bubble and burst
TRANSCRIPT
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Less Than A Bubble,
More Than A Burst
Randall DoddFinancial Policy Forum
EPI Brownbag
November 1, 2002
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COINCIDENT INDICATOR. Industrial production picks up the turning point early in this cycle, but not far from the three month lag
in the prior recession.
Industrial Production
889092949698100
102104106108110112114116118120122124126128130
132134136138140142144146148150152
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COINCIDENT INDICATOR. Total business sales (retail, wholesale and manufacturers) picks up the turning point, and does so in a
sharply defined manner. Figures are seasonally adjusted but not adjusted for inflation.
Total Business Sales
800000
850000
900000
950000
1000000
1050000
1100000
1150000
1200000
1992.0
1
1992.0
7
1993.0
1
1993.0
7
1994.0
1
1994.0
7
1995.0
1
1995.0
7
1996.0
1
1996.0
7
1997.0
1
1997.0
7
1998.0
1
1998.0
7
1999.0
1
1999.0
7
2000.0
1
2000.0
7
2001.0
1
2001.0
7
2002.0
1
2002.0
7
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COINCIDENT INDICATOR. Crude Oil prices is not a typical coincident economic indicator but it worth a look. The price hike
occurred after the prior recession started (note bold vertical lines in chart) and the hike started prior to
the current one. The high prices nonetheless acted as a drag in both.
WTI Oil
10121416182022242628
30323436
1989.
01
1989.
07
1990.
01
1990.
07
1991.
01
1991.
07
1992.
01
1992.
07
1993.
01
1993.
07
1994.
01
1994.
07
1995.
01
1995.
07
1996.
01
1996.
07
1997.
01
1997.
07
1998.
01
1998.
07
1999.
01
1999.
07
2000.
01
2000.
07
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LEADING INDICATOR. New orders for investment goods picks up the turning point almost six months early, and does so in a
sharply defined manner. Figures are seasonally adjusted but not adjusted for inflation.
New Orders: Capital Goods
30000
35000
40000
45000
50000
55000
60000
65000
70000
1992.0
1
1992.
07
1993.0
1
1993.
07
1994.0
1
1994.
07
1995.
01
1995.
07
1996.
01
1996.
07
1997.
01
1997.
07
1998.0
1
1998.0
7
1999.0
1
1999.0
7
2000.
01
2000.
07
2001.
01
2001.
07
2002.
01
2002.
07
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Unlike in prior recession, real consumption has not declined. The pace of growth has slowed in
comparison to the last half of the 1990s. If the Wealth Effect has played a role, it has not been strong
enough to turn consumption negative. (annual rate of % change from quarter to next)
GDP $96
-4%
-3%
-2%-1%
0%
1%
2%
3%4%
5%
6%
7%
8%
89.
1
89.
3
90.
1
90.
3
91.
1
91.
3
92.
1
92.
3
93.
1
93.
3
94.
1
94.
3
95.
1
95.
3
96.
1
96.
3
97.
1
97.
3
98.
1
98.
3
99.
1
99.
3
00.
1
00.
3
01.
1
01.
3
02.
1
02.
3
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Real Weekly Wages Stay Up. They dont continue their progression upwards, but by staying up they sustain consumption.
Weekly Wages
250
255
260
265
270
275
280
285
1991.
01
1991.
07
1992.
01
1992.
07
1993.
01
1993.
07
1994.
01
1994.
07
1995.
01
1995.
07
1996.
01
1996.
07
1997.
01
1997.
07
1998.
01
1998.
07
1999.
01
1999.
07
2000.
01
2000.
07
2001.
01
2001.
07
2002.
01
2002.
07 300
320
340
360
380
400420
440
460
480
500
520
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Wealth is likely to have dampened consumption spending, but not much. It appears to have had an
arresting impact on real retail sales. Retail sales make up 50% of Consumption, health care and
housing make up another about 15% each. The remaining 20% is an unknown for me.
Retail Sales ($82)
115000120000
125000
130000
135000
140000
145000
150000
155000
160000
165000
170000
175000
1992.
01
1992.
07
1993.
01
1993.
07
1994.
01
1994.
07
1995.
01
1995.
07
1996.
01
1996.
07
1997.
01
1997.
07
1998.
01
1998.
07
1999.
01
1999.
07
2000.
01
2000.
07
2001.
01
2001.
07
2002.
01
2002.
07
Stock market peak
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Household Debt -- nominal value, SA Consumer debt, in nominal terms, has risen throughout the recession (unlike the decline in non-
revolving debt during the prior recession). Growth in revolving, i.e. credit card, debt has flattened
off considerably only to begin rising again in the last few months.
Consumer Debt
200,000
300,000
400,000
500,000
600,000
700,000800,000
900,000
1,000,000
1,100,000
1990.0
1
1990.
07
1991.0
1
1991.
07
1992.0
1
1992.
07
1993.0
1
1993.0
7
1994.0
1
1994.0
7
1995.0
1
1995.0
7
1996.
01
1996.0
7
1997.
01
1997.0
7
1998.
01
1998.0
7
1999.0
1
1999.0
7
2000.0
1
2000.0
7
2001.0
1
2001.
07
2002.0
1
2002.
07
RevolNon-Rev
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Auto Debt - rate and terms Rates have fallen substantially since the start of the recession, and the terms of credit have also eased
at maturity has risen and the loan/value has jumped up. (At finance companies, terms are not as
favorable at banks.)
Auto Debt
40
50
60
70
80
90
100
1990.
01
1990.
07
1991.
01
1991.
07
1992.
01
1992.
07
1993.
01
1993.
07
1994.
01
1994.
07
1995.
01
1995.
07
1996.
01
1996.
07
1997.
01
1997.
07
1998.
01
1998.
07
1999.
01
1999.
07
2000.
01
2000.
07
2001.
01
2001.
07
2002.
01
2002.
07
02
4
6
8
10
12
14
MaturityLoan/ValueRate
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Household Debt - Mortgage Debt Total home mortgage debt owed by households has risen rapidly and has not been affected by the
recession. Home Equity debt, which is a component of total household mortgage debt, has risen
far more rapidly since early 1999 and the torrid pace has slackened only slightly since2000:III.
Mortgage Debt
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
5,000,000
5,500,000
6,000,000
6,500,000
7,000,000
90.4
91.2
91.4
92.2
92.4
93.2
93.4
94.2
94.4
95.2
95.4
96.2
96.4
97.2
97.4
98.2
98.4
99.2
99.4
00.2
00.4
01.2
01.4
02.2
100,000
120,000
140,000
160,000
180,000
200,000
220,000
240,000
260,000
280,000
300,000
Mortgage
Home Eq
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Mortgage Interest Rates. Rates have fallen substantially since the start of the recession, after rising through 1999 and first half
of 2000.
Mortgage Rates
45
6
7
89
10
11
12
1987.0
1
1987.0
7
1988.0
1
1988.0
7
1989.0
1
1989.0
7
1990.0
1
1990.0
7
1991.0
1
1991.0
7
1992.0
1
1992.0
7
1993.0
1
1993.0
7
1994.0
1
1994.0
7
1995.0
1
1995.0
7
1996.0
1
1996.0
7
1997.0
1
1997.0
7
1998.0
1
1998.0
7
1999.0
1
1999.0
7
2000.0
1
2000.0
7
2001.0
1
2001.0
7
2002.0
1
2002.0
7
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While the amount of total household debt and consumer debt have increased greatly, the cost of debt
service (principle and interest) as a percentage of disposable household income has NOT. In fact
current ratios are lower than in the mid-1980s and no more than 2% points higher than the beginning
of the decade. This cannot explain much of the slower pace of consumer spending.
Debt Service Burden
456
789
1011
12131415
80.1
81.
1
82.1
83.1
84.1
85.1
86.1
87.
1
88.1
89.
1
90.
1
91.1
92.
1
93.1
94.1
95.1
96.1
97.
1
98.1
99.
1
00.
1
01.
1
02.
1
Total DebtCsm Debt
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Delinquencies at banks are not high, especially in comparison to the last downturn.
Delinquencies at banks (where payments are 30 days past due) are measured as the
percentage of debt written-off and expressed as an annual rate for each month. This does not
include debt at non-bank financial institutions.
Debt Delinquencies
1
2
3
4
5
6
7
8
87.
1
88.
1
89.
1
90.
1
91.
1
92.
1
93.
1
94.
1
95.
1
96.
1
97.
1
98.
1
99.
1
00.
1
01.
1
02.
1
Real EstatelCredit CardsTotal Cs mC&ILoans+Leases
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Although delinquencies are not high, especially in comparison to the last downturn, the amount ofcharge-offs is rising.
Charge-offs are measured as the percentage of debt written-off and expressed as an annual rate for
each month.
Charge-Offs
0
1
2
3
4
5
6
7
8
9
85.
1
86.
1
87.
1
88.
1
89.
1
90.
1
91.
1
92.
1
93.
1
94.
1
95.
1
96.
1
97.
1
98.
1
99.
1
00.
1
01.
1
02.
1
Real EstateCredit CardsTotal Cs mC&ILoans+Leases
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Wealth Effect Most losses likely amongst richest 9%. In 1998, the SCF showed that 80% of
total unrealized capital gains were amongst the top 9%.
SCF (1998) showed that stock ownership concentrated amongst wealthiest 10%of households (82.2%) and top 1% (42.8%). Bottom 89% held less than 18%.
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Both the large cap S&P500 and the NASDQ Composite peaked about the same time in March of 2000.
This differ in how they have fallen before and after September 11th and before and after October 16th
of 2002 (hereafter known as Enron Day. The NASDQ Composite fell 66% from its peak by September
10th, then rose 9% by Enron Day and has then fell again by 35% by October 9th 2002. The S&P500
fell 28% from its peak to September 10th, then rose 6% by Enron Day and then fell 29% by Oct. 9th.
Equity Indices
0100200300400500600700800900
100011001200130014001500
1990.
01
1991.
03
1992.
05
1993.
07
1994.
09
1995.
11
1997.
01
1998.
03
1999.
05
2000.
07
2001.
09
0500
1000
1500
2000
2500
3000
3500
4000
4500
5000
S&P500NASDQ Comp
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Margin Debt The chart shows that the use of margin debt (debt/market capitalization) declined sharply starting in 1986
as the bull market gathered steam. Margin debt flattened out in 1991, was up and down a bit until 1995,
while the bull market charged onwards. When margin use rose decidedly in 1998 it did so as the market
rose to its peak in March 2000. They fell together, then margin use surged and then fell back again.
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
18,000,000
20,000,000
52.1
53.1
54.1
55.
1
56.
1
57.
1
58.
1
59.1
60.
1
61.1
62.1
63.
1
64.1
65.
1
66.
1
67.
1
68.
1
69.
1
70.
1
71.
1
72.
1
73.
1
74.1
75.1
76.1
77.1
78.1
79.
1
80.
1
81.
1
82.
1
83.
1
84.1
85.1
86.1
87.1
88.1
89.
1
90.
1
91.
1
92.
1
93.
1
94.
1
95.
1
96.1
97.
1
98.
1
99.
1
00.1
01.
1
02.
1
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Margin Debt
Market Cap
Value/Debt
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Margin Debt -- smaller interval The chart shows that the use of margin debt (debt/market capitalization) declined sharply starting in 1986
as the bull market gathered steam. Margin debt flattened out in 1991, was up and down a bit until 1995,
while the bull market charged onwards. When margin use rose decidedly in 1998 it did so as the market
rose to its peak in March 2000. They fell together, then margin use surged and then fell back again.
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
18,000,000
20,000,000
81.
1
82.
1
83.
1
84.
1
85.
1
86.
1
87.
1
88.
1
89.
1
90.
1
91.
1
92.
1
93.
1
94.
1
95.
1
96.
1
97.
1
98.
1
99.
1
00.
1
01.
1
02.
10.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Margin Debt
Market Cap
Value/Debt
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Stock Prices: The Bull Charge
Two Reasons First -- fundamentals Low inflation, low interest rates
Low volatility of GDP
Long-wave of tech innovation
Longest expansion in US history
Second -- financial Higher plowback rate
Higher firm specific ROE
Problems Herding - although with some rational basis,
and poor assessment of risk Difficult to price new technologies
Manipulation from skewed market analysis
Manipulation from false reports on market
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Stock Prices: The Bear Dance
Two Stages First -- March 2000 to Oct 2001 Fed raised rates starting Spring 99
Rising market volatility Lowered E1 forecast
First - part two Sharp fall in long-term E forecast
Second -- Oct. 2001 to Oct 2002 Despite Fed lowering rates
More market volatility
Worse earnings forecasts
Sharp, negative Enron corrections
Some firms lower
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This is a different picture of the role of government expenditure than you might expect. It has become
a source of volatility to the U.S. economy! It has has a positive net effect although its magnitude is
modest. Non-defense federal spending is also volatile, and has been negative twice since the current
downturn.
Government $96
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40
45
89.
1
89.
3
90.
1
90.
3
91.
1
91.
3
92.
1
92.
3
93.
1
93.
3
94.
1
94.
3
95.
1
95.
3
96.
1
96.
3
97.
1
97.
3
98.
1
98.
3
99.
1
99.
3
00.
1
00.
3
01.
1
01.
3
02.
1
02.
3
Total Fed Non-Def
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Note that S&L, while presumed to be more cyclical, has been less volatile from quarter to quarter.
Defense spending has been much more volatile from quarter to quarter, and over this period it has been
counter-cyclical even if the reason for the changes has not been primarily macroeconomic
management.
Government $96
-25
-20
-15
-10
-5
0
5
10
15
20
25
89.
1
89.3
90.
1
90.3
91.1
91.
3
92.1
92.
3
93.1
93.3
94.
1
94.3
95.
1
95.3
96.1
96.
3
97.1
97.
3
98.1
98.3
99.
1
99.3
00.
1
00.
3
01.1
01.
3
02.1
02.3
Def S&L
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The role of real net exports has been novel. Usually real imports decline during a downturn due to the
fall income and overall consumption and investment spending. This occurred in both the present and
prior downturns. This time this was matched with a great degree of correlation by a downturn in
exports! This is unusually and suggests that the U.S. economy is more positively correlated with
economies in the rest of the world. (Chained 96 dollars, and net exports are on right axis.)
International Trade
500
600700
800
900
1000
11001200
1300
1400
1500
1600
90.
1
90.
3
91.
1
91.
3
92.
1
92.
3
93.
1
93.
3
94.
1
94.
3
95.
1
95.
3
96.
1
96.
3
97.
1
97.
3
98.
1
98.
3
99.
1
99.
3
00.
1
00.
3
01.
1
01.
3
02.
1
02.
3
-550-500-450
-400-350-300-250-200-150-100
-50050100
ExportsImportsNet Exports
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The Strong Dollar. The dollar appreciated prior to the start of the recession and continued up until 2002. Since then it has
depreciated against the Euro, Sterling and Yen
Exchange Rates
5060
7080
90100110120
130
140150160
170
1990.
01
1990.0
7
1991.0
1
1991.0
7
1992.
01
1992.0
7
1993.0
1
1993.0
7
1994.0
1
1994.0
7
1995.0
1
1995.0
7
1996.0
1
1996.
07
1997.
01
1997.0
7
1998.0
1
1998.0
7
1999.
01
1999.0
7
2000.0
1
2000.
07
2001.0
1
2001.0
7
2002.0
1
2002.0
7
UK Japan Euro-DM
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The role of Investment appears to play a more important role. While investment in residential
structures has played a persistent positive role, that for non-residential structures has turned down and
continues to decline. More importantly, investment in equipment turned sharply downward, and is
only slowly recovering.
Investment $96
100
200
300
400
500
600
700
800
900
1000
1100
90.
1
90.
3
91.
1
91.
3
92.
1
92.
3
93.
1
93.
3
94.
1
94.
3
95.
1
95.
3
96.
1
96.
3
97.
1
97.
3
98.
1
98.
3
99.
1
99.
3
00.
1
00.
3
01.
1
01.
3
02.
1
02.
3
StructEquipRes
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The composition of the changes in investment is telling. Growth is entirely attributed to Information
Processing while that for Trans and Industrial continues to decline. (Again chained 96 dollars.)
Equipment Investment
50
100150
200
250
300
350
400
450
500
550
600
90.
1
90.
4
91.
3
92.
2
93.
1
93.
4
94.3
95.
2
96.
1
96.
4
97.
3
98.
2
99.
1
99.
4
00.
3
01.
2
02.1
Info Process ing
Industrial
Transport
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Change in Inventories. Inventories took a sharp drop, much larger than in the prior recession. Orthodox Keynesians take
note. (Changes from quarter to next in chained 1996 dollars)
Inventories$96
-100
-80
-60-40
-20
0
20
40
60
80
100
120
90.
1
90.
3
91.
1
91.
3
92.
1
92.
3
93.
1
93.
3
94.
1
94.
3
95.
1
95.
3
96.
1
96.
3
97.
1
97.
3
98.
1
98.
3
99.
1
99.
3
00.
1
00.
3
01.
1
01.
3
02.
1
02.
3
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Change in Inventories. Not just the prior recession, but all prior recessions in the post-war era.
Inventories$96
-100
-80
-60
-40
-20
0
20
40
60
80
100
120
47.
2
50.
3
53.4
57.1
60.2
63.
3
66.
4
70.1
73.2
76.3
79.
4
83.
1
86.2
89.3
92.4
96.
1
99.
2
02.
3
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Inventories and Inventory Sales Ratio. Inventory sales ratio rose just as the stock market fell and real retail sales flattened out. The drop in
sales pushed up I/S ratio initially before liquidation of inventories (which is shown beginning in early
2001) turned ratio downward.
Inventories
800000
850000
900000
950000
1000000
1050000
1100000
1150000
1200000
1992.
01
1992.
07
1993.0
1
1993.0
7
1994.
01
1994.0
7
1995.
01
1995.0
7
1996.0
1
1996.0
7
1997.0
1
1997.
07
1998.0
1
1998.
07
1999.0
1
1999.0
7
2000.
01
2000.
07
2001.
01
2001.0
7
2002.
01
2002.
07
1.3
1.4
1.4
1.5
1.5
1.6
1.6
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SUMMARY: CAUSES Not just any one factor. Over determined as Freud would say, or as the great wit and
sage, we made too many wrong mistakes.
Three themes:
Market Crash:
Fed raised interest rates and deflated market
Virtuous tech cycle came to an end: part stumble, part exhaustion and part hitting of wall
One word, Enron
Rest Of World slowed
U.S. is more correlated with ROW and especially during downturn
US dollar stayed up
Investment Crunch
Tech boom stumbled, played out
Higher interest rates
High dollar
Higher capital costs
Drought of new capital
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PROSPECTS CONSUMPTION
depends on employment and wages
further household debt accumulation less likely, especially if housing prices fall. Maybe moreretailer credits.
Wealth effect NOT likely to turn positive in near term.
INVESTMENT
Inventories show little gain even after liquidation
Equipment is coming back, though mostly computers and other info processing. Industrial
and transportation and other is still slack.
Structures are smaller in magnitude but still declining. This may need to wait upon new
business start-ups. Market rebound may help.
Residential has not slowed and thus not likely to speed up and therefore not likely to
contribute to turn-around and rebound.
GOVERNMENT
CR for Fed spending, eventually national security spending will surge.
S&L is pro-cyclical, but not in a leading way.
NET EXPORTS
Misery loves company. US growth increasingly correlated with ROW and thus will find
downturn is aggravated and upturn is awaited.
Export component did show some growth in 2002:III.
US dollar remains strong, though may drop with another Fed ease.
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POLICY PROPOSALS MINIMUM WAGES
will help consumption
INVESTMENT TAX CREDITS Bigger bang for buck, and targeted to sector that has turned down the most.
LOWER INTEREST RATES
Fed can lower rates to help stock market, lower cost of capital and possibly ease drought on
new capital
REAL REFORM OF FINANCIAL MARKETS
gets financial markets working again. True for energy markets as well as stock markets. RENEW GLOBAL GROWTH
reform IMF policies towards expansion
resolve LDC debt problems
reform Japanese financial system
reform EU macropolicy to eliminate downward bias
ROLL-OUT BROADBAND Auction spectrum in order to free resources for further innovation.