet.

Den så kallade förmögenhetseffekten blir då viktig. Om hushållen bedömer att deras egna tillgångar har blivit varaktigt mer värdefulla (till exempel aktieportföljen eller ett eget hus) spenderar de mer pengar.

Flera amerikanska studier visar att 1 dollar mer i förmögenheten leder till en permanent uppgång i hushållets konsumtion med mellan 3 och 5 cent.

På detta beteende kan man också lägga hävstångseffekter som uppstår när optimistiska hushåll (och företag) belånar sina värdestegrande tillgångar och använder det till ökad konsumtion eller nya investeringar. Sparandet faller och blir till och med negativt (i Japan på 1980-talet och i USA under 1990- talet).

När spekulationsbubblan har blivit uppenbar och tillgångspriserna börjar falla igen sker en rad anpassningar i samhällsekonomin som försätter konjunkturutvecklingen i nedförsbacke.

Investeringarna faller kraftigt och konsumtionen brukar samtidigt mattas av när hushållen inser att de är för skuldsatta för att fortsätta sin köpfest och i stället börjar betala av på lånen.

Om spekulationsbubblan involverat stora krediter från finanssektorn finns också risken för en bankkris. Den amerikanska bankkrisen på 1930-talet och den japanska på 1990-talet försämrade kreditförsörjningen till näringslivet så mycket att den försatte USA i depression och har försatt Japan i en långvarig lågkonjunktur.

I dagens ekonomiska bekymmer i USA saknas en bankkris vilket är en välkommen indikation på att historien inte behöver upprepa sig. En viktig skillnad mellan dagens situation och de tidigare historiska faserna är att den ekonomisk-politiska reaktionen i USA har varit så mycket snabbare.

Centralbanken Federal Reserves många räntesänkningar under fjolåret underlättar lånesaneringen hos företag och hushåll och det minskar mängden kreditförluster i bankssystemet. Skulle förlusterna tillta i banksektorn kommer Federal Reserve att reagera snabbt.

Vid de tidigare börskrascherna i Japan och USA var den politiska reaktionen till en början felaktig och i bästa fall otillräcklig. Den japanska centralbanken förde en stram penningpolitik med hög styrränta under en stor del av 1990-talet. Detta försvårade skuldanpassningen och kreditförlusterna exploderade.

I USA efter börskraschen drog man visserligen ned ränteläget, men eftersom inflationen föll dramatiskt ned till negativa tal blev realränteläget ändå mycket högt.

Den misskötta bankkrisen som uppstod fick kreditförsörjningen att haverera och det skulle dröja till 1933 innan politiken lades om.

Trots att USA nu befinner sig i lågkonjunktur efter den ovanligt äventyrliga resan i tillgångspriserna måste alltså inte historien upprepa sig.

Den ekonomisk-politiska reaktionen har varit så snabb och kraftfull man kan begära och det är en viktig förklaring till den vitt spridda uppfattningen att USA ska återhämta sig under året.

Recessions end. This one will be no exception. One can even identify the sources of a turnround: the reversal of the worldwide collapse in manufactured output. The question is whether this will be much more than the proverbial dead-cat bounce. "Highly unlikely" is the answer.

To understand what lies ahead, one must start with the downturn. Not so long ago people argued that new technology meant the end of the business cycle. It is now evident that new technology has, instead, generated the cyclical extremes - via the stock market bubble, the investment surge in high-technology equipment and subsequent collapse, and the inventory cycle.

Can US consumers pull all these rusty freight cars along behind them? With difficulty, alas. Normally, during a recession savings rates rise. This provides the platform from which subsequent rapid rises in consumption begin. But such a correction has not yet happened in the US.

On the contrary, US household savings remain very low, particularly given rising unemployment and a stock market well below its peaks. Yet the stock market is also, once again, highly valued, with a trailing price/earnings ratio roughly double the historic average.

True, monetary policy has been loosened heroically. But the US Federal Reserve's activism has not come through into lower long-term interest rates.

A world without easy money
Martin Wolf, Financial Times, Dec 11 2001 19:33:18 GMT

A little sunshine is breaking through the clouds of recession. That is what equity markets are saying. The question is whether this upsurge in optimism rests on reality or is a temporary high induced by a flood of cheap money.

Scepticism about the wisdom of markets is warranted by experience. Remember what they were saying about prospects for the high-technology sector in March 2000, when the Nasdaq composite index reached 4,959, against just 1,992 on Monday.

It is equally wise to be suspicious of macroeconomic forecasts. In its World Economic Outlook of October 2000, the International Monetary Fund forecast world economic growth in 2001 at 4.2 per cent and the US at 3.2 per cent. The latest consensus of forecasts suggests that the world economy will grow by only about 1.2 per cent and the US by 1.1 per cent. Moreover, the authoritative National Bureau of Economic Research has decreed that this slowdown was well under way by September 11. It has now set the end of the record-breaking US expansion in March.

The November consensus of forecasters was for growth next year of just 1.3 per cent in the world economy, with 0.7 per cent in the US, 1.5 per cent in the eurozone and minus 0.6 per cent in Japan. Thereafter, mainstream forecasts become more cheerful. The Organisation for Economic Co-operation and Development forecasts growth in the OECD area of 3 per cent in 2003, with the US on 3.8 per cent, the eurozone on 3 per cent and Japan on 0.8 per cent. The OECD’s underlying view, again close to conventional wisdom, is that the rebound will begin in the middle of 2002.

The strength of a recovery depends on what caused the downturn. The standard explanation would include soaring oil prices during 1999 and 2000, tightening of monetary policy during late 1999 and 2000, particularly in the US, and the bursting of the high-technology bubble. These changes in background macroeconomic conditions triggered a cutback in investment, a decline in demand for manufactured output, an accumulation of unsold inventories and then a still greater cutback in output. In the US, for example, output of manufactures in October 2001 was 7 per cent below its peak in June 2000.

The slowdown has become global partly because the background forces - higher oil prices, tighter monetary policy and the bursting of the high-technology bubble - were also global. But between 1996 and 2000, the US alone generated just under half of total world incremental demand, at market exchange rates. With that gone, there was not much demand dynamism left. September 11 was merely the coup de grace.

The justification for optimism is that these conditions have changed. Oil prices are now down about 40 per cent in real terms from their peak in 2000. Monetary policy has eased dramatically, particularly in the US, with short-term rates down 4.5 percentage points in less than a year. With inflation subdued, there seems to be little constraint on further monetary easing. Fiscal policy is also becoming more expansionary, particularly in the US. Aware of this and aware, too, of the success of the first stage of the war against terrorism, markets have recovered strongly: the Standard & Poor’s 500 is up 18 per cent from its low on September 21.

All this seems to justify expectations of a fairly normal recovery. Some optimists suggest that the quantity of monetary petrol poured by the Federal Reserve on the dying embers of the US expansion will even generate a vigorous resurgence.

Alas, the opposite is more likely. The view that there will be a more or less conventional recovery rests on the assumption that this was a conventional downturn for which conventional demand management policies are an effective remedy. But that cheerful view could turn out to be grievously mistaken.

The case for pessimism has two elements. The first is the dependence of the world on US demand. The second is the fear that the US is now a post-bubble economy. The argument has been well laid out by Stephen King of HSBC (Decline and Fall - Bubbles, Busts and Deflation). Its analytical heart goes back to non-Keynesian and non-monetarist views of recession. A period of unwarranted optimism can generate exaggerated asset market valuations and equally inappropriate investment. A consequence is likely to be falling propensities to save. These will be associated with rising indebtedness, in relation to incomes if not to (temporarily) elevated asset values.

The US in the 1930s and Japan in the 1990s were the 20^th century’s most spectacular examples of post-bubble economies. Mr King argues that it is particularly difficult for very large economies to grow out of post-bubble corrections, because they cannot easily use the rest of the world as a source of demand. The US can hardly do so today.

This description fits the US experience of the 1990s disturbingly well. If one takes the cycle as a whole, economic growth, at 3.1 per cent a year, was no faster than in the 1980s and far slower than in the 1960s. The stock market reached a valuation peak never seen before in history. The share of non-financial corporate profits in non-financial corporate gross domestic product recovered strongly during the 1990s, only to fall back to the levels of the early 1980s. There was a big investment surge in the private sector, while household savings rates fell. The wealth held in the stock market soared by $12,000bn between 1994 and 2000, equal to more than six years of normal gross saving in the economy. Why save when the stock market does it painlessly for you?

The US is now in what Mr King calls an “unplanned recession”, one that the policymakers did not want and desperately wish to halt. This is a correction that originates more in disappointment than in overheating. But the correction among households has hardly begun. It is also this that easy money is intended to prevent.

If this view of the forces at work is correct, a normal postwar recovery is unlikely. More probable is an extended period of weak growth in private demand, offset by a sizeable fiscal expansion but not, alas, by demand from abroad. This then would be a limping recovery, stronger, no doubt, than Japan’s in the 1990s but far indeed from the “new economy” of the late 1990s.

Is this certain to happen? No. Is it likely? Yes. This story of post-bubble correction is not yet over. It may have hardly begun.

Europe's Economies Find Convergence, Easing the Formation of Monetary Policy
Wall Street Journal, October 5, 2001

The economies of the euro zone are finally starting to move in step, though unfortunately they're all heading in the wrong direction.

The convergence makes it much easier for the ECB to operate a one-size-fits-all monetary policy.

It’s time to come back down to earth
By Philip Coggan, Financial Times, October 5 2001

A share is just that - a share in the assets and profits of a company. Its value depends on the current and future level of those assets and profits.

But for a while in the late 1990s, investors seemed to ignore those fundamentals. They bought shares because they were going up and let the next investor worry about things like assets or profits.

What about the professionals? When stocks were trading at 100 times historic profits, it was pretty hard to recommend their purchase on the basis of traditional valuation methods.

Did this mean that analysts told investors to sell such stocks? Not a bit of it. Instead they went in search of new valuation methods that might justify a holding in the stock.

There is a problem with many of these short cuts, however. Take the price-earnings ratio. It may appear to provide a useful rule of thumb as to whether a share is cheap or dear.

But the p/e is based on earnings per share, a figure which managers find relatively easy to manipulate. To take just one example, when a company with a high p/e uses its shares to make a successful bid for a company with a low p/e, its earnings per share go up. This is nothing to do with whether the bid is a business success.

In the late 1990s, many analysts shifted their attention away from the p/e ratio and towards a measure based on “ebitda” (earnings before interest, tax depreciation and amortisation). This measure was an attempt to look at the cashflow available to service all the obligations of a company (debt as well as equity) and allowed the comparison of companies with different capital structures or accounting treatments.

Secondly, companies shifted to returning cash to investors via share buy-backs, rather than dividend payments; in the US, in particular, buy-backs had tax advantages. The UK government gave this change momentum by abolishing the dividend tax credit in the late 1990s.

The troubles with technical trends
Barry Riley, Financial Times, October 4 2001 19:35

Those eight years took in a stock market bubble. This in part reflected favourable economic trends, and especially growth in corporate profits. But the scale of the price rise also reflected uprating. When I started writing the column, the S&P 500 offered a dividend yield of 2.7 per cent and a price/earnings ratio of 23, falling to 16 in 1995: at the market peak in March 2000 the yield was just 1.07 per cent and the p/e ratio had reached 35.

This bubble was often presented at the time as being created by day-trading amateurs, but it can be better viewed as a collective mistake by investment professionals. How did it happen? Here are a number of the themes I discussed during the late 1990s:

U.S. payrolls plummeted in September, posting the largest drop in more than a decade, the Labor Department said in a report that doesn’t reflect job losses after the terrorist attacks. Unemployment stayed at 4.9 percent.

Payrolls fell by 199,000 last month after declining by 84,000 in August, as service businesses lost more jobs than factories did. The largest previous drop, of 259,000, occurred in February 1991, toward the end of the last recession.

This is turning into the worst bear market since 1973-74. It is not only deep (a 37 per cent decline in the S&P 500 at its lowest close on September 21) but it has also been unusually long, with the Dow so far into the 21st month of decline.

That compares with 23 months in 1973-74, when the total fall was 45 per cent, and almost three years in the record-setting 89 per cent collapse between 1929 and 1932. In contrast, the peak-to-trough decline of 36 per cent centered on the October 1987 crash was fitted into just 8 weeks.

This time it is different, as they say. In recent months the world has been awash with liquidity, and bond yields have been relatively steady: no problems there. It has been the valua tion error that has dominated: a vast gap has become apparent between the incredibly optimistic future growth rate implied by equity market levels at the peak and the rather sombre economic reality now unfolding.

How this mistake happened is too complex a subject to discuss here now. But some vital points are raised in a paper published this week by Bob Semple, UK equity strategist for Deutsche Bank, entitled (with an arguably superfluous question mark) The end of the equity cult? In particular, institutions like pension funds and life insurance companies have accepted too much risk in equities. The great bubb le turned out to be a disaster for risk control: the current bear market represents a restructuring of portfolios in favour of safer assets, notably fixed income bonds.

The puncturing of the bubble now under way bears a worrying resemblance to the post-1929 Wall Street correction and the ending of the Japanese "miracle" in 1990. Such a comparison would fit in with the extended nature of the adjustment now taking place: but more optimistically, we can reasonably hope that today's governments in the US and Europe will not make the mistakes made in the early 1930s in the US, or more recently in Japan.

Needless to say, this downwardly revised prognosis -- 1.9% average growth in world GDP over the 2001-02 period—depicts a world in deep recession. After all, 2.5% growth is usually viewed as the global recession threshold. Moreover, if the verdict ultimately falls at the lower end of our new risk range, it would qualify as the worst global recession of the post-World War II era—both deeper and longer than the contractions of the mid-1970s and early 1980s.

As The Implosion Begins . . .?
Prospects and Policies for the U.S. Economy: A Strategic View1 Wynne Godley and Alex Izurieta Jerome Levy Economics Institute, July 2001 (rev. August 2, 2001)

The U.S. economy is probably now in recession,2 and a prolonged period of subnormal growth and rising unemployment is likely unless there is another round of policy changes. A further relaxation of fiscal policy will probably be needed, but if a satisfactory rate of growth is to be sustained, this will have to be complemented by measures that raise U.S. exports relative to imports.

Över 2 600 miljarder kronor, eller 54 procent, av börsvärdet den sjätte mars i fjol är borta. Det är det tredje största raset någonsin på Stockholmsbörsen mätt i procent och förstås det största mätt i värde.
Bengt Carlsson i DN 2001-09-22

2001 tampas med Kreugererans 1931 om att vara det sämsta börsåret någonsin, mätt i real kursuveckling. I löpande kurser ligger ännu 1931 och börskraschåret 1929 något före 2001.

Ericsson slutade efter en liten uppgång i fredags 84 procent under toppkursen från 2000. Det motsvarar ett tapp på ofattbara 1.500 miljarder kronor, mer än den svenska statsskulden, i värde.

I procent har Nokia klarat sig bättre, vilket är rättvist med tanke på att det finska bolaget är det enda stora i sin bransch som tjänar pengar, men nedgången från toppen är ändå 69 procent, och fallet i börsvärde är med 1 750 miljarder kronor rent av värre än Ericssons.

Och ABB har, medan huvudkonkurrenten General Electric i fredags kunde avisera att de håller fast vid sin tvåsiffriga vinsttillväxt, gått från problem till problem. Kursen har fallit med 81 procent, detsamma gäller Skandia det främsta exemplet på svensk tjänsteexport och en tillväxtstjärna för världens aktieinvesterare så sent som för ett år sedan.

The great bear - Stock markets have been in decline since early 2000.
Philip Coggan, Financial Times, September 21 2001

This is now one of the worst bear markets in history. In early trading on Friday, the Dow Jones Industrial Average had fallen 31 per cent from its January 2000 peak, one of the worst 10 declines the US market has experienced since the first world war.

And the Dow has held up relatively well in global terms. In Germany, the DAX index has more than halved since the peak in March 2000; in London, the FTSE 100 has fallen 36 per cent since its peak in December 1999.

What has made the bear market all the more pernicious is its length. The Dow peaked in January 2000 and many other bourses reached their highs in March of that year. Markets have been falling, with the occasional rally, for 18-20 months. In contrast, it took only two months in 1987 for the Dow to fall from peak to trough.

If one combines time and severity, only four other US bear markets since 1914 are more significant:

1919-21, when the Dow fell 47 per cent over 21 months in postwar economic disruption; 1929-32, when the Dow fell 89 per cent at the start of the Great Depression; 1939-42, when the Dow fell 40 per cent in the early stages of the second world war; and 1973-74, when the Dow fell 45 per cent in the face of Watergate and the oil price surge.

There have been significant effects on certain sectors in the short term: Oliver North, speaking on CNN on Friday, said he was the only passenger on a scheduled flight to New York.

Lower interest rates, in these circumstances, may not help. Who cares if the return on cash falls from 3.5 to 3 per cent? At least by holding cash investors are guaranteed the preservation of their capital.

The problem is that the valuation case is less clear cut than at the bottom of previous bear markets. At the end of 1974, the Dow traded on a price-earnings ratio of 6.2 and a dividend yield of 10.5 per cent; at Thursday’s close, the Dow was on a p/e of 22 and a dividend yield of slightly more than 2 per cent.

These still-high valuations (in historical terms) reflect the excesses of the late 1990s bull market, when it was quite common to argue that such measures were irrelevant. The dividend yield on the FTSE 100 index, for example, moved above the 3 per cent level this week; but this level was seen as a floor for dividend yields until recent years.

The bullish case is that equities now look cheap relative to government bonds. According to Mike Lenhoff, chief strategist at Gerrard, the investment group, the UK gilt/equity earnings yield is now at a 20-year low.

But the bond yield/earnings yield has dubious theoretical foundations; it compares equities, a real asset whose value will tend to rise with inflation, with bonds, a nominal asset whose value is fixed, regardless of the inflationary level. In any case, all this ratio may be telling us is that the equity risk premium has risen. In other words, investors are demanding higher returns (and are thus willing to pay lower valuations) to reflect the increased risks of holding equities relative to bonds.

A market rally will require confidence on the part of investors that the economic and military consequences of the recent attacks can be contained. But confidence must have been severely damaged by the share price declines of the past two years. US retail investors have been encouraged to “buy on the dips” over the long bear market; over 2000-01, that has proved a strategy for throwing good money after bad.

European retail investors had just begun to be enticed into the equity markets during the past few years. European governments had been encouraging the growth of “popular capitalism” as a means of dealing with the long-term fiscal problem of meeting the pension needs of an ageing population. Given the losses many must have suffered, there must be a danger that share ownership is now distinctly “unpopular capitalism”. At the very least, investors will be slow to return to equities again.

Another factor that may be a problem is the existence of “forced sellers”. Some, such as day traders or hedge funds, may have bought stocks with borrowed money or on margin. Bass family members said on Thursday they had sold $2bn worth of Disney stocks, partly to repay margin loans.

Bear markets do eventually end and are, on average, a lot shorter than bull runs. When the markets turn, a few brave souls will make a lot of money. But courage in investment circles is currently in short supply.

Det som hände i augusti kan inte ha påverkats av det hemska terrorattentatet, vilket skedde i september, och som av allt att döma inte låg i marknadens förväntningar.

Den avmattning som CNN rapporterar om i dag kan således inte skyllas på muslimska fundamentalister.

Nja, det kan ju också vara så att att den bubbla som nu brister, redan hade börjat brista i augusti, och dessförinan ,som alla innehavara av Ericsson anar.

Om det inte var någon ny Era kan den nya eran inte har berott på Ronald Reagans skattesänkningar i början på 1980-talet, vilket våra egna talibaner plägar hävda i sina spalter.

Nu hoppas alla på att de amerikanska hushållen, som redan köper för mer än 100 procent av sina disponibla inkomster, skall ta fram sina kreditkort och ytterligare öka sin skuldsättning.

“Housing starts tumbled in the United States last month as what has been a pillar of strength in the world’s largest economy showed some signs of weakness. Groundbreaking on new homes and apartments fell 6.9 percent to a seasonally adjusted annual rate of 1.53 million units in August from July. Economists surveyed by Briefing.com expected housing starts at a rate of about 1.63 million.” (CNN 2001-09-20)

The employment report for August released in early September showed a jump in the unemployment rate from 4.5 to 4.9 percent. Hours worked, the broadest indicator of the path of total economic activity, fell at a 2.9 percent annual rate during July and August. That level, unlikely to be reversed in September, is consistent with third-quarter annual growth of about minus 2 percent-i.e., a contraction of the U.S. economy-well below what had been the consensus in early September. The employment data forced second-half growth forecasts to be lowered while increasing the amount of expected Fed easing.

Again, before September 11, emerging signs of further excess capacity and disinflation or outright deflation (as in Japan) promised continued pressure on profits and further layoffs as companies attempted to cushion the negative impact of shrinking demand on profit margins. Underscoring the global breadth of this trend, second quarter nominal GDP growth in Japan was reported early in September to be falling at an annual rate of 10.7 percent. Profit growth simply cannot revive until prices stop falling, because the response to falling prices, accelerated layoffs, will weaken demand further and cause prices to continue to fall.

The global economic slowdown had, in short, reached a self-reinforcing negative phase by September 11. Attempts by companies to preserve profit margins were leading to more layoffs, which by reducing demand growth and accelerating deflation further, produced an additional negative feedback effect on profit margins.

Börsvärdet har nu fallit med närmare 37 procent sedan årsskiftet, lägg till tre procents inflation och den reala nedgången är 40 procent. Samma nivå som finans- och fastighetskrisens 1990, då dock den nominella kursnedgången stannade på 30 procent men med betydligt högre inflation.

I löpande termer har 2001 ännu några få procent till 1931 och 1929, då kurserna föll med 40 respektive 39 procent. Men att årets kursutveckling ännu inte är lika usel som efter börskraschen på Wall Street i slutet av 1920-talet är ju inte till mycket tröst.

Those who argue that the Dow is now a ‘bargain’ may be highly delusional.
Dow Jones Industrial Average—August 31, 2001:
Price-to-Book: 4.61
Price-to-Earnings: 26.76
Price-to-Sales: 2.44
Dividend Yield%: 1.75%

IMF warns of a significant danger of global recession
Financial Times, August 30 2001 19:43GMT

Economists at the International Monetary Fund have warned of a “significant danger” of a global recession along the lines of the early 1980s and early 1990s.

A leaked draft version of the IMF’s World Economic Outlook, obtained by Financial Times Deutschland, predicts the world economy will grow by 2.8 per cent this year but states that there could be “a much deeper and more protracted global downturn”.

The focus of the IMF’s concern is the outlook for the US. Although the IMF forecasters have not changed the prediction made in April that the US will grow by 1.5 per cent this year and 2.5 per cent next year - roughly in line with the US administration’s expectations - they see a serious risk of a much worse outcome.

If US productivity growth is less than expected, then stock markets could fall, triggering sharp declines in business investment and private consumption. That would cause a global recession, and possibly “substantial financial market turbulence”, including “a possible abrupt decline in the value of the dollar”.

The impact of global recession and market turbulence might be particularly severe for developing countries, the IMF economists note.

The IMF’s economists argue that the impact of a US recession on the world economy would be made more severe by the weakness of the economies of Japan and Europe.

The World Economic Outlook is to be published ahead of the IMF’s annual meetings at the end of next month. It may be revised after it is discussed by the IMF’s executive directors next week but is unlikely to be substantially changed.

Forget the Second-Half Recovery
By John H. Makin resident scholar at the American Enterprise Institute
August 2001

Every time I hear a typical analysis of the U.S. economy in 2001, with its components of global recession, investment collapse, falling profits, record deterioration of household balance sheets, and the rising need for companies to lay off more workers, I wonder when the analysts are going to lower their U.S. growth forecasts for the second half of this year. Notwithstanding a positively awful set of economic conditions, most forecasts from investment firms call for a 1, 2, 3 scenario: 1 percent growth in the second quarter, 2 in the third, 3 in the fourth.

The “easy as 1, 2, 3” recovery outlook is beginning to look like a bad joke. It is based on the simplistic notion that 275 basis points of Federal Reserve easing since the start of this year, together with a combination tax cut–rebate that adds about $40 billion to household income in the third quarter, will boost spending enough to justify the 1, 2, 3 scenario.

Rather, rate cuts appear to have helped sustain a high level of household spending on autos and housing, but one result of that sustained spending has been a sharply elevated level of household debt.

Interest payments on consumer installment debt are soaking up 3.1 percent of disposable personal income, by far the highest level since 1968, when a continuous data series began.

As a result, U.S. consumer installment debt is also at a record high, 22 percent of GDP, while total consumer and corporate debt has reached 135 percent of GDP.

With debt-service burdens at record levels relative to incomes, will U.S. households keep spending and running up more debts just because the Fed has pushed short-term interest rates down to “neutral”—that is, neither stimulative nor contractionary—levels and a check for somewhere between $300 and $600 arrives from the Treasury this summer?

It is time for economists to quit touting a second-half recovery. Otherwise they will look as foolish as the equity (sales) “analysts” who, every week, have revised downward their earnings forecasts by 2 percent or more as negative “surprises” about prospective profits have flowed in.

The sooner analysts acknowledge that the U.S. and global economic slowdowns are intensifying—not abating—the sooner policymakers, households, and corporations can undertake necessary, realistic adjustments and the sooner the recession will be over.

Svenska börsen värderas i särklass högst i Europa. Trots kursfallet de senaste 15 månadernas kursras. Även om man exkluderar alla förlustbolag, i Sverige däribland Ericsson, är Stockholm dyrast i Europa.

Hittills i år har OMX-index, med börsens 30 mest omsatta aktier, fallit 22 procent. Men det behöver inte betyda att aktierna är billiga för den skull. P/e-talet för OMX, hur högt OMX-bolagens vinster värderas alltså, ligger nämligen i absolut Europa-topp. Detta enligt statistik från Bloomberg som DI tagit fram.

It may be that the U.S. stock market is still overvalued, even after a year of losses that have left all the major indexes trading well below their historical highs of early 2000 (11,723 for the Dow, 1527 for the Standard & Poor’s 500 and 5049 for the Nasdaq). The Nasdaq has been virtually annihilated and is trading at roughly 40 percent of its peak. Among technology companies—even those with profits—the slaughter has been almost universal. Microsoft is down 44 percent from its high, Intel 58 percent and Cisco 75 percent. The bubble has burst. Game over.

Consider the market’s price-earnings (PE) ratio. The PE compares a stock’s price with the company’s earnings (profits) and is a basic tool of financial analysis. At the end of July, the PE for the entire S&P 500 group of stocks stood at almost 27: stocks were priced at 27 times their companies’ recent earnings. That’s nearly twice the historical average of 14.5 going back to 1870, according to finance professor Jeremy Siegel, author of “Stocks for the Long Run.” Stocks supposedly represent the present value of all future profits, so today’s astronomical PE must mean that either (a) despite the economic slowdown, the long-term outlook for profits remains strong, or (b) investors are collectively crazy—the market will drop or stagnate for years because stock prices have gotten way ahead of profits.

Gathering this weekend in Italy for their annual summit, the leaders of the major industrial countries seem almost indifferent to the threat of a global recession. Despite widespread prosperity -- or perhaps because of it -- economic forecasts have consistently been too optimistic.

The United States is sputtering. Growth is slowing dramatically in Europe. Japan is in recession. Other Asian countries have been hit hard by the U.S. slowdown. Argentina may default on its debt. The danger does not lie in any one of these developments but rather in their convergence, which could create a snowball effect of weakening global trade, confidence and stock prices. The world's leaders ignore these problems at their peril.

Welcome to globalization's darker side. Connections among economies have multiplied in ways that are only barely understood. Almost universally, trade has grown in importance -- and it's not just trade. Early this year, Europeans thought they would largely escape the effect of the U.S. slowdown -- a judgment reflecting the small share (20 percent) of European exports going to America.

The logic hasn't worked. In 2000, the euro area economy grew 3.5 percent. Now, the latest estimate for 2001 from the major forecasting firm DRI-WEFA is 1.9 percent. One reason is that more European companies have operations in the United States. "As the U.S. economy got hit, these companies began to scale back -- not just in the United States, but also in Europe," says Nariman Behravesh, chief economist of DRI-WEFA.

Why it's absurd to believe investors' psychology has nothing to do with market prices.

Mark Rubinstein and fellow academic Hayne Leland are true believers in the efficient market hypothesis--holding that stocks are always correctly priced, given what's publicly known about them, and that any significant mispricings are illusions. To efficient market acolytes there is no role on Wall Street for herd psychology, fad-chasing of initial offerings or panic selling.

While this notion is ridiculous on its face, it has enjoyed a widespread following through the years and has created a lot of mischief.

Sedan årsskiftet har 65 börsaktier förlorat mer än halva sitt värde.
DI 2001-01-12

Även om trenden bryts snart riskerar allmänhetens förtroende att vara illa sargat en lång tid framöver.

Det är de yngsta börsbolagen som varit de största förlorarna i vårens börsnedgång. Listan här bredvid – 65 aktier som fallit med över 50 procent sedan nyår – vittnar om IT- och telekombolagens tunga halvår, med företag som Adcore, Framfab och Cell i täten.

Även riktiga tungviktare som Ericsson och Nokia får finna sig i att samsas i skamvrån. Ericsson återfinns på plats 55 med en nedgång på 55 procent, tre placeringar sämre än Nokia.

Det svenska folket drabbas hårt av det dystra börsklimatet, och enligt Gunnar Ek på Aktiespararna har antalet klagomål från föreningens medlemmar ökat.

"Det finns många som är förbittrade och känner sig grundlurade. Medierna får ta på sig en stor del av ansvaret, när de har rubriker som 'Här är vinnarna!' om IT-bolagen", säger han.

Well, the Dow may be the best-known stockmarket barometer, but it is also the least reliable. It is a crude average of 30 share prices. In most other stockmarket indices, share prices are weighted by market capitalisation. When Charles Dow first published his index in 1896 there were no computers, so this crude method had advantages. He simply added up the various share prices and divided by the number of stocks.

A dollar increase in the share price of the biggest firm thus has the same impact on the Dow as a dollar increase in the share price of the smallest one. This is misleading, so The Economist has recalculated the Dow, weighting shares by their market capitalisation. On this basis, the Dow is still down by 14% from its peak. The broader market indices, such as the Wilshire 5000, are down by even more (see chart). In other words, investors’ portfolios have suffered bigger losses than looking at the Dow alone would suggest.

At the stockmarket’s bottom in March, investors were comforted by the fact that the Dow had fallen by less than 20%, the conventional definition of a bear market. In fact, if it were weighted, the peak-to-trough decline would have been almost 30%: easily good enough for a grizzly.

Analytikernas förlorade heder
Weje Sandén, t f chefredaktör Veckans Affärer 2001-04-17

På flyget hem läser jag att Wall Streets mest uppburne internetanalytiker, Henry Blodget, stämts på tio miljoner dollar av en förbannad småsparare. Blodget anklagas för systematiskt bedrägeri under flera år.

I USA är Henry Blodget en celebritet. Under fjolåret intervjuades han inte mindre än 816 gånger i TV om sin syn på börsen i allmänhet och internetaktier i synnerhet.

Gurustatusen grundlades 1998 när den då 33-årige Blodget förutspådde att kursen för Amazon.com skulle stiga till 400 dollar. Aktien stod då i 243 dollar – redan det en utmanade hög värdering, enligt andra förståsigpåare. Just detta faktum gjorde att den då okände aktieanalytikern på den lilla mäklarfirman, fick enormt stor uppmärksamhet i tidningar och TV. Gång på gång återgavs Blodgets prognos, med följd att Amazon.com tre veckor senare noterades i 400 dollar. Blodget blev omedelbart hjälteförklarad och anbuden från de stora firmorna haglade.

Merill Lynch bjöd bäst, samtidigt som man valde att kicka ut sin tidigare internetanalytiker (han hade haft sälj på Amazon.com).

Henry Blodget har fortsatt att tala gott om internetaktier – även långt efter det att kursraset började förra året. På senare tid har han dock givit uttryck för viss självkritik, men ännu i början av året hade han inga säljrekommendationer på sina bolag.

Nu har alltså Henry Blodget stämts. Något liknande är knappast aktuellt i Sverige. Men det finns all anledning att diskutera de svenska analytikernas roll i den största spekulationsbubblan i modern tid.

Det finns många som har skäl att vara generade idag: Styrelseproffsen som legitimerade och godkände excesserna, riskkapitalisterna som satte marknadskrafterna ur spel genom att finansiera dödfödda affärsidéer, PR-konsulterna som hjälpte till att sälja in dem till media och entreprenörer som ägnade mer tid att sälja aktier än att bygga företag. Det gäller i allra högsta grad också media som varit alltför okritisk och onyanserad i sin rapportering.

Men priset tar ändå analytikerkåren. Hur kunde så många, som betalas så mycket för att nagelfara företagens affärsidéer och balansräkningar, lockas med i karusellen?

A depression follows a period of euphoria about the outlook for the economy and the future earnings of "new" companies. The euphoria becomes unsustainable, and the stock prices of the new companies collapse. Large wealth losses replace large expected wealth gains. Consumption growth slows, then turns negative, and stock prices of more companies fall because weaker demand erases pricing power and, with it, prospective profits. Demand falls further, and deflation sets in.

In a depression, the central bank discovers (to its horror) that stock prices, not interest rates, become the major transmission mechanism running from financial markets to the real economy. That is because after a bubble earnings fall faster than any central bank can, or will, cut interest rates, and when earnings, or more ominously, expected earnings, fall faster than interest rates, then stock prices fall.

Why the US needs a recession
Samuel Brittan, Financial Times, March 29, 2001

Almost the first economic article I wrote for the Financial Times was in response to queries about whether there would be a US recession. In fact, there will always be a US recession on the horizon. Like most market economies, it is prone to occasional dips; and the most one can do is to be prepared and act to combat any downward spiral.

Is the US already in a recession? The question is semantic. If a recession is defined as a serious fall of growth below trend, the US has been in recession since the last quarter of last year.

What is, however, pretty clear is that significant recessions are almost impossible to predict. This emerges just as clearly from modern work on complexity theory, expounded for instance by Paul Ormerod, as from the more orthodox study by Christopher Dow , Major Recessions, 1998).

Looking at the last three international recessions, in 1973-75, 1979-82 and 1989-93, he finds that in two cases out of three the forecasting performance of the Organisation for Economic Co-operation and Development was either poor or “a failure”.

Failures are particularly likely when the recession is due to a shift in confidence or the bursting of a financial bubble, the timing of which is almost unknowable. The same agnosticism applies to predicting the depth and length of any recession.

Gavyn Davies of Goldman Sachs cites a study showing that of 60 national recessions studied in the 1990s only two were predicted a year in advance. In two-thirds of the cases they were not even expected in the April of the year in which they were happening.

The forecasting record this time round has if anything been worse. As Mr Davies says, it seems likely that “the herd-like tendencies of forecasters was being maintained” - or perhaps they were reacting to their wrong-headed recession predictions after the Asian crisis of 1998.

What can be said with more assurance is that the US needs a recession after a long and excessive boom. In saying this, I am doing no more than following the implications of the mainstream analysis espoused by most central bankers.

They have mostly accepted the view that there is something like a normal degree of resource utilisation or employment level above which we are likely to get not merely inflation but accelerating inflation.

My main departure from this mainstream is that I do not think that this equilibrium rate - and therefore the safety limits to the growth rate - can be estimated even approximately. We do not know how far it has been changed either by labour market reforms or by the so-called revolution in information technology.

There are, however, a good many indications that the US was growing in the past few years at well above these safety limits. It was not merely the stock market: the pressure on the whole economy, including labour markets, had become too high.

It is of course undesirable to have a secondary depression over and above the slowdown required to squeeze out inflation and reduce the investment overhang; but that is very difficult to achieve in practice.

It is bad manners to say “I told you so” but we would not have got to the present point if Alan Greenspan, chairman of the Federal Reserve, had not put so much faith in the New Economy and its ability to suspend the normal generalisations about business cycles and the economy.

There is a sufficient degree of recession in the US pipeline to avoid having to advocate a deliberate and corrective slowdown.

Exact rates of output performance and inflation or deflation are outside the control of central banks or other authorities. What they can do is to pursue sufficiently expansionary policies to maintain a normal 4 per cent or 5 per cent a year growth of nominal demand, while leaving the market to sort out the division between real growth and the price changes.

A panic policy of “cheap money and plenty of it” would (except in Japan) either not work or stimulate a deceptive recovery leading to a greater downturn in later years.

Welcome to the I-told-you-so market. Like fickle citizens who claim to have been freedom fighters after the totalitarian regime falls, US stock market commentators have rushed to demonstrate in recent weeks how they spotted the collapse coming.

With exquisite timing, Warren Buffett, one of the few US investors who can claim to have been part of the resistance all along, released his letter to shareholders of Berkshire Hathaway, the investment company he heads, last Saturday, on the first anniversary of the Nasdaq Composite's peak. A new wave of investors had learnt some very old lessons, he wrote: "First, many in Wall Street - a community in which quality control is not prized - will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest."

Right now, nobody believes speculation is easy. The Nasdaq is down more than 60 per cent from its high of more than 5,000 and concern about the US economy has infected the wider market.
The Wilshire 5000, the broad-based index of all publicly traded shares that Alan Greenspan, the Federal Reserve chairman, is said to watch, is 27 per cent below its peak.
This week, the Standard & Poor's 500 joined it in bear market territory, down more than 20 per cent from its high, and
the Dow Jones Industrial Average dipped below 10,000 for the first time in five months.

The headline-grabbing slump in the main indices prompted even the president to worry publicly about US investors' well-being this week. "I'm concerned that a lot of Americans' portfolios have been affected," President George W. Bush said during a visit to New Jersey on Wednesday, but added: "I've got great faith in our economy."

Mr Bush is not the only influential figure weighing up the stock market on one hand and the economy on the other. Mr Greenspan and his colleagues at the Federal Reserve will have to pay attention to both next week when they meet for the first time since the end of January to discuss monetary policy.

"The US economy, while it has certainly slowed down considerably, has not fallen off a cliff," says Alan Skrainka, chief market strategist at St Louis-based Edward Jones. "The Nasdaq is down 60 per cent but the US economy isn't."

Employment, retail sales and housing data released in the last two days indicate that the economy is stalling rather than diving into recession. The University of Michigan's consumer sentiment index - which most analysts had expected to fall further in March - rose slightly, according to figures circulated yesterday.

"Clearly we see some slowdown but we don't see a recession, by any means," says Deborah Cannon, president of Bank of America in Houston, Texas.

But so far there are surprisingly few signs of outright fear in the marketplace. Investors have poured more money into money market mutual funds but, according to anecdotal evidence, they have not started to flee equity funds. Treasury bonds - the traditional haven of risk-averse investors - have risen as the stock market has declined but there is little indication of a headlong rush to quality as there was in 1998 when the Russian financial crisis and collapse of Long-Term Capital Management precipitated a global liquidity crunch.

Policymakers are conscious of the risks. Lenders and their supervisors "should be mindful that in their zeal to make up for past excesses they do not overcompensate and inhibit or cut off the flow of credit to borrowers with credible prospects", Mr Greenspan told a banking conference this month.

Unfortunately for equity investors, Tuesday's Fed decision will be only one positive element in an otherwise gloomy outlook for the broad stock market. A number of Wall Street strategists now argue that the bottom may have been reached but the main indices are still highly valued by historic standards and the most recent declines came after strategists from Morgan Stanley Dean Witter, Merrill Lynch and Goldman Sachs urged investors to increase their exposure to US equities last week.

There were plenty of smiles at a cocktail party hosted by pension fund managers Phillips & Drew at the Eastbourne investment conference of the National Association of Pension Funds this week.

Its "value" investment style has been prospering again, and although the firm lost a lot of clients last year, this month it has retained a 2bn management contract with the Greater Manchester local authority pension fund.

Yet it is only twelve months since Tony Dye was forced out as Phillips & Drew's investment director. Attaining notoriety as London's Dr Doom, he had been bearish for too long during the extended and extreme bull market.

The timing of his exit turned out to be perversely precise: within days the global stock market bubble reached its peak of over-inflation and America's Nasdaq Index subsequently collapsed 60 per cent.

More significantly, the broad S&P 500 Index was down 24 per cent at its low point this Wednesday. London's FTSE 100 Index declined by a slightly more modest 19 per cent.

Now Tony Dye is launching the Contra Fund, a European hedge fund in which he can not only accumulate the shares of his beloved value companies but he can indulge in the additional pleasure of short-selling overpriced growth stocks.

I backspegeln verkar det envisa fasthållandet vid ett mera optimistiskt perspektiv därför nästan lite naivt.

Men de flesta prognosmakare, börsmäklare och andra ekonomiska analytiker har varit lika goda kålsupare.

Man har talat om en tillfällig avmattning, en "mjuklandning" för ekonomin eller en "normalisering". Vad som ökat oemottagligheten för negativa signaler är förmodligen att den senaste högkonjunkturen har varit onormalt lång, nästan åtta år.

Waking up to equity risk
Can the global equity culture survive its first bear market?
Mar 8th 2001 The Economist

WE ASK all our readers to observe a one-minute silence on March 10^th to mark the first anniversary of the Nasdaq peak. Over the past year this index, once the beacon of Americas new economy, has tumbled by 55%.

Klas Eklund på SvD:s ledarsida 2000-08-11 För 20 år sedan inledde Ronald Reagan en våg av skattesänkningar i västvärlden. När USA sänkte sina skatter skärptes trycket på andra att följa efter. Under en period blundade många i Europa och en rad ekonomer (däribland jag själv) hävdade att Reaganomics var ett oansvarigt tänkande. Men vi hade fel. USA har ryckt åt sig ett stort försprång och har världens mest framgångsrika ekonomi.

Americas broadest stockmarket index has lost more than 20% of its value. Markets around the world are now, on average, at least one-fifth below last years peak, as share prices have also tumbled from Tokyo to Frankfurt, Sao Paulo to Seoul.

Over the past year, around $4 trillion has been wiped off the value of American shares alone, a sum equivalent to 40% of the countrys GDP.

The collapse in share values after the stockmarket crash of 1987 was only half as big, at 20% of GDP. Welcome to the global bear market, the grizzliest for a generation.

Nowadays, falling share prices hurt economies more than they used to because stockmarkets are everywhere much bigger not just in absolute terms but also in relation to national income. As a result, Americas economy may yet face a recession that was not supposed to happen (see article).

But is even more at stake than the course of the business cycle in the United States and elsewhere? Might the fall in share prices spell the end of the publics passionate new fondness for equities? If so, that would be a more significant change than you might suppose.

The 1990s will be remembered as the start of the Internet age, but also the decade when the worldnot just Americadiscovered shares. Global stockmarket capitalisation hit $35 trillion last year, 110% of global GDP, up from 40% in 1990.

Stockmarkets used to be seen as the reserve of pinstriped brokers and their wealthy clients. No longer. Over half of all Americans now own shares, twice as many as on the eve of the 1987 crash. Share ownership is even higher in Australia, an economy which not so long ago was run by trade unions.

In Germany, where cautious investors used to put their money in bonds, one-fifth of adults are now shareholders, twice as many as three years ago. Even poor countries, even communist onesChina is bothhave become crazy for shares.

Will the slump in share prices kill this emerging equity culture? Plainly, it depends on how much worse, if at all, the share-price slump gets, and how quickly it is reversed. Share prices might recover as swiftly as after the crash of 1987. But by many traditional yardsticks they remain overvalued. And just as stockmarkets overshoot at the top, they often undershoot at the bottom.

Falling share prices have already dented enthusiasm for shares in Japan and many emerging markets. But after a pause, strong structural forces should continue to support the equity culture in the long term. In particular, as state pay-as-you-go pension schemes strain under the weight of ageing populations, governments around the world are keen to encourage a shift to private pensions. This will fatten the funds that invest in equities.

After an 11-year bear market in Japan it is hardly surprising that less than 10% of households still own shares. Here, too, a rapidly ageing population poses a big challenge to pension finance. In the short term, on the other hand, a severe bear market would make it even harder to privatise state-run social-security systems, such as Americas.

Meanwhile, companies are struggling to cope. The supply of fresh equity capital has more or less dried up in America in recent months. This has had severe consequences further down Americas capitalist food chain, because venture capitalists rely on the exit route of an IPO to get their money back (ideally multiplied many times over).

Entrepreneurs with bright ideas are finding it hard to raise fundsa state of affairs that could do serious harm to prospects for further innovation. Small individual investors, especially, have lost some of their enthusiasm for equities.

In America, day trading over the Internet is not the national pastime it was; these days it is regarded more as a mild form of mental illness. Actually, that is no bad thing. Small investors need to take a cautious long-term approach to the stockmarket.

With luck, the new equity culture will survive, but with added wisdom. The popularity of shares ought to reflect the underlying profitability of the companies that issue them, not delusions of instant riches at no risk.

It ought to be guided too by something closer to intelligent analysis than the comments of one American dotcom analyst this week. Asked to explain why his recommended stocks were down 79% since the start of last year, he replied: The market went from saying, We like companies that are growing quickly but are losing a lot of money, to saying, We want to see earnings. Its very hard to predict a 180-degree turn like that.

Enough of a bear market to discredit the dispensers of such drivel can only be salutary.

IS THE flurry of gloomy economic news in America giving you nightmares? Fear not. According to a recent survey, only 5% of economic forecasters predict that the American economy is heading into recession. But before you drift back into a peaceful slumber, remember that the dismal scientists have a dismal record in predicting recessions. Not only are their forecasting tools blunt, but many also seem to have an inbuilt bias against uttering the dreaded R-word.

Consider forecasters’ record during America’s past two recessions. In late 1981, when we now know that the economy was already in recession, the average forecast for GDP growth in 1982 was over 2%. In the event, output fell by 2%. In August 1990, the very month that America dipped into its next recession, the consensus forecast was for 2% growth in 1991; output actually declined by 0.5%. By chance, the average forecast for growth this year is again close to 2%. But, of course, this time is different: the forecasters couldn’t possibly blunder again. Could they?

To be fair, economic forecasting is even harder than weather forecasting. At least weathermen know whether it is hot or freezing right now. Economists, in contrast, have to forecast the immediate past, which is constantly being revised. However, there are also much less excusable factors at work, such as the “tell ’em what they need to hear” syndrome or the wimpish tendency to run with the gang. Predicting a recession is never popular, especially if you work for an investment bank. Economists who do not want to jeopardise their career may prefer to stay close to the consensus forecast. Better to run the risk of being wrong in good company, they reckon, than be right and an outcast.

There have long been suspicions about the objectivity of research done by investment-bank analysts, who, even as the ceiling falls in, advise their clients to “buy”, “hold” or “accumulate” (apparently different from “buy” or “hold”) rather than sell. Coincidentally, these banks earn fat fees for flotations or merger deals from the companies they analyse. Investment banks, which have made billions out of the boom, also have a vested interest in remaining bullish about the economy at large. Most Wall Street firms are still officially forecasting no recession in America. But an alarming number of their economists have privately admitted to The Economist that they believe that the risk of recession is higher than their published forecasts say. They are not alone in their dishonesty. International organisations such as the IMF are no doubt just as inhibited about forecasting a recession in the country that is their biggest shareholder.

So as not to alarm their clients, economists are also swiftly redefining a “soft landing”. A few months ago this was widely viewed as growth of around 3%. Today, many economists, reluctant to admit they were wrong, are counting anything short of outright contraction as a soft landing. Shame on them: a slowdown in growth from a rate of 5% early last year to, say, zero this year would certainly feel like a hard landing.

Economists can always quibble about what “recession” means. The popular definition—two consecutive quarters of decline—is too crude. It might make more sense to define a recession as a period when the unemployment rate rises by at least one percentage point—that is, when GDP growth falls significantly below its potential rate. Alternatively, there is a less technical solution. When your neighbour loses his job, it’s a slowdown. When you lose your job, it’s a recession. When an economist gets sacked, that’s a depression. Economists afraid to say what they think deserve to be a bit depressed.

"One of the most striking features of the present chapter in stock market history is the failure of the trading community to take serious alarm at portents which once threw Wall Street into a state of alarm... Traders, who would formerly have taken the precaution of reducing their commitments just in case a reaction should set in, now feel confident that they can ride out any storm which may develop. But more particularly, the repeated demonstrations which the market has given of its ability to 'come back' with renewed strength after a sharp reaction has engendered a spirit of indifference to all the old-time warnings. As to whether this attitude may not sometime itself become a danger-signal, Wall Street is not agreed." The New York Times (Sept. 1, 1929)

"The economy is showing secular productivity growth of a magnitude not seen in decades. Inflation remains under control. The U.S. boasts budget surpluses as far as the eye can see. The build-out of the Internet, so rich in promise, is still in its embryonic stages. The stock market excesses of early this year have largely been purged from the system, without exacting any systemic damage. In short, the Goldilocks economy is alive and well and the bull rules."
Barron's (August 28, 2000)

Martin Wolf, A testing year for the world
Financial Times, January 3, 2001-01-03

This is, for the purist, the first year of the third millennium. As befits such a year, it will be a challenging time for the world economy.

Views on the chairman of the US Federal Reserve fall into two camps. The larger one believes his institution has mastered macro-economic fine-tuning. The smaller camp believes he has helped create a bubble economy.

If the growth of US demand slows smoothly to about 3 per cent, with no big declines in the stock market and a modest depreciation of the dollar, the first group can feel vindicated. If not, it cannot.

Not long ago, believers thought that the business cycle was dead, profits were irrelevant to technology companies and the US was in the middle of an unparalleled technological revolution.

2000 gave the lie to the first two propositions. But what is the plausibility of the third? Even the Organisation for Economic Co-operation and Development accepts that the potential rate of growth of the US economy is 4 per cent. This implies long-term growth in labour productivity of a little below 3 per cent, close to double the 1973-95 trend. If so, productivity growth should remain robust even during this year’s slowdown.

Those who believe that the US miracle is just another bubble economy point to the extraordinary valuations in the stock market. This, they insist, generated unsustainably high rates of private sector investment and unsustainably low rates of private sector savings.

At minus 11.6 per cent, total returns on US stocks last year (with dividends reinvested) were the lowest since 1974. Yet even this was but a modest offset to the staggering 270 per cent cumulative return enjoyed over the previous five years (a compound rate of 30 per cent a year).

If the bubble story is right, last year’s negative return will be followed by more miserable years. If not, returns will soon be back to positive, albeit presumably more modest, levels than in the second half of the 1990s. What happens in 2001 will indicate which it will be.

Launched with optimism, it spent almost all of its first two years sinking abjectly against a currency its founders had hoped it would rival. Finally, towards the end of 2000, the euro began to show some strength as the US economy weakened, bouncing back from a low of $0.83 on October 25 to $0.94 by the end of the year. 2001 will indicate whether this is a durable reversal or a temporary respite for what one analyst rudely labelled a “toilet currency”. If the former, the euro’s proponents would feel great relief. The European Central Bank would also enjoy greater freedom of manoeuvre in response to a sharp slowdown than if the currency had continued to remain weak.

After years of high and rising unemployment, the trend started to turn in 1997. Since then the unemployment rate has fallen from a peak of 11.7 per cent in 1997 in the euro-zone as a whole to 8.9 per cent in October 2000. Employment rose from 118.5m in 1997 to an estimated 125.4m last year. The test for the European economy is whether it can continue to generate jobs and lower unemployment. This depends partly on how far the ECB stabilises the economy but also on whether the recent rise in the employment-intensity of growth will be sustained.

Here, yet again, there are polar views: one is that the economy is finally on the mend; the other is that it remains on the critical list, with the semblance of vitality solely explained by unsustainable fiscal transfusions.

The optimistic view of Japan rests on an expected recovery in consumption along with increasingly strong investment driven by the adoption of information technology and the need to replace outdated capital. This will more than offset the weakening of the external account as the US economy slows. Meanwhile the fiscal deficit is set to remain unchanged: the OECD forecasts general government financial deficits at about 6 per cent of gross domestic product over the next two years.

The counter is partly that the financial sector remains very weak. Worse, just as inflation makes the profitability of net debtors appear worse than it is, so deflation makes it appear better. Smithers & Co, a London-based investment adviser, estimates that the true return on non-financial corporate equity was 2.7 per cent in fiscal year 2000, not the published figure of 6.5 per cent, hardly the ideal backdrop for a needed surge in investment.

The underlying challenge remains that of balancing demand with potential supply. This is an economy with a gross national savings rate of about 30 per cent of GDP but it also has a declining labour force, an unprofitable corporate sector and an exceptionally high ratio of capital to GDP. A return to recession this year would force policymakers to try something radically new.

Russia is particularly intriguing. Goldman Sachs estimates economic growth last year at 7 per cent, after 3.2 per cent in 1999. True, this is a modest turnaround given the huge decline of 44 per cent in the (admittedly defective) measures of GDP between 1989 and 1998. Yet it is at least a sign that the bottom has been reached. Another such year would suggest that the recovery is more than a temporary reversal helped by a jump in oil prices.

Also important this year will be whether Turkey remains on its exchange rate peg, how Latin America, particularly Mexico, copes with a US slowdown and whether east Asian economies dependent on US markets are able to sustain their recoveries from crisis. More broadly, the ability of emerging market economies to survive a slowdown in the US will be the clearest possible test of how far they have strengthened after the financial crises of the 1990s.

Here everything looks almost bewilderingly healthy, with a strong fiscal position, robust currency, low inflation, modest unemployment and a manageable current account deficit. The International Bank Credit Analyst even described the country as a safe haven in its December review. A turbulent 2001 would show whether the economy has been transformed or not.

Yet 2001 will be first and foremost the testing year for the US. Is the world about to witness the popping of a bubble economy or a smooth adjustment from temporary overheating to sustained and rapid growth? If, after a record-breaking nine years of expansion and a modest slowdown the US takes off yet again, we can reasonably conclude that the notion of a new economy is more than mere fool’s gold.

"Many of today's investors were still in diapers during the great stagflation of the 1970s. Those who weren't will never forget the darkest period in modern financial market history."

The Return of STAGFLATION
Stagflation: a term coined by economists in the 1970s to describe the previously unprecedented combination of slow economic growth and rising prices.

The Perfect Storm - Inflation with Dollar Collapse or Depression with Hyperinflation

Den som vill kan muntra upp sig med tankar av Mats Johansson och Klas Eklund, som trots sina skiftande bakgrunder, är eniga om att EMU är jättebra....

Felet med Mosesteorin
SvD-ledare 2000-03-02, utdrag
Efter decennier av skleros och Delorium har EU mycket att lära av den ekonomiska förnyelsen i USA, som tog sin början under Reagan-åren. Aven statsministern bör ta sig tid att studera Prodi-programmets förslag till reformer.

Perssons ekonomiska filosofi samman fattas numera i sentensen om sju feta år, följda av sju magra, den s k Mosesteorin.

Den stämmer inte på USA, som har upplevt en ekonomisk framgång av historiska mått över de senaste decennierna.

Trots flera börschocker, av vilka vi sannolikt inte har sett den sista, förefaller den amerikanska modellen överlägsen den svenska och den europeiska; inte i alla avseenden, men många. .......... I så fall bör vi fortsätta att vända blicken bort från den amerikanska modellen och till siste arbetslös hålla fast vid alla de gamla krusbärsdogmerna. Då har vi inget att lära av det ekonomiska språnget i väster. Då kan vi lugnt fortsätta att irra i öknen och yra om sju år av olika vikttillstånd.

Klas Eklund på SvD:s ledarsida 2000-08-11
För 20 år sedan inledde Ronald Reagan en våg av skattesänkningar i västvärlden. När USA sänkte sina skatter skärptes trycket på andra att följa efter. Under en period blundade många i Europa och en rad ekonomer (däribland jag själv) hävdade att Reaganomics var ett oansvarigt tänkande.

Men vi hade fel. USA har ryckt åt sig ett stort försprång och har världens mest framgångsrika ekonomi.

The governor of the Bank of England, Sir Edward George: "it's not a nightmare scenario"

The governor of the Bank of England, Sir Edward George, has warned that the United Kingdom is likely to be affected by the economic slowdown in the United States.
BBC 2000-12-29

He said the current data did not suggest anything "deeply damaging to our situation" and that it was "too soon to become seriously concerned", but warned the "biggest cloud on the horizon" would be "a sharper slowdown in the United States than we expect".

"We will see slower growth than we expected", Sir Edward said, "but it's not a nightmare scenario".

LETTERS TO THE EDITOR: History’s biggest credit bubble will collapse
Financial Times; Dec 19, 2000 By KIM EVANS

Sir, Prof Rudi Dornbusch has it half right (”A rendezvous with bankruptcy”, December 15). The US does matter - and he glosses over the extent of our problems. Yes, Japan is in parlous circumstances and yes, unless they let their debts liquidate and markets clear, there is no solution on the horizon.

US indebtedness is a much bigger problem. It now exceeds Dollars 2,600bn. The vaunted US surplus is a chimera, as the Federal budget is in deep deficit. Why? The unfunded Social Security and Medicare obligations of the US, coupled with unfunded government workers’ retirement, are a black hole. If there were an actuarial requirement to provide for these obligations, the US budget would show a deficit by one reckoning that pushed Dollars 1,000bn a year.

The purported ”surplus” is due primarily to capital gains taxes and exercise of options by the US’s senior executives. The gap between average worker and CEO has never been greater, at a ratio of 475 times, as a result of options.

Before 1995, Nasdaq and personal consumption in the US had a weak correlation of 0.24. Since 1995, this correlation has increased to 0.74. As the Nasdaq bubble further collapses, a negative wealth effect will occur, lowering corporate profits, wage gains and capital gains.

The US savings rate will increase from a negative rate currently, resulting in diminished US profitability. Rising joblessness means more government payments. Presto! Lo and behold, the deficit reappears.

Since 1995, broad money in the US expanded by Dollars 2,600bn and total credit by Dollars 9,300bn, yet nominal GDP was up only Dollars 2,700bn. In the second quarter of 2000, credit expanded by Dollars 1,400bn, a record pace. Credit has been growing at 4-5 times the rate of GDP growth. Consumer credit has never been greater, mortgage indebtedness as a percentage of total housing value has never been greater and US corporate indebtedness has exploded as US executives have bought back shares to make their options profitable. Downgrades by credit agencies, rising personal and corporate bankruptcies and wide credit spreads indicate a systemic credit problem. Pimco’s Bill Gross said to avoid corporates ”at any cost”. Profit downgrades increase daily.

The US debt situation and credit bubble make Japan look prudent fiscally. No amount of Fed legerdemain can overcome the collapse of the greatest credit bubble in history.

Back in the early 90s, global interest long-term rates - as measured by our IRS index, weighted for outstanding global OTC positions and adjusted into USD - were in excess of 10% as the UK attempted to cool the Lawson Boom, the Bundesbank was making Helmut Kohl pay for his 1 Ost = 1 West decision, Greenspan was pricking the latest debt bubble in the US and Mieno was all-too successfully restoring sanity to Japanese asset markets.

Rates then halved as the ERM crumbled, Japan imploded and America’s banks began to domino. Soon, however, bust began to turn again to boom, and it was time to lurch onto the other side of the boat in an attempt to keep it from capsizing under the weight of its own contradictions. The Fed’s 1994 tightening - and the associated leveraged and structured derivative cascade - took us screeching back over 8% before Mexico collapsed and Japan begun to pump dangerous amounts of liquidity into the system in order to reverse the Yen’s debilitating rise.

Then the Bubble began in earnest and interest rates embarked upon a fairly uninterrupted decline to their nadir of 3.8% in the early Spring of last year. Not only was this unprecedentedly low, for the modern age at least, but it represented a global zero real rate if we compare it to OECD composite indices and it came at a time when the ability to manufacture credit had received an enormous (and still only dimly-understood) fillip from the launch of the Euro and the consequent consolidation of European banking and capital markets......

Corporate-Bond Market Faces a Gloomy Outlook
From Wall Street Journal 2000-10-18

Faced with unrelenting bad news, the U.S. corporate-bond market is staggering through its worst period since the bleak days of 1998.

Though it had been a strong year for corporate bonds until recently, investors' losses have mounted of late, corporations are finding it difficult to sell their bonds and Wall Street dealers are becoming gun-shy about trading them for fear of getting stuck with bonds while prices are falling.

If the problems get worse, the U.S. economy could feel the pinch as companies find it difficult to raise financing.

Treasury securities, the safest bonds, still sell like hot cakes (they rallied Tuesday as stocks continued to fall). But other, riskier bonds suddenly are struggling. Taking the biggest hit: junk bonds, otherwise known on Wall Street as high-yield bonds, a major source of capital for many growing companies that pose a higher credit risk. The proportion of junk bonds trading at distressed prices surged during the past month to the highest level since the early 1990s, when the market was paralyzed by recession and the collapse of Drexel Burnham Lambert.

Nearly one in four junk bonds is trading at distressed levels, defined as yielding 10 percentage points or more over Treasurys, says Martin S. Fridson, chief high-yield strategist at Merrill Lynch & Co. The distress ratio "is a leading indicator of the default rate [for corporate debt], so it suggests some further pain coming," Mr. Fridson says.

Tuesday morning, Gary Goodenough decided to sell $12 million of top-rated corporate bonds, which normally would be a snap for a professional money manager. Not now. When he picked up the phone and asked six Wall Street dealers for bids, two passed. Three made bids that weren't close to the market price. The sixth gave an initial price indication, but said he would only buy the bonds at a lower level.

A year ago, Mr. Goodenough would have hung up the phone. Tuesday, the co-head of fixed-income investments at MacKay Shields Financial in New York said, "Sell 'em" to the sixth dealer. Even though he wasn't happy with the price, Mr. Goodenough was relieved to get out of his position amid a tumbling corporate-bond market -- where it suddenly has become much harder just to get in and out of positions.

"There's been a massive erosion of liquidity," says Margaret Patel, manager of the $120 million Pioneer High Yield Fund, referring to the ability of investors to easily get in and out of bond positions without moving prices.

The average junk bond is trading at 80.65 cents on the dollar, down from more than 84 cents in early September, and almost 90 cents at the beginning of the year, according to Merrill Lynch. Junk bonds now trade at their lowest level since March 1991.

Junk bonds sell at a yield of 7.1 percentage points above comparable Treasurys, markedly higher than the 4.5-point spread at the beginning of the year. Bonds of companies with investment-grade ratings also are sliding amid poor trading conditions. Swap spreads -- the difference between Treasury rates and the rate at which top-rated companies can conduct interest-rate swaps, an indication of sentiment in the bond market -- remain near their widest levels ever.

If bond issuance remains difficult, it will put pressure on an important area of financing for U.S. and global companies, potentially hurting economies around the world. Further, the premium that investors are demanding for riskier bonds could be a signal that the U.S. economy's growth is set to slow substantially, perhaps resulting in a recession.

"I lean toward a hard landing" for the U.S. economy, says William Gross, of Pacific Investment Management Co., the bond heavyweight.

Wall Street is rediscovering fear—this week in its high-tech stockmarkets, but more particularly in the junk-bond market THERE is trouble brewing in the world’s capital markets, especially at their most speculative end. Although the blue-chip Dow Jones Industrial Average has fallen by only a bit—well, 10% actually—this year, Nasdaq, the main market for high-tech shares, has had a torrid time. Since its high point in March, it has fallen by some 40%, and it shows few signs of hitting bottom. The profits of technology companies are failing to meet expectations—and even the rare ones that do, such as Yahoo!, find that this is not always enough to spare their share price a beating. Telecoms firms are saddled with huge debts. Internet firms are near-untouchable. At mid-week, the Nasdaq Composite index had fallen for 13 of its 15 most recent trading days.

So much for shares. But an even scarier story may be unfolding in a market mostly ignored by those who day-trade Nasdaq’s dreamy paper: that for corporate debt. In recent weeks, disappointing profits have meant that some blue-chip companies have seen their investment-grade debt pummelled. The victims include Xerox, Eastman-Kodak, and just about every telecoms firm (“death, taxes and the long-term deterioration of the phone sector are among the few certainties in life,” wrote Credit Suisse First Boston in a recent report).

After announcing bad results, yet again, last week, the spread on Xerox’s bonds over Treasuries tripled to 330 basis points. Hitherto, investment-grade bonds had generally stood above the fray. Cowboy junkies The fray has, in particular, surrounded those bonds without an investment-grade rating: described by Wall Street’s marketing folk as “high-yield bonds”, but formerly (and perhaps again) known simply as “junk”. These bonds, particularly those issued by non-blue-chip telecoms and tech companies, have been by far the worst of a poorly performing bunch. Merrill Lynch’s high-yield index is now nearly as ugly as in 1998, during the panic over the failure of Long-Term Capital Management (LTCM), a hedge fund that owned lots of junk

This week, some big investment banks were rumoured to have lost a fortune—$1 billion is the gossips’ favourite sum—on junk debt they underwrote but could not shift even to their most gullible customers. Among the names bandied about in the market were Morgan Stanley Dean Witter, Deutsche Bank and CSFB. Each denied, more or less, that it had lost lots of money on junk debt.

Since Credit Suisse bought Donaldson, Lufkin & Jenrette (a high-yield-bond specialist), $12 billion—coincidentally, the price it paid for DLJ—has been wiped off Credit Suisse’s market value.

Investment banks hold many billions of dollars of debt and have lots of risky loans on their books. One market participant reckons that there is, perhaps, $25 billion at serious risk in the big investment banks’ portfolios. It is conceivable, he says, that among them, they could lose $10 billion of this. If so, the grim reaper seems likeliest to be the telecoms sector—which is fast looking less like the foundations of a glorious Internet future and more like another outing for the emperor’s new clothes.

The largest bond fund manager in the world is warning investors to avoid corporate bonds at all costs.
Financial Times 2000-10-18

William Gross, managing director of Pimco, the Allianz-owned US fund manager, fears the US economy is heading for hard landing and says the current environment for the fixed income markets is the most uncertain he has seen since he began trading in the 1970s.

"Spread product [corporate debt] is in for some grim reapings in the next month and the next few quarters," said Mr Gross, whose fund manages about $200bn in assets, and is considered the most influential in fixed income markets.

The fund manager's comments, at a New York dinner, have added to the considerable gloom that has descended on the corporate bond market in recent weeks. It has been hit by falling share prices and concerns that the economy's growth may be slowing more than expected as default rates rise.

Corporate bond spreads have widened dramatically in a variety of sectors as a result, drawing comparisons from some analysts to the crisis that swept credit markets after Russia's default in late 1998.

Mr Gross has recently moved much of his portfolio into mortgage-backed securities, such as debt from Ginnie Mae, the home lending agency. Such bonds offer higher credit quality than corporate debt, and higher yields than traditional Treasury bonds.

Bankers are hopeful that a $7bn offering from Unilever will be completed this week despite the market turmoil. The Anglo-Dutch consumer products company will use the funds for its acquisition of Bestfoods.

Nordstrom's, the US department store chain, however, has been forced to sweeten terms of an expected $250m offering as investors have grown more wary. Underwriters were marketing the deal earlier in the week to yield 250 basis points over Treasuries. But investors say the spread may now exceed 300 basis points.

Other deals that underwriters were not confident enough to announce publicly have been quietly abandoned.

Mr Gross predicted corporate bonds would continue to struggle amid a cyclical slowdown, and cautioned that one of the main risks to the economy was that Alan Greenspan, chairman of the Federal Reserve, might wait too long to loosen monetary policy.

The American Enterprise Institute for Public Policy Research is dedicated to preserving and strengthening the foundations of freedom - government, private enterprise, vital cultural and political institutions, and a strong foreign policy and national defense – scholarly research, open debate, and publications.
Founded in 1943 and located in Washington, D.C., AEI is one of America’s largest and most respected ”think tanks.”

A stock market bubble exists when the value of stocks has more impact on the economy than the economy has on the value of stocks.

The U.S. stock market bubble is bursting - hot sector by hot sector, starting with the Internet bubble, which has already burst, and continuing with the information technology communications (ITC) sector bubble, which is in the process of bursting.

The collapse of the hot sectors has also pulled down the stocks of brokerage houses and banks that have been cheerleading for and financing those sectors. Finally, the contagion will spread to more basic stocks such as Home Depot, whose shares dropped sharply after announcing an earnings disappointment in mid-October.

The collapse in 2000 of the hottest sectors of the stock market will probably spread to other sectors and could well cause a U.S. recession next year and possibly a global recession.

Momentum was the great theme in the global bull market in equities, which finally appeared to peak last March. The downturn began a little earlier outside the technology-based sectors (though there were signs of a double top in some countries early in September). Now a Middle East war threat reminds us of event risk of the kind that last hammered the stock market in 1990.

During the bull market, investors chased the fashionable stocks and sectors ever higher. Those people looking for basic value and recovery potential usually did very badly.

In the uptrend it did not matter that there was no conventional value to justify the scarily high prices of high fliers. Now there is no value to support their sinking prices.

The Nasdaq Index, in which became concentrated much of the US stock market's value, but also most of the risk, has fallen by 25 per cent since the beginning of September.

Asian markets have already entered a substantial bear market, with Tokyo down by 26 per cent and Taiwan off by 42 per cent since peaks last spring. The Nasdaq has declined by 39 per cent since the early March top.

The stock markets have arguably been driven by a remarkable, but unsustainable, burst of corporate profits growth. Earnings per share growth in 2000 is expected by analysts to be 16 per cent in the US, 20 per cent in Japan and 25 per cent in Continental Europe.

Even in the better-performing markets the earnings bonanza is unsustainable. The US market is already being undermined by important individual company downgrades, ranging from Intel to Home Depot.

Then there are the credit markets, which can also usually be relied upon to send up some smoke signals of trouble just ahead. Admittedly the banks, and their regulators, are determined not to repeat the regular past mistakes, which have usually been concentrated in the real-estate sector.

But it is complacent to rely on lessons from old crises; the next problem usually emerges from a totally unexpected direction. This time it is the new-economy sector, especially tele-communications. Junk bond spreads over government bond yields have been widening, and the ability of telecoms companies (even substantial ones) to refinance temporary bank borrowings through the bond market is suddenly in doubt.

We can see a classic pattern here, as repeatedly rehearsed in real estate in the past. At one stage, in the middle of the bull market, entrepreneurs and investors are obsessed with growth. The more grandiose the ambitions, the better. Mobile phone giants are paying out something over $100bn to European governments this year, just for the rights to use extra parts of the radio spectrum. This is a symptom of over-investment; then the realproblem turns out to be one of overcapacity.

This week Motorola, one of the mobile phone leaders, warned of a slowdown. The company's already weak share price crashed further, and is now down 66 per cent from the peak.

Throughout the technology sector it is time to ponder on the longer-term consequences of such meltdowns: not just whether it will become difficult to finance negative cashflows but whether it will prove possible to retain key staff when the stock option plans become worthless.

Beyond that, the threat is that the whole process of leveraging companies, partly through stock buybacks, concentrating the growth potential into equities but offloading downside risk into bonds and bank credit, may come unstuck.

In the US, credit quality has already been deteriorating during the boom. Much worse could happen if there is a serious economic slowdown aggravated by an oil famine. So far, however, there is little sign of any loss of confidence in the banking sector - though banks stocks wobbled on Thursday. Banks are viewed by investors as secure alternatives to the dangerous tech wrecks. Mostly, the scare stories have been confined to investment banks, which may have suffered from losses on junk bond positions and the halting of the lucrative flow of new stock market flotations.

Yet it would seem prudent to declare an end to the long global bull market which has been driven by the extraordinary expansion of the US economy.

Over the five-year period 1995-99, the S&P 500 Index multiplied in value more than threefold, equivalent to average annual growth of 26 per cent.

The puncturing of the bubble is scarcely surprising. In this space last new year's day I forecast that bonds would beat equities in 2000, more particularly in the second six months. So far this year the total dollar return on the FTSE World Index has been minus 11 per cent, and on the J.P.Morgan Global Government Bond Index minus 2 per cent. Bonds are ahead, then - if you have avoided telecoms paper.

Samuel Brittan: Watch the dollar, not the euro
Financial Times, October 12
The biggest flaw in the world economy is the US current account deficit, which could place a strain on the currency

När börsen faller är det inte självklart att sätta sina pensionspengar i aktier även om placeringshorisonten är lång.
Ur DN 2000-10-10

Och börsens kräftgång ser ut att kunna fortsätta. IT-aktierna rasar och drar med sig hela börsen. Årets tidigare uppgång på aktiemarknaden är helt uppäten och generalindex pendlar kring noll. Och IT-aktierna har inte fått fast mark under fötterna ännu.

Peter Malmqvist, börsanalytiker på Aragon, tror på en fortsatt nedgång för börsen. Den som ska placera sina PPM-pengar kan därför göra klokt i att avvakta med aktieplaceringarna. Räntefonder är ett bra alternativ tills börsoron lagt sig. - Jag skulle själv inte satsa några pensionspengar på aktier just nu, säger Peter Malmqvist.

Han säger att den som satsar på aktiefonder och ser dem sjunka kanske 10 eller 15 procent förmodligen bestämmer sig för att byta till räntepapper i stället. Och sedan vänder aktiemarknaden upp igen och pengarna placeras om ytterligare en gång. - Man riskerar att bli en sådan som hoppar mellan tuvor och min erfarenhet är att man då oftast hamnar mitt emellan, säger Peter Malmqvist.

Dollar in danger
David Hale, FT, September 5 2000
The writer is chief global economist at Zurich Financial Services Group

The US dollar has been so resilient for so long that most commentators cannot conceive of circumstances in which it would experience a sharp correction. Foreign demand for US assets remains so strong that there is little reason for investors to lose faith in the short term. But once the US presidential election is over confidence could be tested by a variety of policy surprises.

The second great risk posed by the presidential election is that it could set the stage for a clash between monetary and fiscal policy next year. The US currently enjoys such a large federal budget surplus that it will be impossible to prevent fiscal policy becoming more expansionary. The total surplus is projected to be $4,500bn over the next 10 years, or $2,500bn excluding Social Security.

In addition to the risk of inflationary overheating, Mr Greenspan is also concerned at the size of the US current account deficit and the danger that fiscal stimulus could increase it further. During the late 1990s, the US private savings rate fell sharply as the government built up large surpluses. If the government now reduces its surplus without any offsetting change in private savings, the current account deficit would easily expand to 6-7 per cent of GDP.

In the 1980s, fiscal stimulus initially helped to bolster the value of the dollar by increasing real interest rates. But it is unclear if tax cuts and higher spending would be as positive in 2001-2002 because of the changes which have occurred in the US’s external financial position since the early Reagan years.

The US will soon have a deficit on its international investment account of 20 per cent of GDP, compared with a previous peak of 24 per cent in 1894. The expansion of the current account deficit to 6-7 per cent of GDP when there is already a deficit on investment income could at some point frighten the foreign exchange market and set the stage for a dollar correction.

By Philip Coggan, FT, September 5 2000
The bullish case is that the last six months have sorted out the technology sheep from the goats and investors are indulging in some sensible bargain-hunting.
I simply can’t believe it. Valuations remain at extremes. The price-earnings ratio on both the telecoms and the software sector is over 80.
The market’s top quartile stocks have a rating five times the lowest quartile stocks - that is down from a peak of 6.5 in March but still well above the early 1990s when the dispersion never climbed above three.

Fondavgifter bankernas nya guldkalv - Inga sänkningar i sikte trots miljardvinster.
Av Anna Björe, DN 2000-08-29

Bankerna uppvisar rekordvinster och en stor del kommer från landets alla fondsparare. Sedan årsskiftet har SEB tjänat 1.812 kronor på varje fondsparare. För Handelsbanken är motsvarande summa 562 kronor. Men några sänkta fondavgifter blir det inte, trots att vinsten för de fyra storbankernas kapitalförvaltning var mer än 3,6 miljarder kronor.

Fond- och kapitalförvaltning är lönande för bankerna. I flera fall har de fördubblat vinsten på kapitalförvaltningen under de sex senaste månaderna. För SEB:s del utgör vinsten från kapitalförvaltningen mer än en fjärdedel av bankens totala vinst.

I begreppet kapitalförvaltning ingår inte bara fondförvaltning, men fondförvaltningen särredovisas inte. För det mesta ingår exempelvis fondförsäkringar och förvaltning av privata förmögenheter också.

Samtidigt har avkastningen på ett urval av bankernas breda fonder, där det mesta av fondkapitalet investerats, varierat kraftigt. Sju av SEB:s breda fonder har gått 4 procent sämre än index de tre senaste åren, enligt uppgifter som Fondstatistik tagit fram åt DN.

Vissa fonder har gått väldigt bra, andra har gått mindre bra och där får vi skärpa oss, säger Claes-Johan Thureson, chef för SEB fonder.

Enligt honom använder SEB sina vinstpengar till att köpa in bättre förvaltningsresurser för att i förlängningen ge

fondspararna bättre avkastning Någon sänkning av avgifterna är däremot inte aktuell, trots att vinsten på kapitalförvaltningen är nästan 1,5 miljarder kronor.

För Föreningssparbankens fondbolag Robur, som är störst i Sverige på fonder, har förvaltningen av fondpengar och fondförsäkringar det senaste halvåret gett över en halv miljard i vinst. Inte heller Robur har någon ambition att sänka avgifterna.

Vi har marginal i verksamheten och det är jag glad över. Om man ser i ett internationellt perspektiv har Sverige dessutom väldigt låga avgifter, säger Nils-Fredrik Nybleus, finanschef på Föreningssparbanken.

Att det faktiskt går att sänka avgifterna har fondförvaltarna redan visat. De 500 fonder som är valbara i PPM-valet, som startar i september, har en genomsnittlig förvaltningsavgift på 0,7 procent. Bankernas avgifter för de vanliga fonderna, som inte ingår i PPM, ligger i allmänhet på ungefär 1,5 procent men det finns både billigare och dyrare fonder också.

Men Nils-Fredrik Nybleus vill inte jämföra PPM-fonderna med de ordinarie fonderna. PPM-fonderna sköts på ett annat sätt, en hel del av arbetet tar PPM hand om, säger han.

Hur ska fondspararen då känna att bankens vinst från fondförvaltningen kommer dem till godo?

Genom att de får en bra avkastning i paritet med den risk de har i sitt sparande, säger Nils-Fredrik Nybleus.

För Roburs del har snittavkastningen för de breda fonderna legat på knappt 0,5 procent plus för de senaste 36 månaderna.

Det är acceptabelt. Det är bara om förvaltaren presterar avsevärt sämre än index som man ska börja fundera på att byta, säger Susanne Franzén, tidningen Sparöversikt.

Hon konstaterar också att fondförvaltarna knappast är särskilt motiverade att sänka sina avgifter så länge spararna inte sätter press på dem.

Holidays can be a useful time for business people to raise their eyes from the day-to-day grind and take stock of the wider social and economic context in which they are operating. For this group, the literary holy grail is that rare book that entertains, stimulates the intellect, and encourages lateral thinking.

Unfortunately, the biggest business issue of the day - the internet revolution - has produced remarkably few books which come anywhere near this. Almost all are breathless, boosterish or adulatory.

Not so The Social Life of Information (Harvard Business School Press), which looks at the interaction between information technology and human intelligence and concludes that information is not the same as knowledge; that it takes human flair and enthusiasm to create wisdom.

A strength of the book is that it is written not by luddites but two men close to the cutting edge: John Seely Brown is chief scientist at Xerox's Palo Alto research centre, home of some of computing's biggest breakthroughs, while Paul Duguid is an academic at the University of California, Berkeley.

Michael Lewis captures some of the flavour of Silicon Valley in The New New Thing (Hodder & Stoughton), an uneven but entertaining portrait of Jim Clark, the larger-than-life serial entrepreneur who created the internet browser company Netscape.

Anyone with severe market withdrawal symptoms should read Irrational Exuberance (Princeton), a critique of the Wall Street bull market by Robert Shiller, Yale economics professor, who examines the psychological factors (herd behaviour, sports-like media coverage and new age thinking) behind the rise of the Dow and reaches some chilling conclusions.

For a historic perspective, The Go-Go Years by John Brooks (Wiley) is a classic account of 1960s exuberance (with some eerie parallels to now) and its spectacular demise. For takeover junkies, Taken for a Ride: How Daimler-Benz Drove Off With Chrysler by Bill Vlasic and Bradley Stertz (Wiley), presents a breathless and US-centric but entertaining account of Daimler's swallowing of Chrysler.

Globalisation is another big business issue, but books on the subject tend to be dull or platitudinous - not great beach reading. Better to delve into two works, published a few years ago, that put in sweeping historical context the factors that have made some countries rich and others poor.

The Wealth and Poverty of Nations by David Landes (Little, Brown) offers the analysis of an erudite historian. Guns, Germs and Steel by Jared Diamond (Vintage) presents an extremely original scientist's-eye perspective. A book to change your view of the world.

For those who prefer their literature classical rather than post-modern, Anthony Trollope's The Way We Live Now (Oxford) is a tale of a great financier's fraudulent machinations in the 1870s railway business, and a satire of a society in the throes of bull market excess. But on second thoughts, perhaps that is a little close to home.

The $50.7 billion price for VoiceStream Wireless Corp., a cellular service provider based near Seattle, set a dizzying record for acquisition costs in the telecommunications industry, based on price per customer, and left rivals in awe of the leap in expansion costs.

''Two weeks ago, no one would have believed that anyone could pay $20,000 per subscriber for any mobile service anywhere in the world,'' said Fabrice Farigoule, telecommunications analyst in Frankfurt at the B. Metzler Bank.

The greenback's strength reflects inflows of foreign money as international investors have chased the high real returns generated by assets in the booming US. As a by-product, a strong dollar has helped to keep a lid on inflation, financed the country's growing current account deficit and prolonged the boom.

But this virtuous circle could rapidly turn vicious. According to Gabriel Stein of Lombard Street Research, another steep rise in foreign purchases of US equities in the first quarter of this year shows that the US is building up a "dangerous dependency on 'hot' capital flows" just as the Asian economics did in the run-up to the 1997 crisis.

To avoid a similar debacle and to keep on plugging a current account deficit of some 4.5 per cent and growing, US assets must remain more attractive than any alternative. This means US stocks and bonds would need to continue to outperform other markets.

This is difficult to envisage, given rising growth in Europe and most emerging markets and, indeed, so far this year US equities have lagged behind Canada, Germany, France, Italy and Sweden. It is also incompatible with the aims of the Fed, which wants - and needs - a period of restraint from the markets in order to slow down the economy.

For investors this looks like a classic bear trap. Even if the economy does not succumb to one or more of the risks outlined above, the Fed's success" will entail lower returns from US financial assets.

Even a soft landing then, might not amount to the best of all possible worlds for the markets.

Jeff Madrick: Will the Market Crash?
The New York Review of Books, Cover Date: August 10, 2000

The uncertainty of future profits and dividends, it may seem, leaves a particularly wide margin for error in the evaluation of stock prices. But even so, many and perhaps most economists believe that stock prices usually reflect a reasonable estimate of a company's future performance, and that stock prices deviate from this intrinsic value only temporarily. It is not necessary, moreover, that most investors be right about stock prices. A relative handful of well-informed investors will sell or buy stocks if their prices are irrationally driven too high or too low.

In fact, so "efficiently" do these investors gather and evaluate new information that it is extremely difficult for one well-informed investor to have an advantage over others. Rarely, however, have the movements of the stock market tested the validity of this thesis as they do today.
It is hard to open the financial pages of the newspapers and avoid a discussion about whether there is speculative "bubble" in stock prices that is about to burst. [more]

All this comes at a justifiable price, reflecting both PaineWebber's own admission that it lacks a global presence and the systematic undervaluation of brokerage stocks on Wall Street. Despite a 47 per cent premium, UBS is paying just 18 times expected 2000 earnings or around 3.8 times book value.

Morgan Stanley - admittedly a stronger all-round franchise - trades on a similar earnings multiple and over six times book without a whiff of takeover speculation.
FT Lex 2000-07-13

Analysis of companies' net worth suggests that Wall Street's high-flying stocks remain fundamentally over-valued
From Marintin Wolf, FT, June 27, 2000

The probability that real prices on Wall Street will be lower at the end of 2008 than at the end of 1998 is 85 per cent. This is a startling statement. Yet if history and economic theory remain guides to the future, it is also quite correct.

My colleague Philip Coggan has already reviewed the book (FT April 19 2000), but its argument deserves another look. It is too important to ignore.

It is conventional wisdom that it always makes sense to buy and hold stocks. In the long run, this is true. But, as Keynes said, in the long run we are all dead. It has not been true for the time horizons relevant to most investors. The book shows that there were many years in the last century when it was a very bad idea to buy stocks if one's time horizon was 20 years, or less.

What is needed to identify such bad years is an indicator of fundamental value. There is such an indicator: Tobin's q, after the Nobel-laureate economist, James Tobin.

It is the ratio of the stock market value of companies to their net worth. Today, q says that it is more than twice as expensive to buy companies through the stock market than it costs to create them.

Over the long term, the two values have to converge. The question is how. Will it be through a rise in corporate net worth or through a collapse in the stock market's valuation?

The answer to date is clear: over the past three-quarters of a century, the correlation between changes in q and in stock prices is very high.

Since q has recently been higher than at any point in the previous 100 years, the conclusion is that the market is highly overvalued and likely to fall.

When an altimeter leads to so unpleasant a conclusion, people react by thinking it must have become unreliable. The core propositions of those who reject q's uncomfortable message are two.

The second is that the adjustment to the high q will occur not through a fall in stock prices, but through investment, further stimulated by a lower cost of capital.

The first is clearly wrong. The second is logically possible, but at best unlikely.

The most important arguments under the first heading concern so-called intangible assets. Jan Hatzius of Goldman Sachs makes the argument as follows:

"Unmeasured intangible assets have most likely grown faster than physical assets... This is because in the process of economic growth, industries that intensively use intangible capital, such as technology and entertainment, tend to grow relative to industries that do not, such as basic manufacturing and services."

But the view that corporate net worth is seriously underestimated for this reason is implausible, for at least three reasons.

Second, the measured return on capital must include the return on unrecorded intangible assets. If, as people argue, such assets are a large fraction of the total, then the measured rate of return on capital should be higher than ever before. The rate of return on corporate capital did achieve a good cyclical rise in the 1990s. But it remains well below the level it achieved in the 1960s.

Finally, these moderate actual returns on corporate capital are also inconsistent with the one good reason why corporate assets may be more valuable today than before - a rise in monopoly. In any case, for every new alleged monopolist, such as Microsoft or Intel, one can mention weakened old ones, such as AT&T and IBM.

Thus the belief that the staggering rise in q can be explained by the growth in unrecorded assets is nonsense.

Mr Hatzius accepts this, noting that unmeasured intangible assets would have had to increase by $12,500bn since 1990. There is no reason to believe any such thing.

If the rise in q cannot be estimated away, the second line of attack is to argue that it is perfectly reasonable. Here two points are made.

There is no obvious reason why higher prospective productivity growth should raise the value of existing assets, even if it is true. Accelerated technical change is as likely to reduce the value of such assets. Moreover, rational investors should expect returns from higher efficiency to be bid away by competition in favour of workers and consumers. Indeed, if the required return on equity investment has been reduced by a falling risk premium, as many argue, this gain will be more than bid away.

This leaves the last possibility - that adjustments to q will occur not through a fall in equity prices, but via an expansion in corporate net worth. A fall in the equity risk premium (and so of the corporate cost of capital) could then help explain both the increase in stock market value and the subsequent surge in investment.

This is conceivable, but implausible, not least because there is little good reason to believe that the equity risk premium has fallen.

First, it could take a half century for investment alone to bring q back towards its historic average. The slow pace at which the capital stock grows explains why adjustments to q have, in the past, occurred through the price of stocks instead.

Second, people are not behaving as though the prospective real return on equity is lower than for any extended period in the past two centuries. In surveys, investors still talk of the exceptionally high returns enjoyed since the early 1980s. Meanwhile, far from financing themselves with the supposedly cheap equity, companies are doing the reverse.

In recent years, US corporations have been enormous net buyers of equity. This hardly suggests they believe equity finance is unusually cheap.

Try as one might, the q ratio's recent levels remain disturbing. It is a theoretically and empirically sound indicator of market value. It is also extraordinarily high.

The only sensible alternative is that the desired return on equity is now far lower than ever before. Yet this looks like a fairy story, if one without a happy ending.

In the past, collapses in q have meant falls in stock prices that have heralded recessions. Will this story end any differently?

There are worriers around. This week, the Bank for International Settlements, the central bankers' central bank, emerged from its usual obscurity in Basle to publish its annual report. "The global economy now stands on the brink," it announced. "But," it added unhelpfully, "the brink of what?" The danger of a nasty global rebalancing, focused on a tumble by the US dollar, seems to underlie its anxieties.

Central bankers and journalists are habitual gloomsters. People have to rely on stockbrokers and the promoters of mutual funds to spread sunshine.

Pessimism has begun to lift: as the leading economies slow down ahead of a soft landing, the threat of sharply higher interest rates is fading and we should be able to concentrate on the wonderful story of technology-led change and inflation-free growth. Think of the US investors who have made so much money by buying the dips over the past five years.

But central bankers and journalists don't easily believe in miracles. Unconstrained optimism has regularly proved costly in the past. The Japanese miracle, which at one time terrified corporate America, fizzled out in 1989. The Asian miracle had a good run but eventually crashed in 1997. As for the UK, the Lawson miracle encapsulated the usual features of booming growth, rocketing asset prices and a yawning but (for a while, at least) easily-financed trade gap. Yet, it hit the buffers in 1988.

It is the huge imbalances that catch the eye at present, such as a US current account deficit heading towards $400bn a year.

However, the investment flows may be just as important. Indeed, there is something of a chicken-and-egg problem here. Do the investment flows happen because countries find they are piling up excess dollars through trade? Or do the trade gaps widen because institutions or companies around the world are so keen to invest in the US that they are driving the dollar to uncompetitive levels?

Either version of events suggests unsustainability, though the second might well prove longer-lasting.

In an old-fashioned, divided world economy, the rebalancing pressures would be high. In those circumstances the US, Japan and the euro-zone should be more or less financially self-contained. But, in a globalised economy, they need not be.

If Japan wants to sustain a high personal savings rate but Americans spend their way towards a negative one, that will be possible for an extended period. However, the Japanese must be ready to invest overseas and the Americans must accept the responsibilities and drawbacks of being the world's biggest debtors; the costs are much greater than just those of reassuring foreign hoarders of greenbacks that their wealth is not threatened by the redesign of the notes, a problem the US is now having to address.

As for the euro-zone, the ECB seems determined to consolidate the recovery by the euro against the dollar of 7 per cent since the low point on May 17. It has been the sharpest rally during the whole period of downwards drift (aggregating 25 per cent at its worst) since the new currency was born 17 months ago.

The ECB might have realised that its low interest rate strategy could have encouraged so-called "euro-carry" trades (the borrowing of euro to be switched into higher-yielding dollar assets). This is a rather pale version of the Japanese yen-carry trade which was very substantial during the late 1990s, driven by much wider interest rate differences. But that game ended last year when several New York hedge funds lost money.

Carry trade distortions can generate persistent exchange rate trends, but can also cause sudden sharp reversals when the risks of the currency mismatching become painfully obvious and positions are unwound abruptly.

As the BIS describes in its annual report, much of the euro's slide can be linked to the rapid development last year of euro-denominated financing, encouraged by low interest rates, and the widening perception by borrowers that the euro would prove to be a persistently weak currency. The ECB has repeatedly refused to evade this psychological trap by directly intervening to support the euro but, instead, it has now moved quite aggressively on interest rates.

The potential fundamental problems of Japan are considerably greater. Japanese citizens are big savers, which is unfortunate in a country short of demand; but, so long as they are content to stash the money away in (almost) zero interest rate accounts, the system will remain stable. The trouble is, the financial ratios will grow ever more frightening.

Rather similarly, the US financial system will remain stable as long as foreigners are happy to channel $25bn a month into dollar securities or corporate investments.

True, the brink is defined by my dictionary as the edge of a steep slope, with some ambiguity about whether the gradient is upwards or downwards. Perhaps the rest of the world is about to share in the economic acceleration already enjoyed by the US.

Normally, though, brinkmanship involves tactics leading to the edge of disaster.

On a trade-weighted basis, the dollar has suddenly dipped by 5 per cent, eroding some of the protection that currency strength has given the US against imported inflation.

Higher interest rates are required to hold back demand and inflation - but lower rates are needed to support the US securities markets and keep foreign investors happy.

It may be a sign of the times that a 10th-grade history teacher recently assigned the following essay topic: What caused the Great Depression, and how do economic conditions then (the 1920s) and now compare?

The parallels between the 1920s and today are intriguing and (of course) unnerving, because the Depression was -- after the Civil War -- America's greatest social calamity. In 1933 joblessness hit a record 25 percent of the labor force. Indeed, unemployment remained in double digits from 1931 until 1940, when it was cured by World War II defense spending.

The Great Depression was terrifying because it was so resilient. Hardly anyone thinks it could happen again.

Nobody can have made much money out of betting against Alan Greenspan. But the US Federal Reserve’s redoubtable chairman is engaged in perhaps his trickiest task: slowing the US supertanker while avoiding the recessionary shoals. Most people confidently expect him to pull it off. Yet the likelihood of failure is considerable.

According to the latest Economic Outlook from the Organisation for Economic Co-operation and Development, real US domestic demand grew at an average annual rate of 5.3 per cent a year between 1997 and 2000. Over the same period, the growth of real gross domestic product averaged 4.6 per cent.
Since even this impressive expansion lagged behind demand, the result has been a sustained rise in the current account deficit, up from just 1.6 per cent of GDP in 1996 to a forecast of 4.3 per cent this year.

Even though the OECD has raised its view of the potential growth rate of the economy to 4 per cent a year, it estimates the current output gap - the deviation of actual GDP from potential GDP, as a percentage of the latter - at 2.5 per cent.

Thus excess demand has shown itself in both the current account deficit and unsustainable exploitation of domestic resources.

Against this background, the slowdown in the third quarter, with growth falling to an annualised rate of 2.4 per cent, is exactly what Mr Greenspan ordered. The big risk he runs is that the impact of this slowdown on confidence will trigger a rapid unwinding of today’s huge private sector financial deficit - or excess of investment over savings. This has happened to a number of other high-income economies over the past 20 years. The universal result has been recession.

I discussed this vulnerability in a recent article for Foreign Policy.
The Mother of all Meltdowns: what a Wall Street Crash will do to the world,
Foreign Policy, September/October 2000
www.foreignpolicy.com.

Between 1992 and 2000, the US private sector moved from a financial surplus of 5 per cent of GDP, about 2 percentage points above its 1986-93 average of 2.7 per cent, to a historically unprecedented deficit of just over 5 per cent. This swing of 10 per cent of GDP in the US private sector financial balance has, in turn, been the principal engine of demand for the US economy and, to a significant extent, for the world.

Behind the swing in the US private sector’s financial balance have been both rises in the share of private investment and declines in the share of private savings in GDP. In 2000, private sector investment should reach 18.5 per cent of GDP, according to the International Monetary Fund, up 3.3 percentage points from its 1986-93 average. Meanwhile, private sector savings in 2000 should be about 13.4 per cent of GDP, well down from the 1986-93 average level of 17.9 per cent.

Why should US private investment have been so buoyant and private savings so weak? The answer is confidence, as shown in - and reinforced by - the soaring value of equities. Between August 1994 and August 2000, the real wealth (in 2000 prices) embodied in the stock market rose by $11,400bn - more than a year’s GDP.

The impact of this enormous increase in paper wealth on savings is difficult to determine. But it must have been substantial. Why should people bother to save as much as before when the stock market painlessly delivered, over a period of just six years, an increase in wealth greater than cumulative gross savings (never mind net savings) over such a period? But rising stock market valuations not only give a good reason to reduce savings. They have also stimulated investment.

The swing of the US private sector into financial deficit is a reflection of a virtuous circle: limited inflationary pressure; rising profitability and accelerating productivity growth; optimism among consumers and investors; soaring equity values; an improving fiscal position; powerful foreign demand for US assets; a strong dollar; and back again to limited inflationary pressure.

The question now is whether the recent collapse in the value of technology stocks, combined with slowing economic growth, could turn that virtuous circle into a vicious one.

In other high-income countries afflicted by significant declines in asset prices, swings in the net financial balances of the private sector have been as much as 10 per cent of GDP within a few years. That would bring US private sector financial balances back to where they were in 1992.

Such a reversal could follow a big collapse in confidence. That, in turn, would be reflected in - and multiplied by - a further big fall in equity prices. Since the market, excluding technology, media and telecommunications stocks, continues to trade at historically high price-earnings ratios - even though earnings are at cyclical peaks and the economy is slowing - the risks of this cannot be negligible.

Optimists insist that the tools of fiscal and monetary policy, combined with adjustment to the external balance, could offset the impact on economic growth of even drastic private-sector retrenchment. Formally, that is correct. But Japanese and British experience suggest that this can be difficult to achieve.

In the UK, for example, the general government’s financial balance collapsed from a surplus of just under 1 per cent of GDP in 1989 to a deficit of 8 per cent of GDP only four years later. According to the OECD, five percentage points of this deterioration reflected deliberately expansionary fiscal policy. Even so, the economy contracted sharply. Similarly, Japan’s general government financial balance moved from a surplus of just under 3 per cent of GDP in 1990 and 1991 to a deficit of 7 per cent last year. More than 8 percentage points of this deterioration reflected deliberate easing. Yet Japan has suffered a decade of stagnation.

It is implausible that US fiscal policy would, or could, be used with enough aggression to offset more than a modest swing in the private sector’s net financial balance, although a President George W. Bush might give it a good try. The so-called built-in fiscal stabilisers - the decline in tax revenues and increases in spending that automatically follow recessions - would merely cushion the impact, although at the price of a return to big fiscal deficits.

Monetary policy might be still more ineffective. In the context of a stock market collapse, the household sector would want to rebuild its wealth, not take on more debt. The corporate sector’s willingness to invest would be curtailed by declining equity valuations and slowing economic growth.

The immediate impact of an aggressive loosening of monetary policy would probably be on the exchange rate and the external account. Yet difficulties could then arise.

The Federal Reserve might be constrained by fear of a very weak dollar. In 1999, a current account deficit of $339bn was more than financed by $228bn in net foreign private sector purchases of US non-government securities and $130bn in net inflows of foreign direct investment.

If this inflow turned into an outflow, the US would have to finance both that outflow and the current account deficit. This could be done only with huge inflows of short-term speculative capital or purchases of dollars by foreign governments and central banks. Moreover, to the extent that the US is able to offset recession by improving its external balance, it will be exporting its problems to the rest of the world.

The US must now move smoothly to slower growth of demand and output without shaking underlying confidence. If this is to happen, the US private sector must remain both able and willing to run its unprecedented financial deficit. Possible? Yes. Certain? Hardly, is the only possible answer.

Spare a thought for the poor beleaguered central banking community. Yes, they’re in nice, safe public sector jobs. But their reputations are starting to fade.

Not long ago, confidence in central bankers was astonishingly high. They were the men (there is the occasional woman, but the profession appears to have a marble ceiling problem) who had worked out how to control inflation. Alan Greenspan, in particular, could walk on water.

The surge in the price of oil has clearly compounded the dilemma. One response would be to ignore this development. Core inflation remains subdued. The oil price is much less significant to the global economy than it was in the 1970s. To the extent that higher oil prices do have an effect, it will be to dampen demand, as wealth is transferred from consumers in the US, Europe and Japan to producers in the middle east and Latin America.

The problem with ignoring the oil price rise is that it will hand a smoking gun to the central banks’ critics. At this stage of the economic cycle, when no-one is quite sure whether the world economy is on the verge of a new era or an inflationary boom, central banks are very vulnerable to the ”wasn’t it obvious?” attack.

Wasn’t it obvious, they will say, that high oil prices, high stock markets, the weak euro, the US current account deficit, rising debt levels (take your pick) would lead to disaster?

NEW YORK -- Economists are confident that the Federal Reserve will engineer a soft landing this year for the U.S. economy, where growth continues to expand but at a slower, more sustainable pace.

However, economists are deeply divided over whether the soft landing will succeed in keeping inflation under wraps.

The consensus estimates of the 55 economists who participated in The Wall Street Journal's latest semiannual forecasting survey call for annualized growth in inflation-adjusted gross domestic product of 3.6% in the second quarter, 3.4% in the third quarter and 3.2% in the fourth.

Those forecasts indicate that analysts believe the economy has already begun to slow from the red-hot pace of recent quarters and will continue to slow throughout the year. GDP grew at an annual rate of 5.5% in the first quarter of this year and a blistering 7.3% in the fourth quarter of last year.

Essentially, the forecasters appear to fall into two major camps: the optimists and the pessimists. The optimists believe that the Fed, which has been raising interest rates for the past year in an effort to steer the economy toward a 3.5% to 4% annual growth rate, will pull off the perfect soft landing by slowing growth just enough to cut off inflationary pressures while keeping unemployment stable.

"I'm betting on the Fed," said economist Nicholas Perna, of Perna Associates in Boston. Federal Reserve Chairman Alan Greenspan "is the master of the soft landing, having successfully slowed the economy through higher interest rates without causing a recession in 1994-95 and even in 1987-88."

The pessimists also believe that the Fed will engineer a soft landing -- at least in the near term -- but they worry that the Fed's actions haven't been aggressive enough to contain inflationary pressures. And they see evidence of accelerating inflation in the tight labor market, in rising commodity prices and in the huge and growing current-account deficit.

A few even worry that when it becomes obvious later this year that the Fed wasn't vigilant enough in its inflation fight that interest rates will have to rise further, raising the possibility that growth could falter and the economy could slip into a recession next year.

"I think we all recognize that there are various imbalances that must be worked out," says Robert DiClemente, chief U.S. economist at Salomon Smith Barney in New York. "The key between the two camps is do we or don't we get into a tough inflation fight."

The United States economy has now recorded its longest upswing this century and it continues to be spurred by strong consumer demand, business capital formation and, increasingly, exports as the global recovery gains momentum. However, the recent strength of domestic demand is not sustainable and inflationary pressures are now becoming apparent, while the current account deficit has risen sharply, to above 4 per cent of GDP. The challenge for the authorities is to achieve an orderly reduction in demand growth to prevent overheating and avoid the need for a much sharper subsequent tightening of policy. The task facing the monetary authorities has been made more difficult, however, by the strength of financial markets and is complicated by the uncertainty about the extent to which new technology and structural change have raised the economy’s non-inflationary potential. Notwithstanding significant improvements in trend productivity, the monetary tightening that has already taken place is unlikely to restrain demand growth sufficiently. Hence a further tightening of monetary policy is called for and federal funds rates may have to rise to above 7 per cent by next August to ensure a soft landing.

The Need to Fear a Hard Landing
By John H. Makin, American Enterprise Institute, June 2000

Financial markets are pricing a soft landing for the U.S. economy as the Federal Reserve raises interest rates to slow demand growth and the rise of inflation. Simultaneously, the economic data appearing this spring contain the seeds of a hard landing. The resolution of this disconnect between market hopes and economic reality will produce a continuation of the extraordinary volatility in equity markets and a spread of volatility to fixed-income, commodity, and currency markets. Strange as it may seem, markets need to fear a hard landing before they can settle down.

Right now, market insouciance notwithstanding, the outcome in the contest between a hard and a soft landing is too close to call. But it is time to start thinking seriously about ways to tell the difference between the two.

A soft landing would mean that about 50 basis points more of Fed tightening, putting the Fed funds rate up to 7 percent, in addition to the May 16 Fed rate increase of 50 basis points, would slow the economy down to 3.5 percent growth—quickly enough to avoid much more than the 3.7 percent year-over-year headline inflation already evident this spring, not to mention the 4.3 percent wage inflation reported recently in the quarterly Employment Cost Index.

In a soft landing, the dollar won’t fall much and stocks won’t fall much more.

The catch is that such benign conditions won’t do much to slow U.S. demand growth.

In a hard landing, not seen since 1979-1980, inflation is stubborn, continuing to rise as the economy powers ahead or, worse, refusing to fall even as growth begins to slow. Inflation has momentum, and it doesn’t stop rising even as the Fed keeps raising interest rates. During the prelude to a hard landing, the Fed raises interest rates, but inflation goes up even more so that the real cost of borrowing keeps falling and households and businesses aren’t deterred from spending.

Modern economics makes itself intelligible by adopting everyday analogies. If inflation worsens, we say the economy is "overheating." If the Federal Reserve raises interest rates, it's "applying the brakes." If it cuts rates, it's "stepping on the gas." The metaphor of the moment is "soft landing." The economy slows enough to avoid higher inflation but not so much that it suffers a "hard landing" (a recession). It's an enticing vision--which may or may not come true.

The trouble with these analogies is that, even as they clarify, they oversimplify. The case for a "soft landing," though plausible, may not come true because the economy is not an airplane and Alan Greenspan - chairman of the Federal Reserve Board - is not its pilot.

The main difference involves control. Pilots have a lot of it. Landings and takeoffs are routine. By contrast, the Federal Reserve tries to steer the nearly $10 trillion U.S. economy through one tiny instrument: the obscure Fed funds rate. This is the interest rate on overnight loans between banks. When the Fed funds rate moves, the ripple effects spread to other short-term rates (on home-equity loans, business loans), long-term rates (on mortgages, bonds), exchange rates, the stock market and popular psychology. But the connections aren't always the same or entirely predictable.

To shift analogies: the Fed has a small lever (the Fed funds rate) to move an immense boulder (the economy).

Confidence in the "soft landing" stems from the current boom -which has consistently defied pessimists - and a fervent faith in Greenspan. His record surely warrants respect.

The economic expansion, now in its 10th year and the longest in U.S. history, has already experienced one "soft landing." Between February 1994 and February 1995, the Fed funds rate went from 3 percent to 6 percent. Some economists feared a recession. It never came.

Greenspan prides himself on acting preemptively: judging economic conditions and altering rates to prevent major problems. After Asia's financial crisis in 1997 and 1998, the Fed cut rates. Beginning in June 1999, it started raising them again on the theory that the boom - if unrestrained - would create inflationary wage and price pressures.

Sure enough, these seemed to appear in early 2000. Through May the consumer price index has risen at an annual rate of 3.6 percent compared with a 2.7 percent rise for all of 1999. The employment cost index - a measure of labor compensation -increased 4.3 percent for the 12 months ending in March. A year earlier, the gain was only 3 percent.

Retail sales- everything from food to cars - dropped in April (0.6 percent) and May (0.3 percent).

In May the unemployment rate inched up to 4.1 percent from 3.9 percent, and private-sector jobs declined by 116,000.

Housing construction has weakened, with new-home starts in May--at an annual rate--10 percent lower than in December.

"Consumers have been on such a spending binge that while they say it's a good time to buy a car or house, they've already bought a car or house," says economist Cynthia Latta of Standard & Poor's DRI. "And if you're not building as many new homes, you don't need as many new appliances."

The economy seems to be landing softly. But could this picture be wrong? Well, yes.

For starters, the slowdown may be a mirage- a "temporary payback" for the rapid growth of late 1999 and early 2000, says economist Ira Kaminow of the Capital Insights Group. In the last three months of 1999 the economy grew at an astounding annual rate of 7.3 percent. People may have bought in December what they would have bought in May.

Once this effect wears off, the economy may resume growing at more than 4 percent--faster than the Fed wants--and require further interest-rate increases. (Since mid-1999 the Fed has raised the Fed funds rate from 4.75 percent to 6.5 percent. It will consider interest rates at a meeting next Tuesday and Wednesday.)

Or the slowdown may prove worse than expected. "Lower-income household debt is very high," says Mark Zandi of Regional Financial Associates. "That may be the economy's Achilles' heel."

Even in 1998, about a fifth of households with incomes of less than $50,000 needed 40 percent or more of their after-tax income to pay interest and principal on debt, he reports. Higher gasoline prices are another possible problem. They could depress consumer confidence and spending, says Susan Sterne of Economic Analysis Associates. Jobs, profits, the stock market and corporate investment could suffer.

None of these economists yet predicts a recession. In the Standard & Poor's DRI outlook, the economy grows nearly 5 percent in 2000 and slows to 3 percent in 2001. Unemployment hovers around 4 percent. As slowdowns go, that's spectacularly benign. On the other hand, forecasters have often missed major economic turning points.

Everyone is dealing in educated hunches. The imagery of a "soft landing" promotes a false sense of mastery. Pilots know how far and fast their planes can fly. With radar, they have a good sense of weather and terrain. Our economic vision is more clouded. Statistics and studies give incomplete or conflicting answers about current conditions (say, inflation) and the economy's potential growth rate.

The larger point is that the economy responds to its own rhythms: new technologies, products, popular moods, management practices, government policies. The Fed is only one influence, although an important one.

Government could sustain "full employment," it was said, by tweaking various policy dials--taxes, spending, interest rates. The effort failed notably. This history is worth recalling, because it suggests that today's hyperconfidence could usefully be accompanied by some humility.

För bankkoncernerna som helhet är fonder en extremt lönsam affär.
Dagens Industri 2000-05-15

Marknadens fyra största fond- och kapitalförvaltningsbolag fick in sammanlagt 7,8 miljarder kronor i fondförvaltningsavgifter förra året.

Men den största delen gick inte till förvaltning, det vill säga analys, köp och försäljning av aktier. Dit gick bara mellan 17 och 24 procent av förvaltningsavgifterna.

Åtminstone utifrån ett fondspararperspektiv sett. Kontoren i de allra flesta storbanker, fick drygt hälften av förvaltningsavgifterna som ersättning för fondservice och fondförsäljning.

Det är inte lätt för en vanlig fondsparare att bilda sig en uppfattning om vad de förvaltningsavgifter man betalar varje år egentligen går till. Någon sådan redovisning ingår inte i de redovisningar som fondbolagen skickar till sina kunder.

Däremot kan fondernas egna ekonomiska redovisningar beställas från fondbolagen. Men de kopierade A4-luntor som skickas är svåra att tränga igenom för en vanlig fondsparare. Speciellt som fondbolagen ofta har flera dotterbolag.

Redovisningsprinciperna skiljer sig kraftigt åt från fondbolag till fondbolag och en jämförelse är mycket svår att göra. Inte ens informationscheferna på två av de största fondbolagen kan, på rak arm, svara på frågor kring årsredovisningarna, utan måste konsultera kollegorna på redovisningsavdelningen.

Varken Nordbanken Fonder eller Handelsbanken Fonder redovisar hur mycket pengar som fondbolagen betalar bankkontoren för service kring fonder, det vill säga försäljning, rådgivning med mera.

Det gör däremot SEB Fonder, som från i år kallar ersättningen till bankkontoren för en förvaltningskostnad. Detta trots att bankkontoren inte har något som helst inflytande över hur fonderna förvaltas.

Språkbruket i övrigt skiljer sig, även det, kraftigt åt mellan fondbolagen. Det som SEB kallar förvaltningsarvoden, och som är fondförvaltningsavgifter som fondspararna betalar, benämner Nordbanken Fonder som nettoomsättning och Handelsbanken som rörelseintäkter.

Hur mycket de enskilda fondförvaltarna tjänar på att sköta ens fond finns det ingen information om.

George Soros: markets must be regulated Speaking to BBC News Online, Mr Soros said that markets would continue to view the single currency as a "one-way bet," which could easily tumble to below $0.80 and even risked "disintegration" as a currency.

Mr Soros warned that the world's next financial crisis was likely to originate in the relationships among the world's biggest countries, not in the "periphery" as during the Asian crisis of 1997.

He warned that the US was running an unsustainable current account deficit, and that the dollar could come under pressure in the event of a stock market crash.

And he said that the consequences of a "hard landing" where the US was forced to raise interest rates to defend the dollar, would be severe for the rest of the world.

Mr Soros spoke to the BBC at the sidelines of a conference on reforming the global economic architecture sponsored by the Centre for Economic Policy Reserch and the UK's Economic and Social Research Council.

Mats Johansson i högerspalt på ledarsidan i SvD 2000-04-16:
Det är ingen större dramatik i det att börsen ibland korrigerar sig. Det gör marknader.

400 år med bubblor och hysteri
Devil take the hindmost - a history of financial speculation
Författare: Edward Chancellor

Den 8 juli 1932 hade Dow Jones index rasat med 90 procent från toppnoteringen 1929. Historikern och journalisten Edward Chancellor gör i denna bok en historisk exposé av finansbubblor och spekulationshysteri de senaste 400 åren.

Mest spännande att läsa är de kusliga likheter som finns mellan 1920-talets "nya era” och våra dagars "nya ekonomi". Då som nu frångick spekulanterna vedertagna värderingsregler, som som nu intecknades framtida värden i börskurserna, dom som nu blev aktier en folkhysteri.

När sedan kraschen kom berodde den inte på någon påtaglig enskild händelse.

Det var det psyk,logiska klimatet som förändrades. Plötsligt blev pessimisterna fler än optimisterna och börsen föll. Radio Corporation of America, den nya teknologins flaggskepp under 1920-taljet som fördubblat kursen till 160 dollar på tio dagar 1928, rasade ner till 2:5o dollar när marknaden nådde botten 1932.

Vilka ekonomiska risker finns med börshysterin?
Ur Dala-Demokraten 5 april 2000

Mest uppenbar är förstås faran för en allmän kursnedgång som i ett enda slag utplånar åratals sparande. Till och med riksbankschefen Urban Bäckström har varnat för det. Och inte bara aktieinnehavare råkar i såfall illa ut; blir krisen djup kan den utmynna i en allmän ekonomisk nedgång, med accelererande arbetslöshet som följd. Grundproblemet är helt enkelt att gapet mellan börskurser och vinster nu nått historiskt svindlande djup. Gigantiska pappersförmögenheter kan över en natt raderas ut.

Vilka sociala risker medför börshysterin? Varje tid har sina drömmar. Länge nu har drömmen om snabba och arbetsfria inkomster på börsen dominerat. Lite för många unga människor tycks mer intresserade av NASDAQ-börsen än av kunskaper i t ex matematik, kemi, biologi. På sikt undermineras den mark ekonomierna bygger på. Hur mycket ekonomisk egennytta tål ett samhälle?

I måndags morse diskuterade jag 1929 års börskrasch med moderaten Per Westerberg, den f.d. ministern i Bildt-regeringen. Konsekvenserna av den svarta tisdagen var förödande: världsekonomin drogs samman och ur djupen uppsteg den massarbetslöshet som till sist gav nazismen makten.

Westerbergs svar på min reflexion var följande: Ibland går börsen upp och ibland går den ner. Så blundar en frälsare för konsekvenserna av sin lära.

Ändå förstår jag Westerbergs oreserverade glädje. Vi rör oss ju in i det slags samhälle som högern alltid drömt om.

Growing too fast for comfort
A rapid rise in productivity has raised the US growth rate but brought with it an unsustainable level of demand
Martin Wolf, FT, 4 Apr 2000

Something remarkable is happening in the US economy. Yet while everyone agrees on this, people disagree on what that something is. To some it is a bright "new economy". To others it is the bubble to end all bubbles.

Yet these views are not as opposed as they may seem to be. It is perfectly possible for genuine improvements in underlying economic performance to generate a destabilising asset-price driven surge in demand. It is not only possible, but probable, as Alan Greenspan has been stressing.

The chairman of the Federal Reserve explained how he sees underlying US performance as follows, in a speech delivered on March 6. "In the last few years, it has become increasingly clear that this business cycle differs in a very profound way from the many other cycles that have characterised post-second world war America. Not only has the expansion achieved record length, but it has done so with economic growth far stronger than expected. Most remarkably, inflation has remained largely subdued. A key factor behind this extremely favourable performance has been the resurgence in productivity growth."

For close to a quarter of a century, economists have struggled to understand the phenomenon described by Robert Solow, the Nobel laureate from the Massachusetts Institute of Technology, who asserted that "you can see the computer age everywhere but in the productivity statistics".

Now it can even be seen there. An unpublished paper by Stephen Oliner and Daniel Sichel, economists at the Federal Reserve in Washington DC, concludes that "the use of information technology and the production of computers accounted for about two-thirds of the one percentage point step-up in productivity growth between the first and second halves of the 1990s".*

Their analysis uses a standard growth-accounting framework, in which increases in labour productivity reflect a rising ratio of capital to labour and overall technical progress, which is known as "multi-factor productivity" (MFP). The annual growth of labour productivity in the non-farm business sector, they argue, jumped from 1.61 per cent between 1991 and 1995 to 2.67 per cent between 1996 and 1999. Almost half of this increase (0.46 percentage points of the total rise of 1.06 percentage points) is due to increased availability of information technology; and roughly a third (0.35 percentage points) is due to technical progress in the production of computers and semiconductors.

Why has it taken so long for this technological revolution to show up in the productivity numbers? Jeremy Greenwood of the University of Rochester, New York argues that this should be no surprise. This is exactly what happened during the first and second industrial revolutions in the UK in the late 18th century and the US in the late 19th century.** Then too, the initial impact was an apparent reduction in productivity growth, as costs were incurred in understanding and developing the new technologies. Then too, there was an increase in inequality caused by the scarcity of people competent with the new technologies.

This phenomenon of slow adaptation and diffusion would help explain the second striking feature of today's changes: the absence of any improvement in productivity growth outside the leading country. Labour productivity in Japan, Germany and the UK is forecast by Goldman Sachs to grow even more slowly between 1995 and 2000 than between 1977 and 1995 (see chart). It is expected to grow only marginally faster in France. But, as before, the opportunity to catch up remains open to the laggards, provided they make the necessary adaptations to policy and business behaviour.

Yet before accepting that the jump in US productivity growth is both big and durable, it is useful to go back to the work of Robert Gordon of Northwestern University cited in my column on the new economy of August 4, 1999. Prof Gordon concluded that the underlying improvement in productivity growth between the two halves of the 1990s was only 0.3 percentage points, all of which was explained by accelerating productivity rises in computer manufacturing.

According to Mr Oliner and Mr Sichel, new data available to the end of 1999 raise the increase in underlying productivity growth to 0.6 percentage points. The chief reason for the remaining difference between Professor Gordon and the Federal Reserve paper is that the former ascribes much of the recent productivity rise to the cyclical surge in growth. The authors of the Federal Reserve paper omit the cycle on the grounds "that separating cycle from trend is difficult, particularly in the midst of an expansion".

This is true enough. But it also ignores a possibly crucial distortion. From 1996 to 1999, the US economy grew at an annual average rate of 4.1 per cent. Over the same period, real domestic demand rose at an astonishing annual average rate of 5.3 per cent. Making this unsustainable combination possible were the twin safety valves of falling unemployment and a growing current account deficit: the unemployment rate fell by 11/2 percentage points from the end of 1995, while the deficit grew by more than 2 per cent of GDP between 1995 and 1999.

Mr Greenspan ascribes this disturbing surge in demand to the productivity improvement. In his March 6 speech, he argued that "the pick-up in productivity tends to create even greater increases in aggregate demand than in potential aggregate supply" - the transmission mechanism being rising asset prices. The chart, taken from a new book by Robert Shiller of Yale University, demonstrates that the market values corporate earnings more highly than at any time since 1880.*** And, notes the Fed chairman: "The evidence suggests that perhaps three to four cents out of every additional dollar of stock market wealth eventually is reflected in increased consumer purchases."

The resulting unsustainable surge in demand does not only affect monetary policy. It must also qualify any assessment of productivity growth. Since 1995, productivity has grown even faster than before the sudden growth collapse that followed the first oil shock, in 1973. But how durably it has risen cannot be known until the unsustainable demand it has helped cause is back under control.

* The Resurgence of Growth in the Late 1990s: is Information Technology the Story? March, 2000.

First a Japan Bubble, Now an America Bubble
International Herald Tribunde, April 3, 2000
By Sebastian Mallaby The Washington Post

- Back in the 1980s, when Japan's economy was riding high, foreign correspondents had a wonderful time deriding its excesses. Grandmothers were trading market tips in tea salons. Young women seemed permanently affixed to French designer handbags. Salarymen toiled night and day, then recovered by inhaling condensed oxygen and consuming gold leaf with their sushi.

Finally Japan's bubble burst, and in retrospect the meaning of these signs was clear. A society that had taken to swallowing gold leaf was bound to be swallowing its pride soon after.

Well, a decade later, oxygen bars have arrived in New York and Hollywood. And Uncle Sam's Casino in Cripple Creek, Colorado, offers oxygen hits in eight delicious flavors, peppermint and tangerine among them. Americans are not eating gold leaf, but some are wearing suits with gold woven into the pinstripes. For those without $14,000 to spare, ties with 18-karat gold thread can be had for a mere $260

Or consider household pets in bubble-era America. The Kennel Club in Los Angeles offers its canine guests theme-decorated cottages complete with TV and VCR, not to mention workouts to balance the chicken teriyaki on the menu.

Japan's firms drove the salarymen like slaves, then made it up to them with weekend retreats, golf club memberships and other attempts to secure loyalty. Now the corporate campuses of America's computer firms offer everything from exercise to entertainment. Texas Instruments is even willing to arrange a mechanic to repair an employee's vehicle.

In the four years leading up to the end of 1989, Tokyo's stock market index rose by an average of 29 percent a year. From 1995 to 1999, the S&P 500 grew at an annual rate of 26 percent.

Western analysts blanched when Nippon Telegraph and Telephone shares were floated on the Tokyo stock market in 1987 at a price-earnings ratio of 250. After Palm Pilot floated recently, its share price quickly rose to more than 1,000 times earnings.

Japan's boosters said stock prices were justified by the country's work ethic, social cohesion, savings culture, managerial style, whatever. America's boosters cite the country's entrepreneurial ethos, openness to change, technological brilliance, whatever.

Japan was said to be conjuring unprecedented efficiencies from keiretsu, or networks of firms. Americans are wild about networking, too. John Doerr, Silicon Valley's venture capital king, has the nerve to use the Japanese term: His Web site boasts that he has created America's very own keiretsu.

Japan's stock market boom produced corruption in grand style. America's boom may be creating something of a dot-con economy. In a climate that values born-yesterday firms at many times their revenues, the temptation to pump up those revenues is often overwhelming - Web firms advertising with each other and reporting the ad ''sales'' as income, or counting as income the sale of goods produced by someone else, even though the Web firm is only getting a commission.

As in Japan, the party will eventually go sour. But the Japanese comparison suggests that the hangover will not be as great. Japan had a double bubble, in the stock market and also in real estate, whereas American property prices are out of control only in the frothiest patches of the New Economy.

In Japan, moreover, the financial authorities actually contributed to the bubble. They encouraged investors to think that they would support the market if it crashed. They connived at accounting tricks that fueled the speculative frenzy. In America, Alan Greenspan's misgivings about giddy stocks are widely publicized, and the Securities and Exchange Commission is getting ready to clamp down on virtual accounting.

Japan's bust proved especially damaging because of the structure of the country's financial system. Banks owned piles of shares, so the crash wiped out much of their capital. They lent against the security of shares and property, so the crash eliminated the banks' ability to recover loans. As a result, the banks were left too weak to lend. The resulting credit drought lies behind Japan's decade-long recession.

In America, banks are less exposed to the bubble. They are not major owners of stock, and they tend not to rely on shares as collateral. They are not, in any case, as important as banks are in Japan. American companies rely less on loans than on venture capital and equity financing.

If the stock market crashes in America, the pain will be distributed via mutual funds and day-trading accounts to millions of shareholders. It will trigger personal bankruptcies, mortgage defaults and an end to the consumption boom. But it will not create the prolonged malaise that comes when you cripple the financial system.

We may have gotten a small foretaste last week of the endgame of the Internet investment boom. The hallmark of any boom is unbridled confidence, which conceals and condones practices that--in a less giddy climate--would seem sloppy, unethical or illegal. The Internet has been so profitable for so many that people instinctively confuse economic success with moral infallibility. This can't last forever, if only because human nature isn't perfect--even the human nature of the people behind the Internet and computer booms.

What happened last week provided a cautionary tale. Early Monday, MicroStrategy--a prominent software company--announced that it was revising its 1999 financial results. Sales would drop roughly 25 percent from $205 million to about $150 million. Profits would change from a reported 15 cents a share to a loss of between 43 cents and 51 cents. The reaction was swift. On Monday, MicroStrategy's stock plunged 62 percent, from $226.75 to $86.75.

Bombarded by shareholder suits, MicroStrategy will have ample opportunity to explain its actions. No one can yet say whether it committed fraud--or was the victim of overly conservative accounting rules. "I don't think we made a mistake," says MicroStrategy chairman Michael Saylor. "The technology has outstripped accounting guidelines." He says the company merely booked revenues it had in hand and that auditors insisted be spread over the life of software contracts. However the episode ends, it suggests that the high-tech frenzy has created an ethical quagmire.

There are huge pressures to project optimism--and prop up stock prices. The line between what people genuinely believe and what serves their economic interests has blurred. Perhaps some people can no longer see the line. Stretching accounting rules (if that is what MicroStrategy did) is a flagrant trespass. But others are more subtle, ambiguous and, possibly, pervasive. Questions abound about underwriting practices, the independence of stock "research," and the use of stock options.

Consider IPOs. These are the "initial public offerings" of stocks by private companies selling their shares to general investors. The business is hugely profitable for the underwriters--the brokerage houses that handle the sales. According to Jay Ritter, a professor of finance at the University of Florida, the underwriters typically get about 7 percent.

Now, suppose that Whoopee!.com has a $100 million IPO. Why would anyone buy Whoopee!.com? Well, it helps if the Wall Street underwriter has a popular stock analyst whose recommendation will push up the price. The best-known Internet analyst is Mary Meeker of Morgan Stanley Dean Witter. In 1999, she reportedly made about $15 million. (The figure, cited by the Wall Street Journal, isn't denied by the firm.) She was paid so much in part because she helped attract so much underwriting. In 1999 Morgan ranked second in IPO underwritings at almost $14 billion, just behind Goldman Sachs ($14.5 billion), reports Thomson Financial Securities Data.

"The conflicts of interest are immense," argues Ritter. Stock analysts are increasingly "cheerleaders," he says. Their pay depends on the firm's underwriting, which depends on enthusiastic research reports. Glum Internet analysts aren't wanted. (Morgan Stanley Dean Witter has a different view: Meeker does prescreen Internet companies that the firm underwrites; but this review helps eliminate weaker candidates. "There are lots of companies that would like to be underwritten by Morgan Stanley Dean Witter," says a spokesman.)

Capitalism is about risk and reward. If there's risk, some people will lose. Companies fail. Business plans flop. The dot-com phenomenon won't (and shouldn't) be any different. That is not the issue. But to work, capitalism requires reasonably reliable information. If it's skewed, then the risk-reward equation becomes skewed.

Logic suggests that IPO underwriting standards have eroded--and they have. Before Netscape's IPO in 1996, companies going public generally were profitable, says finance professor Jeremy Siegel of the University of Pennsylvania. Now, most run losses. One reason is that they're younger. In 1995, the average IPO firm was 8.1 years old. By 1999, it was 5.2 years.

Of course, this is a godsend for venture capitalists and company founders, who can cash out more rapidly. It's also a bonanza for underwriters. But some companies are--almost certainly--being taken public by promoters who suspect that the firms will never be profitable. Sooner or later, some investors will suffer huge loses. "Fleecing" is the word that springs to mind.

Whose moral responsibility is this? Good question. There are others. For example: Are stock options being overused? Critics believe they may hurt shareholders by draining a company's wealth.

These are ethical--as well as business--questions. They are hardly being asked. (An exception: an excellent recent cover story in Fortune magazine.) The answers aren't easy. As Siegel notes, investors clamor for speculative stocks, despite well-known dangers. "It's the gold rush, like the 1850s," he says. "There's a tremendous amount of stock envy." Josh Lerner of the Harvard Business School says there have been other IPO eras--say, biotech issues a decade ago--when most companies were unprofitable. It's the nature of the beast.

Perhaps. But qualifications may be irrelevant. While the boom proceeds, almost everyone tolerates its excesses, including moral lapses. Winners outnumber losers. Resentment is muted. But let the boom stumble, and the climate might alter. Disappointment and losses mount. Some seem to have profited at others' expense. Recriminations grow. The anger and outrage going down may be as exaggerated as the indifference going up. Other deflated booms have followed this cycle: the 1920s' U.S. stock boom; the S&L scandal of the 1980s; Japan's recent "bubble economy."

In good times, people often do things that--with hindsight--look less than upstanding. The MicroStrategy case may be misleading. Or it might portend a larger reckoning.

In spite of the measures adopted by Europe's leaders this weekend aimed at closing the competitive gap with the US economy, they remain ambivalent towards America's runaway growth of the last few years.

On the one hand - as pledges to deregulate telecommunications, liberalise financial markets and kick-start development of information technology industries reveal there is a grudging but strengthening acknowledgement that America has been doing something right. The rhetoric is still couched in mildly disdainful terms that suggests Europe can improve on the US model. European leaders believe it can achieve an elusive synthesis of economic success and social cohesion by refusing to go down the "market society" route of cheap labour and minimal social protection. Yet there is clearly an acknowledgment that there are lessons to be learnt. In their less public assessments of US

performance, some continental European officials make no attempt to disguise their belief that US growth is one of the most egregious examples yet of "casino capitalism". They believe the elevated demand growth has been fed not by real growth in productive potential, but by a speculative binge, a national loss of financial self-control.

Even as they seek to emulate the internet explosion, some of them view dotcom market fever as an excess that will result in inevitable collapse. Let's see what people make of this great American model when the downside of social and economic flexibility leads to rapidly rising unemployment, impoverishment and social unrest, they murmur.

This posture - reluctant admiration mediated by anticipated schadenfreude - misses the most important economic lesson of recent years on both sides of the Atlantic. Without action to make European labour markets more like the US - the one thing politicians in Europe rule out - attempts at engineering an innovative, entrepreneurial economic culture will fail.

The emphasis in European criticism of the US on the social costs of a freewheeling economic system equally misses the true Weakness in America's economic resurgence. Ironically, it is also a weakness that European action to make labour markets more flexible could help to address.

This means that if income in the US and the rest of the world are growing at precisely the same rate, the US current account will steadily deteriorate. And over time, this imbalance will need to be addressed by a steady depreciation in the value of the US dollar, which is a source of potential instability for the world economy.

Since this phenomenon was first identified, the fundamental imbalance it implied has not mattered all that much. Throughout the 1970s, 1980s and the first half of the 1990s, US demand grew at lower average annual rates than the rest of the world's. The pronounced slowdown in US productivity growth that began after 1973 ensured two decades of relatively sluggish income growth that failed to match the European, still less Japanese, performance.

Though it was the cause of much economic soul-searching in the US it had least had one benefit - the gap in income growth kept the US current account in broad balance with the rest of the world. When the US enjoyed brief spurts of growth above the global average - in the mid-1980s for example - the effect on the current account was dramatic and negative. But these were followed by a quick reversion to the longer-term pattern of sub-par US growth and either current account balance or, at worst, small and manageable deficits.

But since 1995, the US has moved into an extended period of siguificantly faster growth than the rest of the world. The downside of the productivity acceleration is clearly evident in the rapid deterioration of the current account - with the deficit now close to 4 per cent of GDP. If this is indeed a new era of more rapid US growth - or even of merely US growth parity with the rest of the world - the structural imbalance at the heart of American demand will loom larger than at any time since it first emerged 30 years ago.

America's critics say the imbalance represents a chronic US inability to save enough to finance its investment. In strictly arithmetical terms, this is of course true, since the savings-investment gap is simply the counterpart of the current account. But a striking feature of the last few years is that the gap has been caused not by dwindling savings but by accelerated investment.

In other words, the structural problem is a global one. The US economic renaissance is simply providing the best opportunities for investors from around the world. The long-term answer to this long-term problem lies not in depressing US growth - though of course that is what the Federal Reserve is forced to do in the short term - but in raising potential elsewhere.

Genuine action by European countries to cut their structural unemployment by eliminating the penalties against hiring workers will raise their domestic demand, increasing the attractiveness of European investment opportunities. For good measure, it would help reduce potentially dangerous global imbalances and foster that greater international economic stability they talk so much about. That really would be something to celebrate.

Everyone can agree that two things have been happening in the past five years. The US stock market has been rising, and so has private sector debt.

However, not everyone would agree on how and if the two phenomena are connected.

Have consumers been borrowing to put money in the stock market or has the rise in the stock market meant that consumers have felt more comfortable with a higher level of debt?

As usual it depends on which statistic you look at. Some would point to the dangers implied by household margin debt, which is running at 3.5 per cent of disposable income.

Others would cite the fall in the ratio of household debt to assets from 23.5 per cent at the end of 1994 to 21 per cent at the end of 1999. The latter statistic clearly indicates the "wealth effect" of rising share prices on household balance sheets.

According to Lombard Street Research, private sector debt jumped from 168 per cent of GDP in 1994 to 205 per cent in 1999.

The biggest culprit was not the consumer but the financial sector, whose debt jumped from 54 per cent of GDP to 80 per cent during the same period.

Where is all this credit going? It may well have helped fuel the bull market for equities. After all, the availability of greater credit means greater demand for equities at a time when supply has been falling.

But that still leaves a puzzle. Why has the rise in stock markets not "washed through" to the rest of the economy? Excess credit cannot really stay in the stock market. For every buyer of shares, there is a seller that ends up with cash.

Only if the corporate sector was a net issuer of equity, could the stock market really absorb excess credit. But as noted above, corporations have been reducing the supply of equities through takeovers and share buy-backs.

One possible answer could be that the deflationary forces prevailing in the past five years have been far more powerful than we thought.

Global competition and technological advance would have led to outright deflation in the western economies were it not for credit growth. In short, the money has washed through the stock market after all. And that money has benefited one sector in particular.

Edgar van Tuyll, a strategist at Pictet in Geneva, has found a clear correlation between past episodes of high return sectors (the Nifty Fifty in the early 1970s or Japanese property in the late 1980s) and excess credit creation. And the model neatly fits the performance of the internet sector in recent years.

Mr van Tuyll defines excess liquidity as a situation where credit grows faster than the economy - as measured by the relationship between commercial bank credit and GDP.

He believes that, after a period of lengthy economic growth, investors desert the security of government bonds (pushing yields higher) and pile into the high risk "flavour-of-the-month" sectors.

Higher bond yields create a problem for most parts of the stock market. But investor enthusiasm often means that earnings expectations in the fashionable sectors rise faster than the discount rate. The result is a very narrow stock market in which only a few shares are going up.

The pattern reverses when interest rates rise fast enough to reduce the growth of liquidity below that of the economy. Unfortunately, as Mr van Tuyll remarks, this is not a precise art and it is far from clear how much rates have to rise to put the brakes on. Certainly the US Federal Reserve's five increases to date do not seem to have done the trick.

If this model is correct, there are big dangers ahead. If much US private sector debt is (explicitly or implicitly) collateralised by equity prices, then quite a small fall in share prices could have a big effect.

We have seen this before in 1994, when leveraged investors were forced to bale out of bonds or in 1998 when they abandoned high-yield debt. Markets can temporarily break down.

If the liquidity tap is turned off, there is little in the way of fundamentals to help underpin some new economy shares (often no earnings or dividends, sometimes not that much in the way of sales).

Spring is here, hibernation is over, and the bears are out again. Warnings from Wall Street eminences such as Albert Wojnilower ("Some of us believe that the speculation has gone so far that there is no easy or painless way out") and perpetual harangues from Austrian School economists such as Kurt Richebacher suffuse the air we breathe. Even Goldman Sachs' Abby Joseph Cohen, whose optimism has always been tempered, suggested raising cash last week.

Making the biggest splash however, at least from a scholarly perspective, is Robert J. Shiller, a distinguished economist from Yale University. His book Irrational Exuberance is a wonderful history and analysis of market booms and busts.

Three times in Wall Street's past 100 years, incredible speculative binges have grown, and grown, and grown yet again only to give way to wicked mornings after. There was 1901, most famously the 1929 crash and ensuing Depression, and the long 17 years of equity stagnation starting in 1966.

Shiller and his fellow doomsayers believe that the current market boom, in other words madness, has created a bubble - indeed the biggest bubble of them all - and will be followed soon by at least long-term stagnation if not outright devastation.

It is not that there is no real basis for optimism, the learned sceptics agree, with technology breakthroughs fundamentally transforming our economy, but the Wall Street hype has transformed rational optimism to market lunacy, or, in polite and now overused terms, "irrational exuberance".

Heaping ample doses of blame on Wall Street analysts, strategists and brokerages, as well as the purveyors of optimistic news such as Business Week, CNBC and many others, including Alan Greenspan's Federal Reserve, the bear pack accuses these folk of perpetuating a huge and unsustainable swindle on a gullible investing public.

They have sold unsuspecting innocents on such falsehoods as "the new economy", "in the long run stocks always go up", "inflation is dead", "the traditional valuations can't be used any more". And, the one I like best - conveniently used to explain away every bubble in history (including the miracle of Japan in the excessive 1980s): "It's a new era".

The bears make convincing cases that valuations are ridiculously high, volatility has reached dangerous levels, many marginal companies are selling at levels way beyond blue sky, and a significant number of investors are, to say the least, managing their personal finances imprudently.

The problem with these sceptics is that they don't answer the two most important questions: when will the bubble burst and the bull die? And what will follow?

Remember that the legendary Greenspan "irrational exuberance" speech was made in late 1996, almost three and a half years back and, more significantly for investors, some 5,000 Dow Jones points ago. For the most part, the same bears were in full roar back then.

Indeed, some of the naysayers have been crying danger since the early 1990s and urgently urging equities avoidance. How would you like to have missed the last five years or more by heeding their call?

What distresses investors most is the periodic "pockets" of suddenly, steeply declining equity prices. These bouts of dizziness seemingly do the same percentage damage in a fraction of the time that was needed in the past to correct excesses.

Think of the reaction to the Asian crisis in the fall of 1997, and of the profound fears stirred after the Russian default, along with the near-demise of Long-Term Capital Management, the hedge fund replete with Nobel laureates, in autumn 1998.

The bulls disappear, the bears give a roar or two, and famous market technicians wring their hands on cable television and incite panic selling - a sure sign that we are near the bottom.

So what if the bull goes on for another five years? It could happen. It has always seemed to me that the first rule of investing and trading is to know what you don't know.

Of course, the bull market will end. I said so myself on these pages nearly five months ago. But neither the bears, nor the bulls, nor I know when or what will trigger its demise.

It may or may not have anything directly to do with the economy; it may be geopolitical or something seemingly far removed, but, whatever its cause, it will be seen only in hindsight as the catalyst for fundamental mood change.

Yet remember, please, that the greatest gains in previous speculative binges have occurred in their final years.

The second question, of course, is: what will happen after the markets top? What if it is not the devastation of the 1930s but rather the stagnation of the 1970s (or the "golden recession" of 1990s Japan)?

After all, it really is a new economy, it really is the information age, there really is globalisation and the world's central bankers do indeed have the benefit of the knowledge gleaned since the Depression.

During the so-called "sober seventies", bear market and all, there were areas of equity success amid overall broad trading ranges. And certainly, if warranted, a portion of assets could be shifted to fixed income of one sort or another.

Devastation, of course, is possible. The contributing factors are there for all to see: personal debt, public debt, leveraged derivatives, the Nick Leesons of the world - I need not go on. But is it a probability, or merely a possibility?

When have the known dangers caused anything more than needed adjustments throughout financial history? It is the unknown, the wildness that lies in wait. Or, to put it another way, when the excesses are so great and so commonplace that no one pays them any heed: that is the time to watch out.

Yes, the bears' growling ought to be considered, but as before, the ageing bull - albeit prone to the maladies of old age such as the distressing corrections that come along - just may survive another year. Or two. Or three. Or more.

Alfred H. Kingon is a former assistant secretary of the US Treasury, secretary of the cabinet during the Reagan administration, and was US ambassador to the European Union from 1987 to 89. He is principal of Kingon International, an investment firm.

Alan Greenspan faces long odds in trying to nudge the stock market to where he'd like it to go. The chairman of the Federal Reserve has argued that the buoyant market--by making Americans feel so much wealthier--has triggered a consumer spending spree that threatens inflationary wage pressures. To avoid that, Greenspan's Fed has been raising short-term interest rates. Yesterday, it increased the so-called Fed Funds rate to 6 percent. This was the fifth increase since June 1999, when it was 4.75 percent.

The idea is to dampen spending and the ravenous appetite for stocks. Anyone who thinks this will be easy should read "Irrational Exuberance," a new book by Yale University economist Robert J. Shiller. Beyond arguing that the present market is a "speculative bubble," Shiller contends that investor psychology is so given to herd behavior that it's almost impossible to manipulate or even influence. The market can "go through significant mispricing lasting years or even decades."

We know this from history. In the 1920s, stocks more than tripled. By 1929, they were highly overvalued; the economy was about to collapse.

Irrational Exuberance
The Ponzi Paradigm
PAUL KRUGMAN
New York Times, March 12, 2000

Charles Ponzi wasn't the first to try it, but he has joined Dr. Bowdler and Captain Boycott among those whose names will forever be terms of abuse. And the classic scam that bears his name -- using money from new investors to pay off old investors, creating the illusion of a successful business -- shows no sign of losing its effectiveness.

Robert Shiller's terrific new book, "Irrational Exuberance," contains a brief primer on how to concoct a Ponzi scheme. The first step is to come up with a plausible-sounding but complicated profit opportunity, one that is difficult to evaluate. Ponzi's purported business involved international postage reply coupons. In a more recent example, Albanian scammers convinced investors that they had a profitable money-laundering business.

Big-Cap Tech Stocks Are a Sucker Bet
Wall Street Journal, March 14, 2000
By Jeremy J. Siegel, a professor of finance at the Wharton School and author of "Stocks for the Long Run" (McGraw Hill, 1998).

The purest examples of New Economy businesses are those that, while not actually generating a profit, command a mammoth stock market capitalisation. Pacific Century CyberWorks - which, at the ripe old age of 10 months, has just acquired Hong Kong Telecom - is a worthy example. Others include Akamai, Amazon.com, Ariba, Buy.com, Level 3 Communications, Priceline.com, Red Hat, VA Linux Systems and Verticalnet. The 10, a mere sample, have a combined stock market capitalisation of Dollars 176bn.

Greenspan Hoped To Prick Stock Market `Bubble' In '94
Wall Street Journal, March 2, 2000

Federal Reserve Chairman Alan Greenspan thought a "bubble" existed in the U.S. stock market as far back as 1994, two years before his warning about "irrational exuberance" among investors prompted a U.S. lawmaker to reprimand him for causing a slump in global stock prices.

Transcripts released Wednesday of meetings of Fed policymakers in 1994 show that Greenspan expected to "prick the bubble in the equity markets" when the Fed began raising interest rates for the first time in five years in February 1994. The Fed raised its key federal funds rate a total 2.5 percentage points that year to prevent the economy from overheating.

Greenspan, stung by the furor that followed his "irrational exuberance" speech now refuses to say publicly whether U.S. stock prices are inflated. He argues instead that "to spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong" and that "betting against markets is usually precarious at best."

The Dow Jones Industrial Average has climbed 57% since Dec. 5, 1996, when Greenspan posed a rhetorical question in a speech to the American Enterprise Institute: "How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected contractions as they have in Japan over the past decades?" The index is about 260% higher than its level in February 1994, when the Fed began its last aggressive campaign to cool the economy.

Back then, Greenspan had no trouble describing rising stock prices as symptomatic of a "bubble." On March 24, a month after the Fed raised the funds rate a quarter percentage point to 3.25%, Greenspan told his colleagues: "When we moved on February 4th, I think our expectation was that we would prick the bubble in the equity markets. What has in fact occurred is that...while the stock market went down after our actions on Feb. 4, it went down quite marginally on net over this period."

At the March 24, 1994, meeting, he called the 1987 U.S. stock market crash "perhaps the only major stock market crash in history that actually was beneficial to the economy." The crash, he said, "stripped out a high degree of overheating and sort of got right to the edge of where the overheating got into the muscle of the economy and stopped."

I dag värderas Stockholmsbörsen till ett P/e-tal på 39,5. 40 gånger vinsten Det innebär att bolagen i OMX-index värderas nästan 40 gånger högre än årets förväntade vinst. Jämfört med andra viktiga europeiska börser är det den absolut högsta värderingen.

Milano, Madrid och Frankfurt ligger runt 37 medan Europas största börs, London, värderas till ett P/e-tal på blott 22,7.

Vad innebär då ett P/e-tal på 40? Anta att avkastningskravet är 9 procent, vilket bara är 3 procent över dagens räntenivå. En tolkning är då att börsen är rätt värderad, förutsatt att företagsvinsterna i all framtid kan stiga med minst 6,5 procent per år.

Detta är extremt mycket när inflationen är nära noll och den långsiktiga tillväxten ligger på max 3 procent.

Stockholmsbörsen är alltså mycket högt värderad både jämfört med andra börser och sett ur ett ekonomiskt perspektiv.

Dagens börsvärdering är i termer av vinster mer än dubbelt så hög som för bara lite drygt ett år sedan. I slutet av 1998 låg P/e-talet på 17,3.

Stockholmsbörsen är även högt värderad om man jämför med USA. Det breda S&P 500-indexet värderas till P/e 25,3, och där ingår också en hel del tillväxtaktier.

Panic in the bond markets; rumours of collapsing hedge funds and huge losses on Wall Street. Hang on - following the near-collapse of Long-Term Capital Management just 15 months ago, this was not supposed to happen again.

Obviously, whatever temporary seif-restraint hedge funds, banks and brokers exercised in the aftermath of that scare has dissipated and greed has regained the upper hand. Over the past couple of months, these folk have colleetively placed a massive bet on a steepening of the US yield curve by huying eurodollars and short-dated notes and shorting long dated bonds.

That gamble went disastrously wrong this week as the Federal Reserve increased interest rates and the US Treasury announced a $30bn debt retirement scheme, concentrated on the long end. That provoked a stampede into 30-year Treasuries and led to a sharp inversion of the yleld curve.

Perhaps the Treasury deserves some criticism for not spreading its buy-back across the maturity range. But the operation itself was weil flagged. The hon's share of the blame must go to the traders. According to the US Commodity Futures Trading Commission, "large speculators" (meaning hedge funds) had built up an underlying $7bn short position on the 30-year bond, the biggest since its records began.

Clearly the lesson of LTCM - that liquidity risk is just as dangerous as any other financial risk - has been forgotten only too quickly.

The only comfort is that this time the pain seems to be spread more evenly across Wall Street, so the fall-out should be more containable.

We are about to rewrite history. Unless a recession begins in the next few days, this boom will soon become the longest in the American experience. In February, it will have lasted 107 months. The current record is 106 months between February 1961 and December 1969, according to the dating of business cycles by the National Bureau of Economic Research. By and large, Americans are behaving as if recessions are a relic of the past, even though everyone must realize that the boom will end someday--and might end badly.

As with all records, people will celebrate and assert bragging rights. President Clinton always claims credit and will almost certainly repeat the claims in tomorrow's State of the Union. Alan Greenspan, chairman of the Federal Reserve Board, is idolized for his presumed role. The murkier truth is that the boom's causes remain obscure and, to the extent they can be identified, reflect a protracted and largely nonpolitical process.

Low inflation has been the critical catalyst. In the past, rising inflation has doomed expansions through higher interest rates, increased labor costs and squeezed profits. Consumer spending, housing construction and business investment all suffered. Yet, inflation now remains tame. By various measures, it's running between 1 percent and slightly more than 2 percent a year. This is lower than in 1990 (between 4 percent and 6 percent by the same measures) and defies the conventional tendency of inflation to worsen as the economy "heats up."

* The Fed: Paul Volcker, chairman of the Fed between 1979 and 1987, crushed inflationary expectations. In the 1960s and 1970s, these had become ingrained. Companies raised prices because they expected customers would pay. Workers expected pay raises to compensate for higher prices--and then some. The Fed blessed the process by creating more money. Its permissive policies rested on the prevailing--but faulty--theory that a bit of inflation aided economic growth. By 1980 inflation had reached double digits. Volcker tightened money, increased interest rates and caused a savage recession. In 1982 unemployment neared 11 percent. Though brutal, the downturn stifled wage and price increases. By 1983 inflation was 4 percent. President Reagan sanctioned Volcker's policy by muting criticism. Since then, Greenspan's Fed has pursued "price stability" and has raised interest rates (as in 1994) to prevent inflation's upward creep. Presidents Bush and Clinton have emulated Reagan's self-restraint.

* Better Management: Through the 1970s, corporate managers were rarely fired. Their job tenure rivaled university professors'. In the 1980s, things changed. Managers became vulnerable to job loss for many reasons: the recession; foreign competition; deregulation in the airline, trucking and communications industries; "hostile" corporate takeovers; the growth of new discounters (Wal-Mart, Home Depot). Self-preservation made managers more ruthless. They cut costs to raise profits. Old plants were shut. Layoffs and "downsizings" became common. Again, the immediate consequences were often cruel and (as with Volcker's recession) widely deplored. But the lasting effect was less inflationary behavior.

* New Technology: As everyone knows, business investment in computers and communications has exploded. The presumption is that these investments enable companies to do things faster and cheaper--they raise "productivity." Firms can minimize unneeded inventories or speed the processing of customer orders. Higher productivity can be magical. If a company improves productivity 3 percent, it can raise wages 3 percent without increasing prices or sacrificing profits. And productivity has improved. In recent years, it's approached 3 percent a year, up from 1.6 percent in the 1980s.

We're enjoying the fruits of purged inflationary psychology. Luck may also have helped. Economist John Makin of the American Enterprise Institute notes that the Asian financial crisis--which first seemed to threaten recession--may have prolonged the boom. It reduced inflationary pressures by "cutting the [worldwide] demand for raw materials" and stimulating cheap imports into the United States from debtor countries. It also prompted the Fed to cut interest rates in late 1998, providing "a tremendous tail wind for the U.S. economy and stock markets."

There are many plausible reasons that the boom won't last forever. Productivity gains could prove temporary. Inflation might increase, with low unemployment pushing up wages. The Fed is already sufficiently worried that it's raising interest rates. Or the prevailing boom psychology might prove fatal. Undeniably, Americans have gone on a spending spree. Since 1991, for example, personal after-tax income has risen 47 percent (with no correction for inflation); meanwhile, consumer spending has risen about 57 percent. The gap between the two--financed by borrowing or selling stocks--totals almost $400 billion annually. Spending can't perpetually outstrip income.

One reason it has is the effusive stock market. Consumer confidence has risen with consumer wealth, real or on paper. Much of the market's increase reflects genuine economic gains (lower inflation, higher profits). But some reflects sheer speculation.

In a recent report, analyst Steve Galbraith of Sanford C. Bernstein, an investment house, confirmed that there's less long-term holding of stocks--and more trading for instant profits. In 1999 the Nasdaq's turnover was 221 percent. This meant that the market's total number of shares was bought and sold not just once during the year but more than twice. In 1990 turnover was less than half that. "Of the 50 stocks with the highest returns [increases] on the Nasdaq only 15 made money," writes Galbraith, and "the average turnover in this group was 600 percent" (shares were bought and sold six times). On the New York Stock Exchange, turnover has nearly doubled since 1990 to 79 percent. Not surprisingly, margin debt--borrowing by investors to buy stocks--jumped 62 percent in 1999 to $229 billion.

So, the boom is making history, but its history isn't finished. We'd all like it to glide along forever. Perhaps it has years to go. But it could be sowing the seeds of its own destruction.

It is unlikely that the new elite of central bankers and technical advisers has learned how to avoid financial bubbles

The pendulum of fashionable financial opinion has swung from predictions of doom round the time of the emerging market crisis little more than a year ago to one of euphoria. Political leaders are more restrained than financial market enthusiasts. But even Larry Summers, US Treasury secretary, has delivered an upbeat message.

He is not only optimistic about the US, which will soon announce the longest ever period of sustained economic expansion. He is also, by his standards, relatively optimistic about other developed countries after years of criticising them for not doing enough to sustain growth.

He envisages a soundly based upturn in Europe and at least some improvement in Japan, even if the latter does not go far enough. It is just when such optimism is in the air that one should keep a weather eye for trouble.

The threat is the familiar one of an overvalued US stock market, which finds a less extreme echo in the other bourses of the world. But there are two subtleties that have escaped attention.

First, the financial bubble is not simply a sideshow in a booming US real economy. It is an essential part of that boom. The private sector is running an unprecedented financial deficit, which can only be maintained because the soaring value of financial assets - and to a lesser extent real estate - provide the impression of ever increasing wealth. Should that change, the proverbial hard landing would not be far away.

Second, it is possible to say in the case of most economic threats whether the potential problem is one of inflation or recession. But when the threat comes from financial markets, the problem is twofold; first an unsustainable inflationary boom, which is then followed by a bust.

Financial bubbles have been a feature of capitalism from the beginning and it is unlikely that the new elite of central bankers, advised by econometricians, has learned how to eliminate them.

The interesting question is how stretched the bubble is, and what the effects are likely to be when it bursts.

An analyst at Phillips & Drew, Alistair McGiven, has made an attempt to quantify the degree of Wall Street overvaluation. By traditional measures this is extreme.

The dividend yield on the S&P 500 is much lower than at any time since 1910. So is the earnings yield, with the exception of the depression year 1932, when presumably earnings collapsed even faster than equity prices.

The novel feature is his attempt to adjust for forces in the new economy ”that may plausibly influence fair values and so justify current market levels”. He does so by adjusting these yields for more optimistic market expectations about inflation, a lower equity risk premium and faster trend output growth. He maintains that adjusted measures have been able to predict the market except for the last, fabulous couple of years. On the basis of these adjusted earnings and dividend yields, he estimates the US stock market is still about 50 per cent above fair value.

What I find fascinating is that Neil Williams, the global strategist of Goldman Sachs, which has hitherto taken a more optimistic view, is now beginning to issue warning noises. His analysis suggests that the global equity market looks expensive relative to past levels ”but not excessively so”, if one excludes the information technology sector. In statistical terms, the valuation of the market is about one standard deviation ”richer” than the recent average.

Turning to IT valuations, he admits that these look very expensive on any standard measure, but estimates that future earnings growth implied by current valuations are ”not far out of line on what technology has achieved in the last five to 10 years”.

Maybe. But when he adds up the earnings growth rate necessary for both the IT and non-IT sectors to offer ”a decent equity risk premium”, he finds that the ”required growth rate in market earnings comfortably exceeds the likely growth rate of the wider economy”. Although he remains ”neutrally weighted” towards stocks, he adds that they are nevertheless ”vulnerable to unpleasant surprises on either the earnings or the interest rate fronts”. Or as I would summarise it, the risks are on the downside.

Coming to aspects where I feel more at home, the Goldman Sachs central simulation suggests that the share of global GDP taken by profits would have to rise to 19 per cent within 10 years to justify current valuations - a level unknown for a quarter of a century.

Supposing we look back still further, what do we find? For the US alone, the share of profits in GDP was higher for a period in the mid 1960s than it is today. But both the world and US economies are far more competitive, and there are more pressures on profit margins, than 30 or 40 years ago. So it is difficult to see a sustainable increase to anything like these levels. Indeed, the share of domestic non-financial profits has been gradually declining recently.

Happily tallying up your profits on the stock of Microsoft and Intel? They're nothing compared with what Microsoft and Intel are earning on their stock investments.

The companies' profits from investments-which are entirely separate from their operating income-are eye-popping: Intel recently booked $327 million (E323 million) in quarterly earnings from sales of stock it owns. Microsoft, in its latest quarterly report, had $773 million in profits from selling such investments.

It isn't just American technology companies that are making lots of money in the stock market: General Electric Co. and Delta Air Lines, among others, are making significant investments in other companies, often venture-stage enterprises, then sometimes realizing nice gains when the stocks of those companies climb. To the extent the stocks are sold and the gains realized, they flow to the companies' bottom lines.

While supercharging the profits of some big U.S. companies, these stock-sale profits raise an interesting - and to some a question. Are stock prices giving a significant boost to fits that are fueling the euhoric stock market? Or, put another way, stocks to some extent feeding on themselves rather than on real growth in their businesses?

That is the worry of some market watchers who analyze company earnings. The contribution these investments make some companies' earnings may be difficult to repeat, they note, and may mask be quality of the underlying business. And if the stock market were to correct sharply and the market for hot IPOs cool off, many of those gains would dry lip or perhaps even turn to losses.

As the US economy speeds into the New Year in a blaze of self-congratulatory euphoria, the rest of the world seems unable to make up its mind whether to look on in admiration or alarm.

Reform-minded politicians and economists in Europe and Asia hold up US economic success as a model for change in their own countries. The virtues of flexible labour markets, fleet-footed capital markets and a low-tax, deregulated business climate, point the way ahead for their own economic renaissance, they argue.

Critics reject the notion that there is anything to be learned from this transitory US success. The strength of the expansion, they say, is down to nothing more than speculative over-excess, built on unstable internet hype. It will, they predict, end as all such periods have ended, in a spectacular crash that will undermine once and for all the notion that the so-called US model amounts to more than casino capitalism.

There is clearly a risk that speculative excess may undermine US performance perhaps even early in the new century. Less than a decade ago it was, after all, still fashionable to tout Japanese virtues of long-term planning, stable banking relationships and lifetime employment as the way ahead. What is most striking this time in the US is the context of its economic performance - the exploitation of modern technologies that are raising productivity and living standards. In a number of critical fields the US has shown that its market-oriented flexibility is highly effective at managing change and producing prosperity.

America is clearly able to operate its economy at a lower level of unemployment than can most continental European economies. The jobs created are not all hamburger-flipping minimum wage drudges. The fastest growing area of job creation in the last few years has been in the high-tech sector. And while inequalities have certainly widened, the last three years have produced the first real gains in income for average and low earning Americans. Europeans should look with respect at the ease with which US companies are able to hire and dismiss workers. US success should also encourage them to continue to roll back the multilayered social programmes that raise the cost of working.

The story of a bubble – and its aftermath
By definition, a market bubble is not a very obvious affair. If the man on the street begins to see what by all accounts is a bubbly market, he will act rationally, or so the academics believe, and find a safer haven for his savings. Which means that in principle, if markets were truly rational and relied on tried and trusted measures of investment value, then bubbles could never develop.

"En korrigering måste komma", säger Riksgäldens chef Det är upplagt för ett ras på Stockholmsbörsen. Dagens värderingar är orimliga, menar Riksgäldskontorets chef Thomas Franzén. Han är kritisk till aktierådgivarna som inte informerar om riskerna.

"Dagens höga aktiekurser gör att vi snart kan få se ett stort ras på börsen", säger Franzén.

Han pekar på det orimliga i aktiekurser som förutsätter att företagens vinster generellt skall öka avsevärt mycket mer än den totala tillväxttakten de kommande åren.

"Gapet mellan förväntningarna på aktiekurserna och tillväxten i världen kan inte bestå på sikt. Man måste få en avkastning som närmar sig de nivåer som ekonomin växer med", säger Franzén.

En blick i backspegeln ger vid handen att en rimlig avkastning på en aktieplacering är cirka 5 till 7 procent realt, det vill säga inflationen borträknad. Och det är dessa nivåer som marknaden måste börja räkna med, inte de skyhöga nivåer som idag finns inprisade i kurserna, framhåller Franzén.

Men han betonar att det inte är går att räkna med den avkastningen från dagens kursnivåer. Efter de senaste årens kraftiga uppgång kan det krävas ett markant börsfall för att den långsiktiga avkastningen ska hamna på normal nivå.

Han framhåller att många företag idag spår att avkastningen på det egna kapitalet kan ligga kring 15 till 20 procent. Det är inte hållbart i en värld där inflationen är mycket lägre än tidigare. Även företagen måste fundera på vad som är en rimlig avkastning på sikt, menar Franzén.

P/e-talen, som visar vilka vinstförväntningar som finns inbyggda i dagens aktiekurser är rekordhöga med historiska mått mätt. Börsens P/e-tal var i december 1996 14.

Det ska jämföras med dagens dryga 30. Tittar man på enskilda företag framgår det att p/e-talen skjutit i höjden, och det gäller inte bara den upphaussade IT-sektorn.

Klädgiganten H&M:s p/e-tal uppgick till 26 i december för tre år sedan. Idag ligger det på hela 61. Även folkaktierna Nokia och Ericsson uppvisar liknande utveckling.

"Många företag är rädda för att diskutera dagens avkastningskrav", säger Franzén och framhåller att det är dags att ta bladet från munnen. Även aktierådgivarna bör ta ett större ansvar, anser han:

Blir många placerare besvikna och misstänksamma mot marknaden kan svängningarna bli kraftiga och utvecklingen sämre de kommande åren.

Därför att det viktigt, menar Franzén, att aktierådgivarna talar om för placerarna att vi kan stå inför ett kraftigt fall och att de senaste årens utveckling inte är långsiktigt hållbar.

Det hände sig vid tiden före den stora finans- och fastighetskrisen att från börsen utgick ett slags känsla att alla företag borde ha fastigheter och finansverksamhet och att alla borde äga dessa aktier... "Nya ekonomin", "nya konjunkturmönster" samt "e-handel" - se där aktiemarknadens nya budord. Det är dessa nyckelbegrepp som till stor del ligger bakom att många börsplacerare i år har blivit rikare på den 50 procentiga uppgången.

E-handeln är lika het som bränd julglögg och följaktligen värderar börsen alla e-handelssatsningar till självklara vinster. Och enligt flera aktiebedömare slipper företagen hädanefter ifrån triviala problem med upp- och nedgångar i efterfrågan, ty i den "nya ekonomin" så försvinner de traditionella konjunkturmönstren.

Självförtroendet på aktiemarknaden är på topp. En stor del av värdetillväxten har kommit bara under de senaste två månaderna. Aldrig tidigare har börsen varit så högt värderad. Men för dem, som har hunnit med att se både uppgångar och fall på den svenska börsen, ringer klockorna. Och det är inte fråga om några vackert klingande juleklockor, utan kraftiga varningsklockor.
Många är tecknen som pekar på att börsen håller på att bli rejält överhettad. Affärsvärlden har varit med i nästan hundra år - vi började analysera aktier redan 1901. Vårt evangelium inför denna millenniets sista jul blir därför något av en hälsokur: Vi vill nämligen påminna om tongångarna på börsen för tio år sedan.
1989 var börsen osårbar - trodde många. Ett år senare hade den rasat med 30 procent. En fasansfull finanskris hade skakat om så gott som alla börsbolag. Inte alla lyckades överleva på börsen de kommande tio åren. Men här finns förstås också något gott att lära.
En lärdom är att börsen inte bara styrs av en eller ens ett fåtal faktorer - då var det finans, nu är det internet. Året är 1989, och Stockholmsbörsen står på topp. Bortsett från två år har börsen stigit under hela 80-talet, med i snitt 25 procent per år. Flera av börsbolagen värderas till all-time-high, något som faktiskt oroar vissa bedömare. Under de sena höstmånaderna vänder börsen också nedåt, och Affärsvärlden konstaterar i ett av årtiondets sista nummer: "En tioårig uppgång är bruten. Stockholmsbörsen är på väg nedåt. Högvärderade bolag, sämre konjunkturutsikter och nya möjligheter att köpa aktier utomlands - det talar för att Stockholmsbörsen har passerat toppen."
Läs mer i veckans nummer av Affärsvärldennr 49 1999

The US bull market of the past two decades has been driven by two broad forces: a revival in corporate profitability, and the decline in inflation that has allowed investors to attach higher valuations to that stream of profits. The latter trend is substantially complete: inflation is close to zero and valuations have shifted from cheap to expensive. That leaves earnings growth as the prime determinant of future stock market performance.

No worries here, say Wall Street's finest. US analysts expect S&P 500 earnings to jump a blistering 17 per cent in 2000, according to First Call - the same as this year, which saw the rebound from the emerging markets crisis.

Even the more sober, top-down strategists forecast growth of 10 per cent. Investors' long-term expectations are scarier still. Assuming an (optimistic) equity risk premium of just 2 per cent, research group BCA calculates that earnings would have to rise by nearly 15 per cent a year for the next 10 years and by 8 per cent a year over the next 30 to justify the market's current heights.

Subtract inflation and that implies real growth of more than twice the historical average.

It is hard to see how these targets can be reached, however fervently one believes in new paradigms.

Granted, the US is in a long-run, technology-led upturn that is boosting productivity and thus the economy's non-inflationary speed-limit - from say, 2½ per cent to 3½ per cent in real terms. That is a huge achievement.

But, for the corporate sector at least, it is being balanced by a number of other factors. The first is labour costs. While hourly wage growth is subdued at 3½ per cent, once other forms of compensation are taken into account overall labour costs are growing at closer to 5 per cent - exceeding productivity growth of around 4 per cent. On top of that, many companies face persistent downwards pressure on prices, from computers to detergents. Corporate debt is rising and so are interest payments as a percentage of profits, after having dropped sharply for most of this decade. Finally, all that high-tech capital investment is pushing up depreciation charges.

National incomes data based on tax returns - a broader measure than the earnings of S&P 500 companies alone and one less susceptible to accounting shenanigans - suggest US corporate profit margins actually peaked in 1997 after rising sharply for nearly a decade. Intuitively, that makes sense: over the long haul, corporate profits simply cannot grow faster than the economy.

To be fair, the S&P 500 should grow more rapidly than the corporate sector as a whole. Not only does it contain many of the country's biggest and most dynamic companies. About a third of their earnings come from overseas, where competitive US groups can win market share.

But it is unlikely that those factors will be enough to bridge the gap between domestic economic growth of, say, 6 per cent (3½ per cent real growth and 2½ per cent inflation) and investor expectations of many more years of double digit earnings increases.

Krisen är redan på väg -- en österrikisk blick på den nya ekonomiska eran
av Mattias Svensson, kolumnist i Metro
Vissa tror att inflationens och konjunkturnedgångarnas tid är förbi i den nya ekonomiska eran. Men företrädare för den österrikiska ekonomiska skolan varnar för inflation, trots att priserna inte stiger. Problemet är att dagens högkonjunktur drivs av en penningmängdsökning, som är skadlig för långsiktig kapitalbildning och framtida välståndsskapande. En lågkonjunktur måste komma så småningom men bör utlösas så snart som möjligt, eftersom det är en ekonomiskt sund anpassningprocess. Det österrikiska perspektivet visar att dagens penningpolitik står fjärran från laissez-faire. För marknadsanhängare finns all anledning att se kritiskt på dagens penningpolitik, som trots vissa friheter väsentligen är en form av statsinterventionism.

Gunnar Örn: USA kraschlandar inom ett år

Varför ska världens rikaste land behöva låna pengar av omvärlden? För att hålla köptrycket uppe på New York-börsen?

Eller för att stötta dollarkursen? Även om det inte varit den ursprungliga avsikten har effekten blivit just den, och alla bävar för vad som ska hända när valutaströmmarna vänder.

USAs utlandsupplåning, alltså underskottet i den amerikanska bytesbalansen, är snart uppe i 4 procent av BNP. Så stort har det inte varit sedan 1987, strax före den beryktade börskraschen i oktober samma år.

Världens finansmarknader väntar nervöst. Om underskottet ska sluta växa måste USA antingen börja exportera mer eller importera mindre. Men det är svårt att se hur den omställningen ska ske utan att både börsen och dollarn rasar på kuppen.

Minskad importefterfrågan kräver att de amerikanska hushållen börjar öka sitt sparande och drar ned på sin konsumtion. Det skulle emellertid dämpa den ekonomiska tillväxten i USA.

Ökad export kräver att de amerikanska företagen blir mer konkurrenskraftiga. Om amerikanska produkter ska göras billigare i omvärlden - och utländska varor dyrare på den amerikanska hemmamarknaden - förutsätter det en svagare dollar än i dag.

Nu finns det en del experter som invänder att USAs underskott inte behöver vara något problem, så länge det lånade utländska kapitalet används till produktiva investeringar. Här har de en klar poäng. Det slitna uttrycket "leva över sina tillgångar" behöver inte vara tilllämpligt här.

Ekonomiprofessorn Gustav Cassel definierade det så här i början av seklet: "Ett land lever inte över sina tillgångar så länge underskottet i bytesbalansen är mindre än de samlade nettoinvesteringarna i landet."

Tesen upprepades i mitten av 1970-talet när Sverige åter fick stora underskott i bytesbalansen. Bland annat av SNS Konjunkturråd, som då bestod av Villy Bergström, Sven Grassman, Erik Lundberg och Göran Ohlin: "Så länge vi inte kommit i närheten av gränsen för vår kreditvärdighet ökar kapitalimporten våra möjligheter att sänka inflationstakten och öka den inhemska produktionen och sysselsättningen", hette det i 1977 års rapport.

Men allt beror på hur pengarna används. Sverige lyckades inte hoppa över 1970-talets kriser med hjälp av lånade pengar. Tvärtom, nyinvesteringarna krympte i takt med att bytesbalansunderskotten ökade. Utvecklingen tvingade fram två kraftiga devalveringar under 1981 och 1982.

Tio år senare rasade investeringarna så kraftigt att de inte ens räckte till att ersätta utslitet kapital, samtidigt som bytesbalansunderskottet rakade i höjden. Även detta tvingade fram en kraftig försvagning av den svenska kronan.

I slutändan beror allt på vilka investeringar som görs. Grovt uttryckt kan man säga att Sverige för 100 år sedan lånade till järnvägsbyggen och vattenkraft. 100 år senare gick pengarna till lyxsanering av betongförorter à la Brandbergen.

För att modifiera Cassels tes, kan man säga att ett land lever över sina tillgångar när det lånar till konsumtion eller improduktiva investeringar.

Dessutom, om alla länder finansierade sina nyinvesteringar med lån, skulle det till slut inte finnas några sparare kvar att låna av.

Under vissa omständigheter är det förmånligt för ett land att låna (importera kapital), ibland att spara (exportera kapital). Tumregeln är att mogna industriländer tjänar på att exportera kapital till snabbväxande "emerging markets", eller tillväxtmarknader.

Dagens amerikanska underskott är ungefär lika stort, mätt som andel av BNP, som det svenska var 1982 respektive 1992.

Men utvecklingen i USA de senaste åren påminner ändå en hel del om 1987: med krympande inhemskt sparande, stark dollar, växande underskott i utlandsaffärerna, stigande räntor men ändå rekordhöga P/e-tal på börsen.

Betyder det att historien måste upprepa sig? För att få svar på den frågan räcker det inte att bara titta på makrostatistik över nettoinvesteringar och valutaströmmar. Man måste gå på djupet och titta på hur investeringskapitalet används på mikronivå. Kan amerikanska bjässar som Intel, Microsoft och Cisco använda sina fordringsägares pengar mer effektivt år 2000 än de kunde 1987? Gör amerikanarna överlag intressantare och mer produktiva investeringar än européer och japaner? Har

USA, som världsledande nation inom IT och Internet, rentav blivit en "emerging market" som drar till sig investeringskapital från hela världen?

Om så är fallet kan amerikanerna fortsätta låna av omvärlden med gott samvete. Om inte, är den nuvarande utvecklingen helt ohållbar. Då har vi en kombinerad börskrasch och dollarkollaps att vänta inom en inte alltför avlägsen framtid. .... mera optimistiska tongångar

Alan Greenspan's warning on Thursday that banks should set aside reserves in case of a market collapse was just the latest in a series of hints the Fed chairman has given about overvaluation of equity markets. Yet, together with some unfavourable figures for US producer prices, it was enough to give the markets a serious jolt. Investors are getting jittery about the US market.

The gradual upward creep of US bond yields over the past year was the first sign that the markets were getting wind of a change in economic conditions. Over the last few months, equity investors have also become more cautious. Now both markets are uneasy about the prospect of further interest rate rises.

The monetary policy decision that Mr Greenspan faces is fairly straightforward. The two quarter-point interest rate rises over the summer have not stemmed demand. Higher energy costs helped push producer prices up by 1.1 per cent in September, although much of this rise can be explained by one-off factors in the tobacco and auto industries. Retail sales are showing no slowdown. Unemployment looks set to fall. A further rise in interest rates would be wise.

But in a country with a stock market which is by any conventional measure overvalued, and with a large and rising current account deficit (the consequence of an imbalance between private sector savings and investment), any rise in interest rates has implications that go far beyond the control of prices. The reaction to Mr Greenspan's speech shows once again how sensitive the markets are to any hint of a change in monetary policy.

The US economy, for all its strength, is highly vulnerable to a market setback. It relies on foreign investment to finance the gap between domestic savings and investment. This has so far been forthcoming, because of the good performance of US assets, and the sustained strength of the dollar.

But should either of these conditions change, the US may fall out of favour. Already Japanese investors have been turning away from US Treasuries because of the slide in the dollar against the yen.

Yesterday's falls in the stock market and the dollar could make investors elsewhere more wary too. If the US were to experience a big market crunch, interest rates on assets would have to rise to attract foreign funding back into the country. This would have a contractionary effect. In addition, the spending spree of US consumers, prompted as it was by the wealth effect of higher equity prices, could come to an end. The Fed would of course react to limit the damage, but nevertheless the correction could be very painful.

Yet it is hard to see how the Fed could have avoided this problem. Monetary policymakers are ill-equipped to deal with imbalances in asset prices or the exchange rate, because these react to interest rate movements in an unpredictable way. Mr Greenspan has chosen to base monetary policy decisions on domestic price conditions, rather than trying to manipulate the markets directly. His efforts to keep the lid on asset prices have been limited to cryptic remarks in speeches, with the result that his pronouncements have attained an almost mythical status among investors.

The Bank of England faces similar difficulties, although on a much smaller scale. The economy seems to be adapting fairly well to the sustained strength of sterling, so much so that an interest rate rise has been necessary to keep demand in check. Whilst most of the economy is now on an even keel, though, the housing market has been accelerating. The Bank's dilemma is that a rate rise large enough to control house prices would stifle the rest of the economy.

Continental Europe shares the US phenomenon of rising bond yields, but its position at an early stage of the economic cycle means that its policy choices are very different.

Bond yields are high compared with inflation. This, together with the appreciation in the euro over recent months, amounts to a de facto tightening in monetary policy. Given that inflationary pressures are virtually absent across most of the euro-zone, this means that the European Central Bank may not have to move rates by as much as the markets are expecting. Bond yields may yet ease again. And the wave of mergers and acquisitions taking place within the euro-zone are likely to support European equity valuations for some time to come.

Yesterday's market turbulence could turn out to be short-lived. Yet it is a further reminder of the delicate task facing Alan Greenspan. Does he try to deflate the markets gently, and risk triggering a crash - or does he say nothing, and stand by and watch a bubble inflate?

From article WSJ, October 17, 1999
Despite Terrible Week for Stocks, Advisers Urge Investor to Stay Put
"Nu gäller det att ha is i magen"

The Dow Jones Industrial Average seems ready to hit 10000 again. But this time there's no call for champagne and noisemakers of the sort that greeted the stock market's first close above what the public called "Dow 10,000" in March. That's because this time, the milestone is poised to be hit on the way down, not up.

But investment pros say there's no reason to panic. "If you're invested for the long term, it's not going to be unusual to see stocks swing 20% off historic averages," says David Bugen, an investment adviser in Chatham, N.J. "It's painful, but unfortunately part of the price of investing in equities is short-term volatility."

Another thing to keep in mind about the daily point moves: Because the Dow is so high, it's a lot easier for it to move 100 or 200 points these days than in the past. In 1987, a 500-point decline represented a fall of well over 20% -- a crash by any measure. But the equivalent percentage drop today would require a fall of 2,000 points. In other words, don't get too excited by a startling-looking decline of 200 points, or even 500 points. On their own, they are fairly routine declines.

"Even with the pullback to 10000," investors still have more than a 50% gain, he says. "Even if we see a 20% pullback, it would still leave us at more than 20% above where we were when Greenspan spoke those words." Mr. Stovall adds, "If you had gotten nervous back then, you would have missed out on the nice rise of the overall market."

Eric Lake, who runs his own commodity-trading-advisory and money-management service (www.DowGuru.com), said three times this summer the industrial average just touched and failed to break a trend line that he traced back to Black Monday.
Most ominous of all, the average peaked on Aug. 25, the same date it peaked in 1987. Noting that the market crashed 55 days after its peak in 1929 and 1987, Mr. Lake said, "Oct. 19 is the target date: 55 days out."

A miraculous error
Martin Wolf, FT, September 29 1999
The Federal Reserve inadvertently allowed unsustainable growth in the US, but this helped to offset the collapse of demand elsewhere and avoid deep world recession

The International Monetary Fund is hardly the first to question the sky-high valuation of US stocks, but its arguments are no less convincing for that. The fund agrees with the bulls that the near-tripling of US equities since 1995 can probably be justified by lower interest rates - which boost valuations by increasing the discounted value of future dividends.

But now that US rates are rising again, how come shares are still going up? This requires one of two things.

The first is an increase in real dividend growth, which is unlikely given the maturity of the current economic expansion and the fact that dividends are already growing at close to historic highs.

The other is a further decline in the equity risk premium, which is hard to square with rising spreads in fixed-income markets.

The IMF notes other factors that might justify current prices, such as robust productivity growth and greater popular participation in the stock market. But it does not find them hugely convincing. And it warns, justifiably, that any US correction would drag down international markets, whether they are intrinsically overvalued or not.

But while the fund's logic is sound, its conclusions were yesterday cheerfully dismissed by investors, just as they have ignored occasional gloomy mutterings by Alan Greenspan, Federal Reserve chairman.

Just what might trigger a correction neither the IMF nor Mr Greenspan seem prepared to reveal.

A. Gary Shilling: author of "Deflation: How to Survive and Thrive in the Coming Wave of Deflation" is president of A. Gary Shilling & Company Inc. and an economist.
http://www.agaryshilling.com/

Göran Albinsohn Bruhner i SvD 99-09-07
Men när ni lyssnar till konjunktur skrytet från Rosenbad bör ni betänka att en optimist som regel är en otillräckligt informerad person.

Has Alan Greenspan joined the ranks of bubbleologists?
Bursting Mr. Greenspan's Bubble
By James K. Glassman and Kevin A. Hassett.
Wall Street Journal, September 3, 1999
Mr. Glassman and Mr. Hassett, fellows at the American Enterprise Institute, are the authors of "Dow 36,000," just out from Times Books.

The latest sensation among investment books is a bestseller called "Dow 36,000," which argues that the Dow Jones Industrial Average should be worth three times its current value.

Joined at the hip
James Grant in FT, August 16, 1999
Bond traders are displaying more signs of worry about the state of the US economy than equity investors, but sooner or later credit concerns will affect share prices

The great American public still has the spending bit between its teeth. That much is clear from the surge in imports that made such a signal contribution to this week's awful US trade figures.

When the Bubble Bursts . . .
By Edward Chancellor
author of "Devil Take the Hindmost: A History of Financial Speculation"
(Farrar, Straus & Giroux, 1999).
Wall Street Journal, August 18, 1999

New York Stock Exchange member firms’ customer margin accounts, which allow investors to borrow against a portion of their portfolios to purchase additional stocks, surpassed $170 billion in April, reaching $178 billion in May before edging back by about $1 billion in June. That represents a 25 percent increase versus December, 1998
CNBC 99-08-09

IMF Concludes Article IV Consultation with the United States On July 30, 1999
Although the performance of the U.S. economy had been remarkable, Directors noted the contribution of possibly transitory factors and cautioned that there were significant risks. Principal among these is the danger of a substantial and abrupt decline in U.S. equity prices. ........ more

The real question facing the U.S. and global economies whether the U.S. stock market bubble - and yes, it is a bubble - will be deflated endogenously (that is, by natural market forces) or by the Fed's ever-so-gently raising interest rates.
John H. Makin, American Enterprise Institute
http://www.aei.org/eo/eo10752.htm

Decade of Greed II, by Robert J. Samuelson
Washington Post,July 14, 1999
An intriguing paradox of the 1990s is that it isn't called a decade of greed. Only the 1980s have acquired that stigma, even though the advance of individual wealth, the explosion of personal fortunes and the obsession with money in this decade all rival or exceed what happened in the last.

Greenspan also warned of a possible ``euphoric'' rise in stocks fueling increased consumer spending.
``If new data suggest it is likely that the pace of cost and price increases will be picking up, the Federal Reserve will have to act promptly and forcefully so as to preclude imbalances from arising that would only require a more disruptive adjustment later,'' he said.

James Grant - Talking up the market
In its search for profits, Wall Street is playing the bull-market game by highlighting positive news about companies. But even honesty and plain speech are cyclical

A severe bear market is something to fear
Philip Coggan wonders whether current stock market crashes will plunge to past depths of financial dislocation - FT 98-09-03

The meeting of G7 finance ministers and central bankers showed that the world's economic leaders, rightly, remain concerned about the global outlook. The big economies pledged to continue to support domestic demand, to bolster world growth.

This will take little effort in the US. In the first three months of this year the economy expanded by a remarkable 4.5 per cent, following growth of 6 per cent in the previous three months. The IMF forecasts growth of 3.3 cent this year.

This may well turn out to be on the low side. With inflation remaining weak and labour costs subdued, there is no sign that the Federal Reserve intends to raise interest rates soon, despite such strong growth. If this continues, equity valuations may begin to look less stretched.

It is the robust US that has kept the world economy turning. Last year, US private sector spending accounted for almost half the increase in world demand.

This year, Japan will suffer recession, and growth in the eurozone will be weak - particularly in Germany and Italy. But such an uneven balance of world demand brings substantial risks. US consumer demand, by sucking in imports, has helped emerging markets to recover, and Japan to avoid collapse.

But the US current account deficit cannot continue to grow indefinitely unless investors have an insatiable appetite for US assets.

Moreover, US consumers have financed their spending by running down the savings rate to negative territory. This cannot continue indefinitely.

Policymakers must hope the path of adjustment for these imbalances is a smooth one. But a sharp fall in the US stock market could upset this. So too could a sharp fall in the dollar.

For the moment, a decline in the dollar remains unlikely. Japan's fall may have reached bottom, but the economy will be stuck in recession this year. With strong US growth and weak euro-zone activity, the dollar's strength against the euro also looks fully justified.

Still, with the emerging markets crisis at last receding, the great uncertainty now is whether Europe and Japan can recover, to take the strain off the US consumer, before the US economy slows.

Alan Greenspan, Washington, May 6
The phenomenal performance of the U.S. economy in recent years - largely a function of increasing productivity - could end unless ``imbalances'' in the economy are addressed, Federal Reserve Board Chairman Alan Greenspan said.

Greenspan also said the ``worst of the crisis abroad'' may be over, and that many people think stock prices are overvalued. ``Of most concern is how long this remarkable period of prosperity can be extended,'' Greenspan said in the text of remarks to the Chicago Fed's annual Bank Structure Conference.

- There are imbalances in our expansion that, unless redressed, will bring this long run of strong growth and low inflation to a close,'' he said. A pickup in productivity "does seem to explain'' much of the favorable inflation news in recent years. While it's led to excess capacity that is holding down prices, the savings to companies are boosting corporate earnings. Perhaps too high, he suggested.

The revaluation of business assets due to technological progress "has induced a spectacular rise in equity prices that to many has reached well beyond the justifiable,'' Greenspan said.

Buffett: stocks 'dangerous'
Billionaire says downturn likely after unprecedented rally of recent years March 3, 1999:

- Billionaire investor Warren Buffett believes the U.S. stock market has seen virtually unprecedented increases in recent years and is in a "dangerous" period that could see stock values drop sharply. Stocks have risen "terrifically" over the past 15 years, driven higher by lower interest rates and rising return on equity, Buffett told the ABC News "Nightline" program Tuesday.

"After a while the very act of stocks going up starts drawing in other people who get excited about the fact that their neighbor made some money ... and that's when you get into the dangerous periods," he said.

Asked when the bubble would burst, Buffett said, "You never know. You know that valuations are high, by historic standards. You know that the level of speculation is high, by any historic standards, and you know that it doesn't go on forever ... but you don't know when it ends."

Not in 40 years has so much of the stock market's advance been so concentrated in just a handful of stocks. In 1998, the Standard & Poor's 500-stock index advanced 26.7%. But the average stock in the index gained just 10.8%.

The difference results from the extraordinary gains of the largest stocks, which have the biggest impact on the capitalization-weighted index. And the largest stocks are, by and large, fast-growing companies for which investors are paying ever higher price-to-earning ratios. Salomon Smith Barney estimates that the 50 largest companies collectively returned 38% in 1998.

FT leader 98-09-19 excerpts
The world's two largest economies are now locked in a strangely symbiotic embrace. The US is the world's biggest debtor and spender; Japan is the biggest creditor and saver. From these diametrically opposed positions, the respective economies have nonetheless reached a state where the effectiveness of monetary policy is subject to severe constraints.

Japan is already close to a serious deflation, with the 10-year bond yield falling this week to a scarcely believable 0.7 per cent. No one expects the recent cut in Japanese overnight interest rates to 0.25 per cent to impart much stimulus to the economy, though it will provide modest relief to the troubled Japanese banking system. Monetisation - the modern version of the printing press - by now looks imminent.

In the US, meantime, the collapse in the savings rate to 0.6 per cent of disposable income in the second quarter, compared with its customary level in the 1990s of between 4 and 6 per cent, is worrying. It means that interest rate cuts may be of limited help in promoting further borrowing and spending, especially when bankruptcies are running at record levels.

Capitalism is not in a global crisis. But there are difficult times ahead - and not just for the emerging markets.

A respected economic forecaster has warned that the world economy could stall or even contract over the next 18 months as the financial crisis that has hit Asia and Russia spreads throughout the world.

The Economist Intelligent Unit (EIU) has issued one of its gloomiest ever reports on the outlook for economic growth. Te EIU believes that, even if the financial crisis does not deteriorate further, the world's economy is heading for a rough ride.

And there is a real danger that the global financial crisis could get significantly worse, with problems in Asia and Russia spreading to Latin America according to the research.

However the EIU does not believe that the economy will plunge into a prolonged recession lasting several years as it did in the 1930s in the wake of the Wall Street crash.

The EIU believes the key factor will be how the US Federal Reserve reacts to the financial problems and whether or not it chooses to cut interest rates.

Warren Buffett declined to offer an opinion on the stock market's current valuation at a Berkshire stockholder meeting. But he did disclose that Berkshire is holding $9 billion in cash.
Wall Street Journal 98-09-17

At the annual meeting of the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming, over the weekend, some central bankers were privately admitting that these are the worst global economic conditions they have seen in their lifetime.

Thanks to the bull market, the measured wealth of American households has doubled over the past three years. This has made consumers feel richer, and as a result they have saved less and consumed more. In the second quarter of this year America’s personal savings rate fell to a historic low of 0.6%, with consumer spending jumping at an annual rate of 6%.

Rising share prices also made it cheaper for firms to raise equity finance, so fuelling a surge in investment. The risk now is that this could all go into reverse, as plunging share prices dent consumer and business confidence. If the Dow Jones stays close to its current level of nearly 8,000, then the impact on consumer spending may be small, as that still leaves the market 25% higher than in December 1996.

But by such measures as price/earnings ratios or the yield gap, Wall Street is still significantly overvalued — the more so since profit growth this year seems to have flattened out.

Indeed, the real fear is that the new European Central Bank, anxious to establish its credentials as guardian of the world’s second currency, the euro, will be inclined to be too tough. Peripheral economies such as Ireland’s and Spain’s have been showing signs of incipient inflation. And the ECB is eager to inherit the fearsome reputation of the German Bundesbank. Should the euro economies falter, there must be a risk that the ECB will be too slow to respond by easing monetary policy.

First, until the early 1930s countries were on the gold standard—under which their currencies were tied to gold. This restricted their ability to ease monetary policy as economies went into recession after the Wall Street crash of 1929.

Second, governments compounded their tight-money mistake with tight fiscal policies, even in the depth of the depression. Rather than allowing taxes to fall automatically as incomes declined, the Americans raised taxes in 1932 to balance the budget. Not only do governments have a better understanding of macroeconomics today (Dennis, Feldt, Bildt, Wibble, Åsbrink och Persson), but now that public spending takes a much bigger share of GDP, their ability to stabilise demand is greater. Edited excerpts from The Economist 98-09-04

Martin Wolf: Threats of depression

THE HIGH-RISK SOCIETY Peril and Promise in the New Economy. By Michael J. Mandel. 227 pp. New York: Times Business/Random House. $25.

THE TROUBLE WITH PROSPERITY The Loss of Fear, the Rise of Speculation, and the Risk to American Savings. By James Grant. 348 pp. New York: Times Books/Random House. $30.

Professor Tim Congdon i Lombard Street Research Monthly Economic Review, July 1988
excerpt

International financial commentators have become so obsessed with Japan’s various failures that a very serious macroeconomic disequilibrium now emerging in the USA has been almost unnoticed. A standard line has been “the American economy will slow down when the full effect of the Asian crisis comes through”. This is tantamount to saying that “the American economy will slow down because the balance of payments is moving heavily into the red”.

Indeed, the deficit on the current account of the USA’s balance of payments in 1998 will be the largest that the world has ever seen. Hardly any concern is being expressed by governments or in financial markets about the medium-term implications of this development.

The scale of the deficit would be remarkable even if the USA were a substantial lie creditor nation. But, in fact, foreign-owned assets in the USA exceeded the USA’s foreign assets by over $1,300b. at the end of last year.

The current arts account deficit in the first quarter (Q 1) was $47b. and will undoubtedly increase, perhaps towards $60b., in Q2.

The current account deficit may be $230b. - $250b. in 1998 and a rather higher figure of, say, $300b. in 1999 and 2000.

The USA’s negative position on its international investments (“its net debt”) may by the end of 2000 be almost $2,OOOb., which would be more than twice the value of its exports.

There is little question that the USA will also have a large and widening deficit on investment income. (See pp. 8 - 9 of this Review.) To prevent the external debt running out of control, exports will need to grow faster than imports for an extended period. But this will require a drastic wrench to the growth pattern enjoyed over the last six years. Net exports were a negative influence on GDP in 20 of the 24 quarters to Q1 1998.

What form will this wrench take? Plainly, the growth of domestic demand will have to run at a beneath-trend rate also for an extended period.

But how likely is that in late 1998 and early 1999 after three years of high money supply growth, vast capital gains from the asset price bubble and an extremely buoyant housing market? (Seep. 5, p. 7 and p. 12.) Also helpful would be a lower dollar.

Sooner or later a fall in the dollar is inevitable, but it probably will not happen in late 1998.

The favourable interest rate differential compared with other leading currencies (apart from sterling) protects the dollar and will widen further when the Federal Reserve tightens.

The resolution of the USA’s external disequilibria will begin to become part of policy-makers’ agenda only next year and thereafter.

But the longer the deficit persists, the greater will be foreigners’ accumulation of claims on the USA and the worse the eventual problem of adjustment.

Återigen: USAs handelsunderskott rekordstort
Date: Sun, 19 Jul 1998
From: Rolf Englund <englund@internetional.se>

CNN: The US trade deficit soared by 10% to a record $15.75bn in May, the highest since the current monthly series began in 1992. The trade gap is running at a record annual rate of $150bn, up almost 50% on last year's figure, based on the first five months of the year. The figures came as a surprise to analysts, who were expecting an improvement in the trade deficit after April's record gap of $14.5bn.

Kommentar RE: Läsarna av Net Bulletin lär väl dock ingalunda ha blivit förvånade. Det stora underskottet visar, menar jag, att USA inte alls är inne i någon s k ny era - Clintoneran? - utan har en vanlig överhettning, som Sverige hade i slutet av 1980-talet, med full sysselsättning, goda statsfinanser, låg arbetslöshet och stigande villapriser och aktiekurser.

När den amerikanska bubblan spricker, kommer den att spricka med besked. Dollarn kommer att falla, som en växelkurs bör göra i ett land med stort handelsunderskott, och alla direktörer i Västeuropa som tror att dom är duktiga för att deras företag går med vinst när dollarn står i åtta kronor kommer att se lika förvånade som löjliga ut. Liksom deras eftersägare.

Slutsats: Du som inte vill framstå som en löjlig eftersägare bör således redan nu distansera Dig från den fåniga uppfattningen om nya eror. Att byta fot är väl inte så svårt för Dig? Sväng kappan och fortsätt vara framgångsrik!

(Ursäkta sarkasmen - Den som inte känner sig träffad är heller inte träffad - och tvärtom.)

A yawning trade chasm is opening up for the US, which experienced a record goods and services deficit of $15.75bn for May and could be heading for a total deficit of more than $200bn (£122bn) for 1998.

Economists are scratching their heads over the impact on the US economy in the second quarter. On the one hand, domestic demand continues to race along at between 5 per cent and 6 per cent. America is booming and no wonder when, as J.P. Morgan's Philip Suttle points out, accruing capital gains on financial assets are adding two-thirds to normal household incomes.

On the other hand, deduct the rocketing share of net imports and further subtract a necessary inventory correction and you have a sharp GDP slowdown: a drop from 5.4 per cent annualised in the first quarter to just 1 or 2 per cent.

One consequence of these distortions is a squeeze on profits, particularly in manufacturing, as pricing power disappears; production stalls (especially for export) with negative implications for productivity growth while domestic costs edge higher.

Yet Wall Street could not care less, having gained yet another lease of life in this geriatric bull market. The Standard & Poor's 500 Index has raced ahead by 10 per cent since mid-June, and most indices have been hitting new all-time highs (although the smaller capitalisation Russell 2000 Index has not been invited to the party).

There is a clue in the surge of liquidity in the US in recent weeks. The Federal Reserve feared any US monetary tightening could have ”outsized effects”; on Asia, Alan Greenspan, Fed chairman, told the Senate Banking Committee yesterday. According to CrossBorder Capital, a London consultancy that monitors global liquidity, in an apparent policy reversal the Fed has been opening wide the taps… CrossBorder says that free reserves of the US banking system, after falling all year until June, have doubled in a few weeks. Broad money growth, meanwhile, continues to be stimulative - at some 10 per cent year-on-year. There seems to be a clear link with the renewed upturn on Wall Street.

However, the year has contained darker elements as well. The Japanese economy has thus far failed to respond to repeated policy initiatives, and the crisis among trading partners elsewhere in Asia raises the possibility of mutually reinforcing weakness in the region as a whole.

The sharp decline in commodity and oil prices will place a heavy burden of adjustment on a number of already fragile economies.

The buoyancy of stock markets and bond markets in industrial countries, and the strength of capital inflows into non-Asian emerging markets, could in themselves be described as good news. Yet the enthusiasm of financial markets also raises another spectre: that it may not last, and that the economic effects of such a change in sentiment might be difficult both to predict and to manage.

The economic expansion in the industrial world is still being led by the United States, where the economy has continued to grow rapidly under the influence of strong domestic demand and healthy productivity gains. Developments in the United Kingdom have mirrored the US experience in some respects.

The economic and financial drama unfolding in Asia over the last year or so has understandably puzzled and preoccupied both policy-makers and market participants. The deterioration in the economic fortunes of many of the affected economies has been extraordinary, particularly given the widespread belief that their earlier successes were based on sound fundamentals. Unfortunately, these earlier successes seem to have contributed as well to a climate of excessive optimism among both borrowers and lenders. As a result, inadequate attention was paid to the rapid build-up of domestic and foreign debt by domestic corporations.

Also ignored was the significant threat this would pose to the stability of local banking systems should heavily managed exchange rate regimes come under pressure. Once difficulties emerged, a sharp and simultaneous reassessment of exposures to liquidity risk, market risk and credit risk then turned what might otherwise have been an orderly adjustment into a prolonged crisis.

We should not forget that a counterpart to strong growth with low inflation in both the United States and the United Kingdom has been a firming of the exchange rate and a widening of the trade deficits.

So far such deficits have been easily financed. However, a greater degree of hesitancy on the part of foreign investors could alter this situation and, in turn, the role played by the exchange rate in keeping domestic inflation subdued. Monetary policy might then need to take more of a leading role in maintaining price stability, and this would be all the more likely were the recent downward trend in commodity prices to reverse.

A closely related issue is the current buoyancy of financial asset prices in many industrial countries, amid associated concerns that investors everywhere may be underestimating the riskiness of certain kinds of financial investment.

In setting monetary policy, the implications of rising asset prices for spending and inflation must obviously be taken into account.

The experience of Japan, the Nordic countries and the United States in the early 1990s, and other parts of Asia more recently, indicates that asset price bubbles fuelled by bank credit can cause lasting damage to the banking system and to the broader economy.

While property prices figured prominently in earlier crises, and such prices have only just begun to turn up in many industrial countries, the current rapid expansion of monetary aggregates in a number of countries needs to be closely monitored.

There were good reasons to think that Hong Kong would be insulated from the Asian crisis.... But it could not escape some fallout. The main impact has come through higher interest rates, which led to large falls in the asset markets - property prices have fallen 30-40 per cent since their peak last October. Retail sales have slumped, as has tourism, falling by 25 per cent year-on-year as Asian tourists stayed at home.

The key concern is how far house prices can fall. With Hong Kong's banks heavily exposed to the property market, a collapse in prices could threaten the stability of the financial system, a pillar of the economy.

So far there is no reason for panic. Most of the fall in property prices is the correction of a bubble. Prices had risen by more than 40 per cent between the third quarter of 1996 and their peak in 1997, causing serious concerns about Hong Kong's competitiveness. An adjustment had to come at some point. Moreover, the limits on mortgage lending in Hong Kong are very strict, giving the financial system some protection.

The government must tread a fine line. It must prevent the slump from getting too deep but should not overreact and resort to crude interventionism. Its reaction has so far been sensible. It has been robust in its defence of the currency link. And it is providing the economy with a fiscal stimulus through a combination of tax cuts and infrastructure projects. (Kommentar RE: Är det inte misstänkt likt s k förlegad keynesianism?)

Housing policy is crucial. Hong Kong's new government last year announced a programme of accelerated land release and homebuilding. But implementing this now could send prices into freefall. Hong Kong's chief executive, C.H. Tung, gave a welcome indication in a speech this week that he was prepared to relax the policy. Most important, Hong Kong must avoid panic measures. Trying to hold interest rates down artificially or pumping money into unnecessary infrastructure will only worry the markets and lead to inefficiencies.

"Börsen är ett chickenrace"
Gerhard Stenberg, chef för Handelsbankens kapitalförvaltning i Göteborg, hoppar av i protest mot börshysterin efter nästan 30 års arbete i aktiemarknaden. Han tror att en börskrasch är oundviklig och vill inte ta ansvar för att rekommendera placeringar i aktier för närvarande. "Kurserna är på tok för höga och måste ned med minst 30 procent. Vi står inför ett kraftigt fall i börskurserna i hela världen. Det kommer att bli en rejäl smäll".

MATS HALLVARSSON Dagens Industri 98-05-02
Om kraschen kommer - var finns beredskapen?
Men om vi är på väg in i den sorg- och aningslöshetens era som präglade de finansiella marknaderna i slutet på 1980-talet, är det emellertid inte bara börsutvecklingens påverkan på konjunkturutvecklingen som borde bekymra. Ett i grund och botten allvarligare problem är att börsens goda rykte står på spel och därmed legitimiteten för hela riskkapitalmarknaden, marknadsekonomins centrala nervsystem.

Risken är mycket hög för en kraftig rekyl på världens aktiemarknader, men när bubblan väl spricker behöver det inte påverka världsekonomin mer än vad 1987 års börsras gjorde.

"Tror man att börsen ska fortsätta stiga i snabb takt utan någon rekyl, då tror man också på fortsatt sjunkande räntor, stigande fastighetspriser och ökad inflation i tillgångspriser", sa Nils Lundgren. "Men om priserna fortsätter att stiga på aktier och fastigheter slår det förr eller senare över på konsumentpriserna, och då kommer centralbankerna att börja strama åt med räntehöjningar", varnade han.

Nils Lundgren medgav att det finns goda argument för en högre värdering av aktier i dag än för några år sedan. Inflationen och räntorna har kommit ned. Dessutom har de stora fyrtiotalskullarna kommit upp i 50-års-åldern. Med barnen utflugna och villalånen betalda kan de pensionsspara mycket. De har enorma summor som måste placeras och med dagens låga räntor är aktier det attraktivaste alternativet.

"Men vad jag vet har det aldrig hänt att börsen stigit till en ny nivå och parkerat där utan att det först varit en överdriven kursuppgång följd av en kraftig rekyl", sa Nils Lundgren.

Merita Nordbanken tror dock inte att en eventuell rekyl får några större realekonomiska effekter. Det blir 1987 års börs-krasch i repris snarare än 1929 års. Den enda riktigt allvarliga följden vore om Tokyobörsen drogs ned så kraftigt att den japanska finanssektorn kollapsar - det skulle få oöverskådliga konsekvenser för världsekonomin.

Different Times, but the 1990s Do Resemble the 1920s
By Robert J. Samuelson The Washington Post
International Herald Tribune, Thursday, April 23, 1998

Americans know that today's economic boom will someday end, because all booms do. Yet faith in its immortality seems to grow almost daily. You see it in the stock market, confidence indexes and tight labor markets. Has there ever been anything like it? Well, how about the 1920s? The suggestion seems anti-social. It raises the specter of another Great Depression. (Unemployment averaged 18 percent in the 1930s.)

This need not be, of course. Peering back teaches at least two important lessons: People do get carried away, and today's economy may have some little-noticed weaknesses.

Parallels with the 1920s abound. The stock market soared. New technologies daz-zled. Today it is personal computers and the Internet. Then it was radios and mass-produced cars. From 1919 to 1930, the number of radios went from almost zero to 14 million; car registrations tripled to 23 million.

Then as now, people thought that the economy had permanently changed for the better. The 1920s supposedly heralded a ''new era.'' The operative phrase in the 1990s is ''the new paradigm.''

It holds that favorable forces (computers, foreign competition, deregulation) have made the economy more competitive, more productive and more stable. The economy is now said to lack the ''excesses'' that typically trigger a recession. Inflation is low; there is not much obvious business overinvestment (in, say, office buildings). But this overlooks the stock market, which may be just such an ''excess.'' It may be nudging the economy along by bolstering consumer confidence and spending.

Higher stock prices, it seems, embolden people to spend more of their incomes. They feel wealthier. Or they cash in - and spend - some market profits. The extra spending sustains the expansion. As the market has risen, the personal savings rate has fallen. In 1992 it was 6.2 percent of disposable income; by 1997 it had sunk to 3.8 percent, the lowest since at least 1946.

And why shouldn't consumers feel cocky? The market's surge now rivals the 1920s run-up as history's greatest. Ned Davis Research Inc. dates the present bull market to Oct. 11, 1990, when the Dow Jones Industrial average was at 2365.10. Since then it has risen by 288 percent (based on the April 17 close of 9167.50). In the 1920s, stocks rose by 345 percent from October 1923 to September 1929.

Stock prices have almost quadrupled in value since 1990. On Oct. 11, 1990, Ford closed at a little less than $10 a share; now it trades just under $50

This has meant an explosion of personal stock wealth. At year-end 1990, the value of households' stock holdings was $3.1 trillion. By 1997, that was $11.4 trillion. (These figures include stocks held through mutual funds, retirement accounts and pensions.)

But suppose the runaway market is, as The Economist argues, a speculative ''bubble.'' Suppose investors are simply chasing higher prices. Or suppose that something - Asia's economic crisis? - unexpectedly hurts profits. What then?

Perhaps this: Stocks ultimately drop; confidence, bolstered by their rise, sags with their fall; consumer spending weakens or maybe declines. Consumer spending represents about 68 percent of the American economy's output. If it weakens, corporate investment might be excessive; cutbacks could occur.

The point is that the stock market is not merely an indicator of the economy's performance. The market also determines how the economy behaves, through mass psychology and consumer spending.

In the 1990s, just as in the 1920s, stock wealth has soared and ownership has spread. It is creeping down from its bastion among the rich and upper middle class. Among families with incomes ranging from $10,000 to $25,000, stock ownership rose from 13 to 25 percent from 1989 to 1995, reports the Federal Reserve. For families with incomes from $25,000 to $50,000, ownership went from 33 to 48 percent.

And wealth effects are huge. In 1990, households' real estate wealth (mainly homes) totaled $6.6 trillion, more than twice stock wealth. By 1997, stock wealth was about 30 percent more than real estate wealth of $8.7 trillion.

In the late 1920s, warnings that the market was overvalued did not deflate the mania. One reason was that until early 1928 the market's rise reflected higher profits and dividends. Most of the 1990s surge also rests on solid economic gains. Inflation and interest rates have declined; this makes stocks worth more, because competing interest-bearing investments (bonds, bank deposits) are less attractive. And profits have doubled since 1990, boosting stocks.

But the market has moved well beyond present profits. Its price/earnings ratio is now at a historical high of 28. Since World War II, the ratio has averaged about 14. Something much higher may now be warranted. But 28? Who knows?

Perhaps higher prices will ultimately be vindicated by economic conditions (lower interest rates, high profits). Even if stocks dropped by 15 or 20 percent now, investors and consumers might take the decline in stride. After all, stock prices would still be where they were in early 1997, and more than twice their early 1991 level. And the 1990s are not the 1920s.

Although the crash of 1929 (the Dow dropped by 48 percent from September to mid-November) did mark the start of a sharp recession, it did not cause the Depression. The Depression occurred because the Federal Reserve did not do its job.

It allowed 11,000 banks to become insolvent by 1933, and it permitted the money supply to drop by a third. These were preventable events that would probably now be prevented. It is dangerous to overdo historical analogies. The 1920s cannot tell us whether today's boom will end next week, next month or even next year. But the history is mighty intriguing, and leaves a sobering question.

Small investors continue to believe Wall Street is the best place
USA Today 04/21/98 utdrag:

Small investors continue to believe Wall Street is the best place for their money, despite the highest stock prices in history and worries about global turmoil. Two-thirds of Americans think stock prices will rise the next six months, according to a USA TODAY/CNN/Gallup poll. A similar number say if they had $1,000, investing it in stocks would be a ''good idea.''

That bullishness startles Yale Hirsch, editor of the Stock Trader's Almanac. A bull market usually peaks when 50% to 60% of investors think stock prices will continue to rise, he says. The positive outlook is comparable to a poll taken last November amid fears of Asian economic collapse and when stocks were well off their highs. Since then, investors have helped fuel the rise in stock prices.

They pumped more than $66 billion into stock mutual funds during the first quarter, the Investment Company Institute estimates. But, Hirsch says, eventually the amount of money flowing into the stock market will level off, and demand will sag. ''If everyone is wildly bullish, all their funds are committed and they don't have any more money to invest,'' he says.

Many market pundits say the rise in stock prices is justified because inflation is barely visible, interest rates are low and economic growth is moderate.

Det frågade sig Wall Street Journal för ett par veckor sedan när det senaste kursrallyt hade pressat upp värderingarna i New York till nya rekordnivåer. Sådana frågor får börsoptimister att reflexmässigt slå bakut.

Varsågod, kliv av då, själva fortsätter vi börståget till himmeln, skrattar de självsäkert. Och så kommer sakargumentet: Inflödet, fatta inflödet! P/e-talet på Wall Street är idag högre än 1992, slutet på den förra glansperioden. (Kommentar RE: Skribenten menar nog 1929, även om också 1992 var ett händelserikt år).

Lägre räntor, högre vinster och allmänt sjunkande risker i världen kan kanske motivera. Därom får experterna tvista. Men likviditetsargumentet är ett cirkelresongemang som borde få ansvarsfulla placerare att fundera en extra gång. Oupplysta fondsparares massiva efterfrågan på aktier har inget med fundamental aktievärdering att göra. Fondsparare tycks tro att börsens riskpremie är noll! Här kan man tro att fonderna skulle rollen som grindvakt. Att de räknar på aktierna och säger stopp om börsen blivit övervärderad. Men det gör de inte.

Om fondförvaltarna räknar på börsen med en riskpremie som understiger marknaden i övrigt är det inte svårt att räkna hem kurserna. I slutändan är förvaltarna nöjda om de hänger med eller slår index. Och det finns ju alltid någon aktie som är minst övervärderad. Så kan börståget fortsätta mot himlen.