Archive for February, 2009
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Happy Fun Day
Eddy Elfenbein, February 23rd, 2009 at 9:24 pmStock-Market Crashes and Depressions by Robert J. Barro and Jose F. Ursua
Long-term data for 25 countries up to 2006 reveal 195 stock-market crashes (multi-year real returns of -25% or less) and 84 depressions (multi-year macroeconomic declines of 10% or more), with 58 of the cases matched by timing. The United States has two of the matched events – the Great Depression 1929-33 and the post-WWI years 1917-21, likely driven by the Great Influenza Epidemic. 45% of the matched cases are associated with war, and the two world wars are prominent. Conditional on a stock-market crash, the probability of a minor depression (macroeconomic decline of at least 10%) is 30% and of a major depression (at least 25%) is 11%. In a non-war environment, these probabilities are lower but still substantial – 20% for a minor depression and 3% for a major depression. Thus, the stock-market crashes of 2008-09 in the United States and other countries provide ample reason for concern about depression. In reverse, the probability of a stock-market crash is 69%, conditional on a depression of 10% or more, and 91% for 25% or more. Thus, the largest depressions are particularly likely to be accompanied by stock-market crashes, and this finding applies equally to non-war and war events. We allow for flexible timing between stock-market crashes and depressions for the 58 matched cases to compute the covariance between stock returns and an asset-pricing factor, which depends on the proportionate decline of consumption during a depression. If we assume a coefficient of relative risk aversion around 3.5, this covariance is large enough to account in a familiar looking asset-pricing formula for the observed average (levered) equity premium of 7% per year. This finding complements previous analyses that were based on the probability and size distribution of macroeconomic disasters but did not consider explicitly the covariance between macroeconomic declines and stock returns.
After reading that, here’s something that might cheer you up.
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Zero for 9,000
Eddy Elfenbein, February 23rd, 2009 at 5:11 pmMebane Faber reports that out of Morningstar’s database of 9,000 stock mutual funds, not one is up for the year.
Oh, and it’s still February. -
The S&P 500 Just Above Intra-Day Low
Eddy Elfenbein, February 23rd, 2009 at 2:35 pmI noticed that the S&P 500 was hanging at 755, which always make me think of Hank Aaron. The index got as low as 749.69 this morning. The intra-day low from November 21 was 741.02.
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It Had to Happen Sooner or Later
Eddy Elfenbein, February 23rd, 2009 at 8:16 amFrom the NYT:
Nigerian Accused in Scheme to Swindle Citibank
To carry out the elaborate scheme, prosecutors in New York said on Friday, the man, identified as Paul Gabriel Amos, 37, a Nigerian citizen who lived in Singapore, worked with others to create official-looking documents that instructed Citibank to wire the money in two dozen transactions to accounts that Mr. Amos and the others controlled around the world.
The money came from a Citibank account in New York held by the National Bank of Ethiopia, that country’s central bank. Prosecutors said the conspirators, contacted by Citibank to verify the transactions, posed as Ethiopian bank officials and approved the transfers. -
U.S. Eyes Large Stake in Citi
Eddy Elfenbein, February 22nd, 2009 at 8:57 pmFrom the WSJ:
Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the government would convert into common stock, people familiar with the matter said. The government obtained those shares, equivalent to a 7.8% stake, in return for pumping capital into Citigroup.
The move wouldn’t cost taxpayers additional money, but other Citigroup shareholders would see their shares diluted. A larger ownership stake by the federal government could fuel speculation that other troubled banks will line up for similar agreements. -
Sign of the Times
Eddy Elfenbein, February 20th, 2009 at 10:52 pmRep. Michael Capuano to the bank executives last week:
Basically you come to us today on your bicycles after buying girl scout cookies and helping out Mother Teresa, telling us “We’re sorry, we didn’t mean it, we won’t do it again, trust us”…I don’t really have a question, but I was told that I can use my five minutes.
In other news:
Girl Scout cookie sales crumbling -
Velkomme to Sweden
Eddy Elfenbein, February 20th, 2009 at 1:32 pmI hate saying this, but we have to stop kidding ourselves—it’s time to nationalize our rotten banks. I’m not really pro nationalization but I’m anti stupidity and that’s what we’ve been doing up till now.
My normal fear of nationalizing is that it would lead to a moribund industry incapable of turning a profit. Well, we’re already there.
My only hope is that it’s done quickly. Very quickly. Before anyone notices. -
Blast From the Past
Eddy Elfenbein, February 20th, 2009 at 1:04 pmWith the market at new lows, it’s time to recall some predictions. This is from January 2, 2008:
Christian broadcaster Pat Robertson, who has made predicting the future an annual tradition, predicts a recession and a major stock market upheaval are on their way for the United States.
Aside from a recession this year, Robertson suggested Wednesday that Americans will be paying much more for gas at the pump as the price of a barrel of oil rises by 50 percent in the coming months.
Specifically, he said oil would reach $150 a barrel – the price hit $100 on Wednesday – with the dollar continuing to lose value in 2008.
“I also believe the Lord was saying by 2009, maybe 2010, there’s going to be a major stock market crash,” said Robertson, who is a millionaire businessman as well as an evangelical leader.Not bad. Oil topped out at $147. The stuff about nuclear war? Well, unfortunately, that didn’t pan out.
Still, that’s some pretty good predictioning from Pat. No wonder he came in second in the Iowa caucus. -
Paragraph of the Day
Eddy Elfenbein, February 20th, 2009 at 12:57 pmFrom Arnold Kling:
Starting last September, our country has gone through six months that shook the world. We have abandoned free markets. We have abandoned democracy, in the sense of having policies that reflect the popular will. The United States has become a technocratic dictatorship.
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How Things Have Changed
Eddy Elfenbein, February 20th, 2009 at 1:18 amJames Surowiecki from January 6:
As I showed yesterday, investors overwhelmingly supported the Paulson plan: it was only when it was killed, that stock prices really started their downward spiral. And it was only after Obama unveiled his economic team and made clear how big his stimulus plans were that the market began its sharp recovery (the S. & P. 500 is now up twenty-five per cent since Nov. 20th).
Surowiecki made what I call, the “Daniel Gross Mistake” which is to read partisan political opinions from stock market returns. January 6 turned out to be the exact near-term high. Since then, the S&P 500 is down 16.7%.
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