Transcript Stock markets and real estate

A Few More Bubbles
Fin254f: Spring 2010
Lecture notes 2.3-2.4
Readings: Shiller 1-2,
Kindleberger and Aliber, 8,
"What Moves Stock Prices"
Outline
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The U.S. stock market summary
The U.S. real estate market
Three recent events
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Japan 1980's
East Asia 1990's
U.S: dot.com 90-2000's
Real U.S. Stock Prices
Shiller's P/D plots
and U.S. Price/Earnings Ratio
1881-2009
Unusual Periods for U.S.

Twentieth century peak, June 1901, P/E =
25.2
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Real earnings double over previous 5 years
Real return 10 years after this = 4.4% per year, 20
years = -0.2% (includes dividends)
Sept 1929: P/E = 32.6,
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Real index does not return to this price level until
mid 1950’s
Real price drop into early 1930’s = -80.6%
Real return = -1.4% over 10 years, 0.4% over next
20 years (includes dividends)
Unusual Periods for U.S.
 January
1966: P/E = 24.1,
Kennedy/Johnson peak
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Earnings up over previous 5 years 36%
Real stock prices do not return to this level
until 1992
Real return over next 10 years = -1.8%,
1.9% over the next 20 years
Market Crashes and News
"What moves stock prices"

Largest moves and news
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Oct 19, 1987 (-20)
Oct 21, 1987 (+9)
(4) Sept 3rd, 1946 (-6.7) no basic reason
(6) Sept 26, 1955 (-6.62) Eisenhower heart attack
Some other important days
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Dec 8, 1941 (-4.4) Japanese bomb Pearl Harbor
Oct 23, 1962 (-2.7) Cuban missile crises
Nov 22, 1963 (-2.8) Kennedy assassinated
U.S. Interest Rates
U.S. Interest Rates
U.S. Interest Rates
 Few
obvious movements with stock
prices
International Comovements
 Figure
1.2
Outline



The U.S. stock market summary
The U.S. real estate market
Three recent events



Japan 1980's
East Asia 1990's
U.S: dot.com 90-2000's
U.S. House Prices (long)
U.S. Real Estate Prices
 Shiller
figure 2.1
 Predictability (R2 = 0.5)
 Run ups are small than stocks
 Past not informative (nonstationary??)
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Statistics difficult
 Fundamentals
2.1)
not well connected (fig.
Other Data Features
Several major declines
 Small run up in the 1920’s
 Many regional bubbles
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Geography is important
Figs 2.2, 2.3
Not all cities move together, but more so now?
Large (and permanent) increase after WWII
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GI Bill of rights
Home construction restricted during the war, then
expands
Why Do People Think Home
Prices Always Rise?
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Two possibilities
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Infrequent transactions
Inflation
Example
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House bought in 1948 for $16,000, and sold for
$190,000 in 2004
Total real return = 48%
Real return per year = 1%
Also, property probably improved a lot over time
(different goods) - also in index too
Special Things about Real
Estate
 Long
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term comparative data
Difficult
Hard to find
 Curious
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features about
Care and owner/renter incentives
 Special
tax breaks
 Leverage
 Cross country differences
Outline



The U.S. stock market summary
The U.S. real estate market
Three recent events



Japan 1980's
East Asia 1990's
U.S: dot.com 90-2000's
Bubbles in Asia (80’s-90’s)
Kindleberger/Aliber (8)

Japan 1980’s
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Land values: Imperial palace = California
Market value of Japanese land = 2 x U.S.
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(land area = 5 percent of US)
Stock market: Twice the market val of US
7/10 largest banks are Japanese (assets)
 Japanese firms acquiring “trophy” properties
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Rockefeller center
Pebble Beach Golf course
Japanese Growth History
Late 1800’s begins to industrialize
 Adopting foreign institutional models
 Early industry built around feudal families
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Large multi-industry holding companies
General MacArthur outlaws at end of WWII
 Firms replace this with “cross-holdings”
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Holding of other firm’s shares
1950’s-1960’s, Japan starts to catch up
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Growth rates near 10 percent per year
Japan in 1980’s
 Global
economic power
 World leader in
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Cars
Electronics
Photo optics
 Industrial
planning: “Japan Inc.”
 Financial structures: bank lending
Financial Regulation
Restrictions on interest rates
 Negative real returns
 Leaves only real estate and stocks with
positive returns
 Mid 80’s begins to deregulate
 Begins to financially become more global
 Real estate and stock markets continue rising
 Bank assets increase, collateral increases,
lending increases
 Cross holdings magnify changes in asset
values: Buy shares of other firms rather than
investing
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Three Factors in the Japanese
Real Estate Bubble
Long term positive returns (lots of scarce
land?? Phoenix versus Tokyo)
 Financial liberalization: Opens up more real
estate lending
 Monetary growth
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Bank of Japan intervenes to keep value of Yen low
relative to the dollar
Money supply expands
Banks increase reserves : can lend more
Stock Market Bubble
Continues
 Cross
holdings drive firm and investor
wealth
 As value of Japanese market rises,
international funds allocate larger
amounts to Japan
 Drives prices higher
 (Same in dot com bubble: Passive
funds part of problem.)
Peaks in 1989
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Some real estate buyers in cash bind
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Rentals smaller than interest payments
Think “Ponzi”!
Distressed selling starts
Land and stock prices begin falling
Downward spiral
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Property sales, price drops
Bank capital falls
Lending falls - > more price drops
Japan
Japan in the late 90’s and
early 2000’s
Japan has some periods of deflation
 Near zero interest rates
 Bankruptcies rise
 Banks in trouble
 Depositors do not withdraw
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Belief government will step in
Too big to fail
Foreign lenders to Japanese banks believe
government will not help them
 Japanese lenders and firms move to foreign
banks
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Shift Away from Japan
 Exports
increase/Imports fall
 Yen appreciates
 Investors shift to China, Malaysia,
Thailand where labor costs were lower
Early 1990's
 East Asian
"tigers"
 Beginning in the 1960's and 70's
 Key aspects
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Transformations
Growth (often near 10%)
 Stock
markets in Thailand and Malaysia
take off in the early 90's (300 - 500%)
Foreign Capital
Foreign direct investment
 Setting up manufacturing
 Real estate booms
 Consumer lending takes off
 1996: Consumer finance companies
experience losses, begin to fail
 Foreign creditors nervous
 Capital inflows suddenly stop
 Thai Baht can no longer be managed on a
dollar peg, currency collapses
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Regional Contagion
 Triggers
crisis across region
 Other currencies collapse
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Indonesia loses 70 percent of value
 Stock
prices down 30-60 percent
 Large number of banks fail
"Miracle" Comments
Disappear
 Crony
capitalism
 Destabilizing speculation
Ending in Asia, Starting in the
U.S. (late 90's)
 Current
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account deficits shift to surplus
(Central bank reserves increase)
 Exports
to U.S. rise
 U.S. trade deficits rise
 U.S. dot com bubble gets really heated
Dot Com World
VC's, Entrepreneurs, IPO's
 First day "Price Pop"
 December 1996: Greenspan "Irrational
Exuberance"
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Dow = 6300, NASDAQ = 1300
End of 1999
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Dow = 11700, NASDAQ = 5400
NASDAQ value = 80% NYSE value
 Initially "new economy" stocks
 Eventually all stocks
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“Our proprietary portfolio of
New Economy stocks was up
over 80.2% in 1998!”
“At this rate, $10,000
turns into $3.4 million in
10 years or less!”
When Did the Bubble Start?
 1995?
 1998?
S&P and NASDAQ
Bubble Persists
 1999:
Fed obsessed with Y2K
 Increases bank liquidity
 After 2000 Fed reduces liquidity
 Stock market falls 40%, NASDAQ 80%
International Aspects of
Dot.com
 Capital
inflows to U.S.
 Dollar appreciates
 Import prices fall in U.S.
 U.S. inflation low
 U.S. savings rates fall
Summary: The Three Recent
Bubbles
 Japan:
1980's
 East Asia: 1990's
 US dot com: late 90's early 2000's
 How do they fit into the Minsky
taxonomy?
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Ponzi??