Re: FW: History shows paths to market crashes, but lessons seem forgotten
In a message dated 1/8/03 7:10:56 AM, [EMAIL PROTECTED] writes: True, but people don't live 300 years! People who make their fortunes in a bull market and then get decimated in a bear market may not recover in their lifetimes. It has happened before. ~Alypius Skinner yes, and that may in part account for focus on the busts, but the same people who cover the busts with such glee either do not cover the booms, or cover then grudgingly and with contempt. Bryan Caplan started this thread (or responded to an article someone had sent starting the threat) by asking why the bubbles get so much attention and the underlying growth gets so little. I submit that one cause may be that people rarely appreciate what they have, but surely lament what they lose. Another may be that the vast majority of the people who report the news hate liberty and prosperty (for anyone except themselves and their cohorts, of course) and love--one might say are addicted too--government control. It may well be that most of the people who report the news don't have a clue as to the 25-fold increase in real incomes over the past 300 years, but I'm sure that if they did they'd mostly either not report it at all, or focus on all the flaws they can find or imagine in that truly miraculous news. David Levenstam
Re: FW: History shows paths to market crashes, but lessons seem forgotten
In a message dated 1/7/03 12:53:47 AM, [EMAIL PROTECTED] writes: I find it interesting that there are so many more articles about bubbles than about the underlying reality of the equity premium puzzle. This is a nice case where a little knowledge is a dangerous thing. The average investor would be far better off if they did think that enormous returns could continue forever because, in a deep though less dramatic way, they DO. I suspect that a lot of people have been turned off to stock ownership for decades in spite of the fact that they are the smart long-term bet. -- Prof. Bryan Caplan Department of Economics George Mason University If one had a cynical bent one might suggest that the predominance of stories about the small bubbles in the huge cake batter of the miracle of modern economic growth stems from a prevalence of statists in the news media. David Levenstam
Re: FW: History shows paths to market crashes, but lessons seem forgotten
If one had a cynical bent one might suggest that the predominance of stories about the small bubbles in the huge cake batter of the miracle of modern economic growth stems from a prevalence of statists in the news media. David Levenstam What about the large bubbles? Fred Foldvary = [EMAIL PROTECTED]
Re: FW: History shows paths to market crashes, but lessons seem forgotten
--- Bryan D Caplan [EMAIL PROTECTED] wrote: I find it interesting that there are so many more articles about bubbles than about the underlying reality of the equity premium puzzle. This is a nice case where a little knowledge is a dangerous thing. The average investor would be far better off if they did think that enormous returns could continue forever because, in a deep though less dramatic way, they DO. I suspect that a lot of people have been turned off to stock ownership for decades in spite of the fact that they are the smart long-term bet. Two reason for owning bonds in addition to stocks are: 1) the long run for stocks can be a very long run, so short-term bonds are used for funds that need to be available sooner. 2) what counts is returns after tax, and the double-taxation of dividends plus the taxation of nominal rather than real gains reduces the compounding gain. For a 50% marginal tax rate, the real wealth return on the DJIA is only about 2.5%, relative to an untaxed rate of 6.7%. Thus, a high-income person may be better off in tax-free municipal bonds after having maxed out his tax-free retirement accounts. Fred Foldvary = [EMAIL PROTECTED]
Re: FW: History shows paths to market crashes, but lessons seem forgotten
The average investor would be far better off if they did think that enormous returns could continue forever because, in a deep though less dramatic way, they DO. I suspect that a lot of people have been turned off to stock ownership for decades in spite of the fact that they are the smart long-term bet. -- People aren't always alive in the long-term! Lots of baby boomers are approaching retirement when they will begin to draw down their savings. If their savings are being decimated by a bear market at the same time, they may not have enough to last them until they die. For people who have already accumulated a nest egg and may not be young enough to start over, capital preservation is rule number one. So it may be a wise precaution for these people to move their wealth into save havens, mainly bonds. In a few years, this movement of baby boomer money into safe havens should drive down both the price of stocks and the yield on bonds. ~Alypius Skinner
Re: FW: History shows paths to market crashes, but lessons seem forgotten
In a message dated 1/7/03 11:58:51 AM, [EMAIL PROTECTED] writes: If one had a cynical bent one might suggest that the predominance of stories about the small bubbles in the huge cake batter of the miracle of modern economic growth stems from a prevalence of statists in the news media. David Levenstam What about the large bubbles? Fred Foldvary Compared to the factor of 25 by which real per capita incomes have grown since the Industrial Revolution, there ARE no large bubbles. David Levenstam
Re: FW: History shows paths to market crashes, but lessons seem forgotten
Alypius Skinner wrote: People aren't always alive in the long-term! Lots of baby boomers are approaching retirement when they will begin to draw down their savings. If their savings are being decimated by a bear market at the same time, they may not have enough to last them until they die. People retiring today can expect to live another 20 years or so. So even there it's not clear that heavy equity investment isn't the smart choice. As far as I understand the literature on the equity premium puzzle, this explanation doesn't really work. And is % of assets in equity really tightly linked to age anyway? I suspect that people who avoid equity when old also avoided when young, and vice versa, but maybe I'm wrong. For people who have already accumulated a nest egg and may not be young enough to start over, capital preservation is rule number one. So it may be a wise precaution for these people to move their wealth into save havens, mainly bonds. In a few years, this movement of baby boomer money into safe havens should drive down both the price of stocks and the yield on bonds. ~Alypius Skinner -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] Mr. Banks: Will you be good enough to explain all this?! Mary Poppins: First of all I would like to make one thing perfectly clear. Banks: Yes? Poppins: I never explain *anything*. *Mary Poppins*
Re: FW: History shows paths to market crashes, but lessons seem forgotten
I find it interesting that there are so many more articles about bubbles than about the underlying reality of the equity premium puzzle. This is a nice case where a little knowledge is a dangerous thing. The average investor would be far better off if they did think that enormous returns could continue forever because, in a deep though less dramatic way, they DO. I suspect that a lot of people have been turned off to stock ownership for decades in spite of the fact that they are the smart long-term bet. -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] Mr. Banks: Will you be good enough to explain all this?! Mary Poppins: First of all I would like to make one thing perfectly clear. Banks: Yes? Poppins: I never explain *anything*. *Mary Poppins*
FW: History shows paths to market crashes, but lessons seem forgotten
http://www.mail-archive.com/futurework@dijkstra.uwaterloo.ca/msg05751.html http://www.ardemgaz.com/tech/D4bcrashes6.html History shows paths to market crashes, but lessons seem forgotten LARRY ELLIOTT THE GUARDIAN, LONDON In the spring of 1720, when all of London was clamoring for shares in the South Sea company, Sir Isaac Newton was asked what he thought about the market. "I can calculate the motions of the heavenly bodies, but not the madness of the market," the scientist is said to have replied. Newton should have heeded his own wise words. Having sold his stock in the company at 7,000 pounds sterling, he later bought back more at 20,000 pounds sterling at the top of the boom and went down for the count with other speculators when the crash came. Little has changed in the intervening 280 years. Common to every bubble is the ingrained belief that this time things will be different, that the rise in the price of an asset is rooted this time in sound common sense rather than recklessness, stupidity and greed. Take the crash of 1929. In Devil Take the Hindmost, Edward Chancellor records how Wall Street's elite convinced themselves that the rules of economics had been rewritten and that the market could support ever-higher share prices. John Moody, founder of the credit agency that bears his name, intoned in 1927 that "no one can examine the panorama of business and finance in America during the past half-dozen years without realizing that we are living in a new era." And Yale economist Irving Fisher declared a few weeks before the October crash that stock prices had reached a "permanently high plateau." Why was this? Simple, he said. The creation of the Federal Reserve in 1913 had abolished the business cycle, and technological breakthroughs had created a "new economy" that was much more profitable than the old. As share prices continued their heady rise, traditional methods of stock market valuations were abandoned. It did not matter that many start-up companies of the late 1920s were not making any money; what counted was that some day they surely would. So share prices were justified by discounted future earnings. Investors mortgaged themselves to the hilt to buy stocks in exotic companies from brokerages houses, which proliferated in the 1920s. One analyst warned that "factories will shut ... men will be thrown out of work ... the vicious circle will get into full swing and the result will be a serious business depression" unless sounder minds were brought to bear. He was, of course, ridiculed by market experts. Sound familiar? It should, because the gravity-defying performance of stocks in London and New York is eerily redolent of 1929. And again those who warn that the stock market edifice is built on sand have so far been proved wrong. It is quite possible that they will continue to be wrong and that this time the rules really, really have been rewritten. It may be that Fed Chairman Alan Greenspan has abolished the business cycle, that Goldman Sachs' contented equity guru Abby Joseph Cohen is wiser than Irving Fisher, that Amazon.com is in a different league from RCA (the go-go stock of the 1920s). However, there are plenty of warnings there for those prepared to heed them. One is what is happening in the markets themselves. More and more money is being concentrated in a handful of stocks in the technology sector, while shares in "old industry" fall. An analysis by Peter Oppenheimer of HSBC showed that the price-earnings gap in London between the new economy stocks and the old economy stocks is the largest for any market ever. An analysis of the balance sheet of Amazon.com by Tim Congdon of London showed that liabilities were covered more than four times by holdings of cash and securities in early 1999. However, by the end of the year, high investment and trading losses meant that liabilities were higher than cash and securities. He believes that the rise in the Nasdaq index is being underpinned by firms borrowing money to buy each other's shares -- the equivalent of taking in each other's washing. Amazon.com's results, he says, give "a fascinating and alarming insight into the cost of building an Internet brand. Arguably, they also demonstrate that the high-tech element in the American stock market is now gripped by a speculative madness of a kind never before seen in the organized financial markets of a significant industrial country." Economist Robert Gordon has started to unpick the American productivity data in an attempt to put the "new paradigm" into historical perspective. "I believe that the inventions of the late 19th century and early 20th century were more fundamental creators of productivity than the electronic-Internet era of today," he said. Oppenheimer, at HSBC, estimates that share prices in the new economy imply growth rates that are unlikely to be achieved and that collectively shares are
Re: FW: History shows paths to market crashes, but lessons seem forgotten
In a message dated 1/5/03 6:56:36 PM, [EMAIL PROTECTED] writes: Take the crash of 1929. In Devil Take the Hindmost, Edward Chancellor records how Wall Street's elite convinced themselves that the rules of economics had been rewritten and that the market could support ever-higher share prices. In all fairness, while it's possible the market would have crashed eventually anyway--that's certainly true of the bankers who ran the Fed at the time--the Fed caused the stock market crash, and did so deliberately by tripling the rediscount rate the day before the crash. David Levenstam
