March 11, 2003
Germany Under Stress

Germany Under Stress: A correspondent writes: Do you realize the German DAX is down 70% from its early 2000 highs? Look at the ten year chart of the DAX versus the S&P 500. The Germans had, in many ways, a much worse bubble and harder come down than we did. That society must really be under some stress. The answer is, "No." I had not realized the magnitude of the decline in the DAX. And I no much too little about what a large stock market decline in Germany must be doing to the shareholder class, to German finance, to the German economy, and to German society. Yet another thing I need to learn about pronto......

Posted by DeLong at 09:30 AM

Japan Under Stress

Japan under stress. The Japanese economy and financial system have been under stress for more than a decade now. But the amount of stress has just ratcheted itself up again. From Dow Jones: TOKYO -- Tokyo stocks ended sharply lower yet again Tuesday, as geopolitical fears and concerns about the falling market's impact on Japan's fragile financial system prompted further selling. The Nikkei 225 Stock Average closed under the 8000-mark, falling 179.83 points, or 2.2%, to 7862.43 -- the lowest finish since January 1983. It was the sixth straight session of declines for the key index. The Topix index of all the Tokyo Stock Exchange First Section issues fell 13.90 points, or 1.8%, to 770.62, the lowest close since August 1984. On the TSE's First Section, 966 issues fell, 419 issues rose, and 133 were unchanged from Monday. The slumping stock market rekindled worries about Japan's financial system. At current index levels, major banks' latent stock losses appear to have ballooned to around ¥6 trillion ($51.2 million or ?46.5 million), and most major life insurers are also seen to have heavy losses, analysts said. Among banks, Sumitomo Mitsui sank 12% to a new all-time low of ¥206,000. Mitsubishi Tokyo Financial...

Posted by DeLong at 09:24 AM

March 10, 2003
Fannie Mae and Freddie Mac Lose Six Percent of Their Market Value

I realize that this is one of Bill Poole's stock lines--that we need to figure out exactly what kind of animals Fannie Mae and Freddie Mac are, and make that clear, and that uncertainty is a potential source of vulnerability. And I realize that Bill Poole repeating one of his stock lines should not knock six percent off the equity value of these GSE's. But this market is really weird. Perhaps this line should be rotated out of the stock speech... : Fed's Poole: Fannie Shocks Could Spread: The agencies' stock prices sank after Poole's comments, with Freddie Mac's shares falling to a new 52-week low and Fannie Mae's clinging just above its one-year low. "Should either firm be rocked by a mistake or by an unforecastable shock, in the absence of robust contingency arrangements the result could be a crisis in U.S. financial markets that would inflict considerable damage on the housing industry and the U.S. economy," Poole said at a conference on the two government-sponsored enterprises, or GSEs. Surprises that destabilize financial markets can and do occur with some frequency, Poole said. Because of the scale of the short-term debt obligations of Fannie Mae and Freddie Mac,...

Posted by DeLong at 07:32 PM

September 14, 2002
Daniel Gross, Meet Daniel Gross

Last week Slate's Daniel Gross tut-tutted that Berkshire-Hathaway's Warren Buffett is lending money to distressed companies at usurious interest rates: these transactions are not in existing shareholders' interest, but they do satisfy managers' desire to postpone bankruptcy in the hope that something, anything might turn up. Daniel argued that Berkshire-Hathaway's resort to this strategy--the exploitation of the conflict-of-interest between managers and shareholders--is a sign that the stock market is still highly overvalued: The New Warren Buffett Way - From value investor to vulture investor. By Daniel Gross: ...Perhaps the deals say something more profound about the post-9/11 market than about Buffett. With so many stocks having plummeted, so many companies beset by scandal, so much money fleeing the market, and such a crisis of investor confidence, one might expect that the classic value situations that are Buffett's hallmark would be everywhere. Buffett should be grabbing an underpriced company every few days. The fact that Buffett, who has oodles of cash to put to work, hasn't found many--and has instead been nibbling on distressed properties--shows just how overvalued stocks still are... This week Daniel does a backflip and savages PIMCO Bond's Bill Gross for... saying that the stock market is still...

Posted by DeLong at 08:52 AM

September 09, 2002
Alan Murray on IPO Underpricing

Alan Murray wrestles with the problem of IPO--Initial Public Offering--underpricing. On the one hand, why should the rest of us care if entrepreneurs wish to sell 10 percent of their companies at a half-off discount to the friends and clients of their investment bankers when their firms go public? Entrepreneurs are giving a rather large present to those on the IPO list, but if they did not wish to do so they could always use Hambrecht and Quist and run a true auction to sell off the initial tranche of shares. And they get benefits--a bunch of people who will have made money by investing in their stock, and who are likely to hold onto it and talk it up. Murray comes down on the side of the--highly plausible--theory that IPO underpricing is a way that investment banks get their going-public client corporations to bribe those from whom they want to be thrown other prices of investment banking business. - Article ...When the price of a stock jumps to $20 from $10 in the first day of trading, reaping instant profits for the lucky few who have been allocated shares, the investment bankers celebrate a "hot" offering. They ought...

Posted by DeLong at 09:18 PM

September 06, 2002
The Economist Joins the Pile on Alan Greenspan

This week's "Economics Focus" in the Economist joins the pack piling on to Alan Greenspan for not deflating America's stock market bubble earlier: ...There may be no painless way to deflate bubbles. Yet the correct test is not whether a bubble can be deflated without some loss of output. Rather, it is whether the early pricking of a bubble causes less pain than letting it grow only to burst later. The longer a bubble is allowed to inflate, the more it encourages the build-up of other imbalances, such as too much borrowing and investment, which have the power to turn a mild downturn into something nastier. If the Fed had let some air out of the bubble earlier, America's economy might now be better placed for future growth... Admittedly, for the Fed to justify an increase in interest rates when inflation was low would have been hard—but not impossible. It could, for instance, have argued that raising rates and so containing financial imbalances would avoid future economic instability and hence a large undershoot in future inflation. Central bankers do not have a political mandate to respond to asset prices. Even so, Mr Greenspan could still have done more to...

Posted by DeLong at 03:10 PM

August 30, 2002
Greenspan Defends His Policy Toward the Late Stock Market Bubble

There is a principal about asset market bubbles: a policymaking authority like the Federal Reserve can never be sure enough that an asset market rise is a bubble in order for it to take steps to pop it. Why? Because if the Federal Reserve can be sure it is a bubble, the "smart money" in the stock market can be sure that it is a bubble too--and if the smart money is sure that it is a bubble, the smart money will already have gone short the market on a large scale, and so popped the bubble by itself. Therefore the only bubbles that can flourish and grow are those that people are not sure are asset market bubbles. Here the Associated Press reports on Alan Greenspan's defense of Federal Reserve policy in the late 1990s. The only point on which I think Greenspan is weak is his claim that he knew that raising margin requirements would do no good, hence did not raise them. It's not clear to me that they wouldn't have had a beneficial effect--although probably a very small one. Greenspan Defends Decisions of Policy Makers in Late 1990s: ...In addition to defending the Fed's decision not...

Posted by DeLong at 12:36 PM

August 24, 2002
Stockmarkets: The Economist Remains Pessimistic

The London Economist gives a pessimistic review of the past summer's movements in the stock market. If you can get your undergraduates to read it, they'll be exposed to a bunch of important points--that stock market values depend on expected future profits; that future profits depend on productivity growth, how close the economy is to full employment, and on the strength of competition; and that high stock market values are a good cause/signal of high levels of business investment. I always like to grab an article like this from the Economist and hide it away until we begin talking about "animal spirits" and the determinants of investment in the Keynesian model. The Stock Market: Jumping Yet Jumpy: ...From the beginning of May, when the Dow Jones Industrial Average stood above 10,000, it slid to a low in July of 7,702. The broader S&P 500 index and London;s FTSE 100 followed similar routes south. Having been stamped on heavily after earlier slips, the Nasdaq Composite index (with a heavy weighting of technology companies) had little strength to resist and so sank too. With at least one eye on Wall Street, many other markets followed suit. Then, almost as abruptly in...

Posted by DeLong at 05:18 PM

July 23, 2002
George Bush Predicts P/E Ratios Will Rise. Megan McArdle Disagrees

George Bush predicts P/E ratios will rise. Megan McArdle--sensibly--disagrees. First George: Bush Defends Treasury Secretary and Speaks Out on Markets the clear distress of some of his aides, Mr. Bush went into an extensive discussion of the falling market, after a reporter asked what would send the market back up. "Value," Mr. Bush said. "They're going to realize that there's values in the market. In other words, if they buy stock, they're buying value, as opposed to buying, you know, buying into a bubble." He said market confidence would increase if Congress passes a corporate accountability bill this week before the House goes into its summer recess. He then returned to his theme, predicting that corporate earnings are bouncing back and stocks won't be far behind. "What's happening is corporate earnings are improving, so that the price/earnings ratios are improving," Mr. Bush said, referring to the ratio between the price a stock is fetching and a corporation's per-share earnings. "And I believe people are going to come back into the market. But listen, I'm not a stock broker. I'm not a stock picker. My attitude on Wall Street is they'll buy you or sell you, depending upon if it's...

Posted by DeLong at 08:46 AM

July 21, 2002
Dow 36000?

On September 20, 1999--the date of the publication of Glassman and Hassett's Dow 36000: The New Strategy for Profiting From the Coming Rise in the Stock Market--the Dow Jones Industrial Average closed at 10834. If you had bought the stocks that made up the DJIA that day, reinvested your dividends (taxfree), and changed your portfolio to match changes in the index, your average inflation-adjusted annual return to date would have been: minus 10.62 percent per year A far cry indeed from the tripling of your money promised on the book's cover....

Posted by DeLong at 07:22 PM

July 18, 2002
A Sign That the Stock Market Is Near Its Bottom?

A Sign That the Stock Market Is Near Its Bottom? This piece of spam from might well qualify as a signal that the bottom is near: when the attention-grabbing headline is not "9 stocks that will double in value" but "17 big-name stocks you MUST SELL now," bear-market psychology must be near its maximum possible value... ================================= Date: Wed, 17 Jul 2002 15:58:54 -0400 From: To: delong@econ.Berkeley.EDU Subject: 17 Big-Name Stocks You MUST SELL now... Dear Investor, Everything's hunky-dory, right? Alan Greenspan says the economy is "in recovery;" all the corporate big-wigs are rushing to claim, "There's nothing wrong with OUR books;" and many market pundits are once again urging you to buy "before the next run-up". Don't do it. Don't get suckered this time around. We're not headed back to the glory days again just quite yet. And if you buy the market...load up on big-name tech stocks just because they're cheap...or take Wall Street's word at face value, be prepared to get CLOBBERED. "XYZ company beat earnings estimates," the financial press will announce. And everyone will get excited and tout the stock. What a great buying opportunity, right? WRONG! Thatís when I get really steamed by...

Posted by DeLong at 12:32 PM

July 16, 2002
The Falling Stock Market Makes the Fed Think About Cutting Interest Rates Again

"Some observers" now believe that the next shift in U.S. interest rates may be down, not up. From what I hear these "some observers" are quite highly placed in the monetary policy-making decision structure. This is a measure of how much the 30% decline in the S and P Composite this year has caused or signalled a likely further fall in business investment. Grrrr: After sharp falls last week, the world's stockmarkets began another frightening rollercoaster ride this week. The bear market has devastated portfolios and frightened investors. Can confidence be restored? ...Stockmarkets, though, continue to slide, and each recovery in share prices has been reversed with the next piece of bad news. Of that there has been plenty, especially in America's corporate sector, with a series of spectacular accounting scandals which have brought down some of the world's biggest companies. Irregularities at Enron, Andersen, WorldCom and others have shaken international confidence in American capitalism. This is a headache for two groups of policymakers. Those concerned with corporate regulation are having to work fast to come up with convincing proposals to restore confidence in the system. And those whose job it is to maintain economic stability have to judge what...

Posted by DeLong at 12:54 PM

July 15, 2002
S&P Composite Round Trip

The S&P Composite index is now back where it was in mid-1997. In real inflation-adjusted terms, it is back where it was in the winter of 1997, two months after Alan Greenspan wondered how we would know if the stock market had become the victim of irrational exuberance. That means that if you had invested in a diversified portfolio of stocks that matched the S&P Composite on the day of Alan Greenspan's speech, held it, reinvested the dividends, and tracked changes in the index since, you would have made about 3.5% per year in real returns over the past five and a half years. By contrast, you would have gotten 4.2% per year over and above inflation--a higher return with practically no risk at all--had you simply invested your money in 10-year Treasury bonds with 5 1/2 years until their maturity. The 5 1/2 years since Greenspan made his "irrational exuberance" speech have thus been one of those relatively rare periods during which in aggregate and on average government bonds have outperformed stocks....

Posted by DeLong at 04:44 PM

July 13, 2002
Steven Roach Preaches Doom and Gloom

Morgan Stanley's Stephen Roach--one of the best we have at current analysis of the state of the business cycle--explains why he is so much more pessimistic about the future of the American economy than the typical forecaster. In brief, he sees the parallels between the U.S. today and Japan a decade ago as much stronger than the typical forecaster does (or than I do). Morgan Stanley Global Economic Forum ...most view the US macro outlook through the lens of a traditional business cycle framework. That's not unlike the approach that remains in favor back home. I guess I'm on a different planet. I continue to see the US macro through the lens of a popped asset bubble. As a result, the macro I practice these days couldn't be more dissimilar from that embraced by the broad consensus of investors, businesspeople, and policy makers. For me, the past several years have been like peeling away the layers of an onion. Once the equity bubble popped, the steady progression of subsequent events has fallen into place in a fairly logical and predictable fashion. Nasdaq, of course, was the first to go -- and, sadly, is still going. It's currently off 73% from...

Posted by DeLong at 01:20 PM

July 07, 2002
The Economist Looks at the Bear Market of the 2000s

The magnitude of the decline in stock market values since their peak is not surprising: stock prices were substantially overvalued by historical yardsticks. (Moreover, they remain overvalued by historical yardsticks--albeit less so--today.) The important questions are two: (1) Will skillful economic management be able to keep irrational exuberance from becoming irrational depression? (2) Will skillful economic management be able to keep falling stock prices from triggering falling demand, and depression? We may well have a chance to see exactly how good at central banking the Federal Reserve is. | | Watching Out for the Great Bear | THESE are not times for nervous investors. The recent sharp fluctuations in the world's stockmarkets have brought the doom-mongers out in force. They point to the relentless downward slide in share values since their peak in 2000 in America, earlier in London and more than a decade ago in Japan. The collapse in share prices has sent many investors scurrying for cover in safer assets like bank deposits or bricks and mortar; and workers due to retire have begun to worry about the safety of their pension funds. Stockmarket volatility has been matched by swings in currency values--if there's panic around, foreign-exchange...

Posted by DeLong at 03:12 PM

June 20, 2002
The Federal Reserve Says Its Keeping Its Foot on the Gas

At the moment short-term real interest rates are negative: the 1.75% per year interest rate that the Federal Reserve has set on overnight federal funds is less than the rate at which consumer prices are rising. This is a very stimulative posture--it tells businesses that they should undertake investments that (in the short term at least) promise any profits at all, no matter how low. Now the Federal Reserve is telling us that there are no interest rate hikes on offer for the next few months. The Federal Reserve does not have confidence that the recovery is strong and steady enough to risk disrupting it by raising interest rates and making the incentive to invest less. The Federal Reserve does not fear rising inflation enough to want to raise interest rates to put downward pressure on price increases. | Fed May Not Raise Rates At Least Until September | John Berry | June 20, 2002 | The Federal Reserve now appears unlikely to raise interest rates until the fall, at the earliest, because inflation remains extremely low and the U.S. economy is not growing fast enough to create many new jobs. At the beginning of the year, some investors...

Posted by DeLong at 09:10 PM

June 19, 2002
Why So Many Earnings Restatements? Why So Many Bad Accounting Numbers?

The Wall Street Journal's David Wessel does an extremely good job in making sense of just why it is that so many boardroom bad guys have emerged all of sudden right now. David's conclusion? That the 1990s stock bubble--and the options paid to CEOs during it--changed the incentives facing top managers, making it much more lucrative to report dodgy numbers or engage in full-scale accounting fraud. And the institutions that were supposed to monitor corporate performance simply didn't: The remnants of a professional ethos in accounting, law and securities analysis gave way to getting the maximum revenue per partner. The auditor's signature on a corporate report didn't testify that the report was an accurate snapshot but only that a company had cooked the books without formally violating GAAP.

Posted by DeLong at 10:23 PM

June 17, 2002
How Far Out of Whack the Stock Market Really Is: The Answer? Very

Few people recognize how far out of whack the stock market still is today. Even though stock prices--especially the prices of high-tech stocks--have fallen substantially relative to their early-2000 peak values, there is still a large disconnect between current stock-market values and traditional valuation ratios relative to measures like earnings and dividends. Typically, over the last fifty years, if you took a diversified and representative basket of stocks, you would have found that it sold for about 30 times its annual dividends and for about 18 times its annual earnings. It might go as low as 6 times earnings or as high as 23, but whenever it reached one of those boundaries you could bet that valuation ratios were about to move back to normal. Today, however, stocks are selling for more than 30 times earnings, and more than 60 times dividends. You can leave the dividend numbers aside--there are, after all, better and cheaper ways of getting cash out to shareholders than dividends, and the mystery is not why dividends today are less than 50% of earnings, but why in the post-WWII past they were more than 60% of earnings (and still higher percentages of earnings back in the...

Posted by DeLong at 02:58 PM

June 13, 2002
Proposals for Corporate Governance Reform from FORTUNE

Joseph Nocera and friends put forward their proposals for reforming American corporate governance in FORTUNE. The curious thing, however, is that the enthusiasm for reform on Capitol Hill has ebbed: there seems little desire for more than face-saving and cosmetic changes in the way the system works. System Failure: Corporate America has lost its way. Here's a road map for restoring confidence. FORTUNE Monday, June 24, 2002 By Joseph Nocera Goldman Sachs CEO Hank Paulson is not a touchy-feely guy. Even by Wall Street standards, he's fairly buttoned down. But the daily drumbeat of news about horrifying corporate behavior would get to anyone--and it's clearly getting to Paulson. "In my lifetime, American business has never been under such scrutiny, and to be blunt, much of it deserved," he said in a recent speech. To FORTUNE he added, "You pick up the paper, and you want to cry." You sure do. Every day, it seems, a new scandal bursts into public view. Bankrupt Kmart is under SEC investigation for allegedly cooking the books. Adelphia's founding family is forced to resign in disgrace after it's revealed that members used the company as their own personal piggy bank, dipping into corporate funds...

Posted by DeLong at 09:55 AM

June 12, 2002
Board Room Truth and Beauty

Board Room Truth and Beauty By Marco Becht and J. Bradford DeLong Foreign Policy, July/August 2002, pp. 88-9. During the 1990s, when the Internet boom seemed unstoppable and the U.S. stock market at its most bullish, it became fashionable to predict that corporate governance around the world would soon mirror the U.S. model. That is, private executives would receive high-power incentive pay in the form of stock options, and they would be kept in check chiefly by shareholder-friendly laws, lawyers, and institutional investors, as well as by the specter of mergers or takeovers resulting from low stock prices. Conversely, labor unions, major-bank shareholders, and rich-family financiers—key influences in other countries—would be less important. Some signs supported the convergence view. Managers in other countries looked enviously at the magnitude of the capital flowing through U.S. (and British) financial markets and the easy terms on which funds could be raised. Corporate governance in Europe, Japan, and emerging markets appeared to be shifting in the U.S. direction, as foreign firms that wanted to be listed on U.S. stock exchanges tried to make their systems appealing to American investors. For UCLA management professor Sanford Jacoby, this evidence is not compelling. Writing in the quarterly...

Posted by DeLong at 01:15 PM

June 11, 2002
The Economist Sums Up the Arthur Anderson Trial

I haven't been following the details of the trial, so I have little sense as to whether you can say that the firm was guilty, or whether it was simply a failure of the firm's management and supervision system over employees who desperately wanted to make a big client happy. Regrettably, the Economist does not tell me what it thinks--only that--"with a Texan jury, there are no certainties." There is one potential smoking gun that the Economist mentions: "Carl Bass, another technical expert, who reported to Mr Stewart, was barred from advising on Enron matters because the oil company did not like his decisions..." Andersen on trialJun 6th 2002From The Economist Global AgendaThe prosecution and defence in the criminal trial of Andersen, the once-mighty accounting firm, have had their say. Now it is up to the jury to decide whether Andersen, the auditors of Enron, were guilty of obstruction of justice by shredding documents in an effort to thwart an investigation by the Securities and Exchange Commission (SEC). Andersen is already finished as a firm, with its overseas network sold to rivals. The verdict will be taken as a judgment on whether it was the government, or Andersen itself,...

Posted by DeLong at 08:59 AM

June 05, 2002
Profits and Productivity

In the 1990s profits, as measured by the national income accountants, peaked in 1997. Thereafter--even as productivity and production in the entire economy grew more rapidly than they had in a quarter-century--profits fell. The benefits of the wave of innovation in information technology and economic growth in the last years of the twentieth century flowed not to corporations' shareholders but to consumers in the form of lower prices and to workers in the form of high wages and salaries. There had been a debate about whether the coming of information technology would subject American businesses to more competition, as better information technology made it easier to comparison shop, or subject to less competition, as first movers exploited economies of scale and scope to acquire entrenched monopoly positions. The answer, of course, is "both"--America is a big place where lots of things can happen. But it seems clear that the first happened more than the second: that the late 1990s saw a profit squeeze as the benefits of economic growth went overwhelmingly to workers and consumers. The joker was that America's businesses did not tell their investors that profits had peaked in 1997. By 2000 the S&P 500 firms were...

Posted by DeLong at 11:44 AM

June 01, 1990
Robert B. Barsky and J. Bradford DeLong (1990), "Bull and Bear Markets in the Twentieth Century," Journal of Economic History 50: 2 (June), pp. 1-17.

Robert B. Barsky and J. Bradford DeLong (1990), "Bull and Bear Markets in the Twentieth Century," Journal of Economic History 50: 2 (June), pp. 1-17....

Posted by DeLong at 03:10 PM

July 01, 1989
J. Bradford DeLong, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann (1989), "The Size and Incidence of Losses from Noise Trading," Journal of Finance 44: 3 (July), pp. 681-696.

J. Bradford DeLong, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann (1989), "The Size and Incidence of Losses from Noise Trading," Journal of Finance 44: 3 (July), pp. 681-696....

Posted by DeLong at 12:21 PM