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Lecture 8: Growth Theory, Stock Market,
Long Run Issues and China
Dr. Rajeev Dhawan
Director
Given to the
EMBA 8400 Class
South Class Room #600
February 17, 2006
Chapter 25
Production & Growth
Production and Growth
A country’s standard of living depends on
its ability to produce goods and services.
In the United States over the past century,
average income as measured by real GDP
per person has grown by about 2 percent per
year.
A nation’s standard of living is determined
by the productivity of its workers.
Table 1 The Variety of Growth Experiences
Copyright©2004 South-Western
Productivity
Productivity refers to the amount of goods
and services that a worker can produce from
each hour of work (Average Labor
Productivity)
Productivity plays a key role in determining
living standards for all nations in the world.
The Factors of Production
The inputs used to produce goods and
services are called the factors of production.
The Factors of Production
–
–
–
–
Physical capital
Human capital
Natural resources
Technological knowledge
The Production Function
Y = A F(L, K, H, N)
–
–
–
–
–
–
–
Y = quantity of output
A = available production technology
L = quantity of labor
K = quantity of physical capital
H = quantity of human capital
N = quantity of natural resources
F( ) is a function that shows how the inputs are
combined.
The Production Function
 Y/ L = A F(1, K/ L, H/ L, N/ L)
Where:
Y/L = output per worker
K/L = physical capital per worker
H/L = human capital per worker
N/L = natural resources per worker
 The preceding equation says that productivity
(Y/L) depends on physical capital per worker
(K/L), human capital per worker (H/L), and
natural resources per worker (N/L), as well as the
state of technology, (A).
The Importance of Saving and Investment
(b) Investment 1960–1991
(a) Growth Rate 1960–1991
South Korea
Singapore
Japan
Israel
Canada
Brazil
West Germany
Mexico
United Kingdom
Nigeria
United States
India
Bangladesh
Chile
Rwanda
0
South Korea
Singapore
Japan
Israel
Canada
Brazil
West Germany
Mexico
United Kingdom
Nigeria
United States
India
Bangladesh
Chile
Rwanda
1
2
3
4
5
6 7
Growth Rate (percent)
0
10
20
30
40
Investment (percent of GDP)
Copyright©2003 Southwestern/Thomson Learning
What is the Impact on Growth?
 Investment from Abroad
 Education
 Property Rights and Political Stability
 Free Trade
 Research and Development
CASE STUDY: The Productivity
Slowdown and Speedup in US
From 1959 to 1973 productivity grew at a
rate of 3.2 percent per year.
From 1973 to 1995 productivity grew by
only 1.5 percent per year.
Productivity accelerated again in 1995,
growing by 2.6 percent per year on average
during the next six years.
The Growth in Real GDP Per Person
Growth Rate
(percent
per year)
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0
1870– 1890– 1910– 1930– 1950– 1970–
1890
1910
1930
1950
1970
1990
1990–
2000
Copyright©2003 Southwestern/Thomson Learning
Growth Accounting
3 factors that Fuel Growth
– Labor
– Capital
– Technology
Debate is regarding the mechanism via
which technology contributes to growth
2 Main branches of thought
– Old Solow & New Romer (Lucas) Style
What does Paul
Romer say
(direct quote from Wired Magazine’s, June 1996 article)
“Old
growth theory says we have to
decide how to allocate scarce resources
among alternative uses.
theory says...
New growth
“..Bull$#!+! We’re in this world, it’s
got some objects, sure, but it’s got
these ideas, too, and all that stuff
about scarcity and price systems is
just wrong”
New Growth Economics
Technical progress is an outcome of
conscious R&D investments done by the
Industrial sector.
R&D involves the use of skilled people with
existing stock of knowledge to produce new
knowledge.
 The new knowledge is in the form of:
 Specifically, one sector’s R&D efforts spill
over to other sectors at very low cost.
What do the New Growth Adherents
have to Say (LA Times , June 10 1997)
Allen Sinai “ What is coming could be the
perhaps the best performance in our
history”
W. Michael Cox “For the next 20 years, we’re
going to have a period of massive growth”
Where do I stand in this debate?
 The rise in the R&D investments in 1980’s
coupled with the new technological
developments of the 90’s are expected to
raise the growth rate of GDP.
– Q. By how much?
– A. 0.2% extra growth per year!
Productivity and Real GDP Growth Relationship
(% Ch. of Centered 7-Qtr. Moving Averages)
8
6
4
2
0
-2
1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999
Real GDP Growth
Productivity Growth
What Does Research Tell Us?
Mark Zandi “A Productivity Primer” (1999)


Measurement errors in CPI
Falling proportion of self employed workers
Dhawan & Gerdes, Journal of Productivity Analysis
(1997). Analysis of U.S. Firm level Data using new
estimation tools shows that the Services sector is
responsible for the decline in technical progress during
1970-1989 period.
Robert Gordon “Has the New Economy Rendered the
Productivity Slowdown Obsolete? (1999). No acceleration
in productivity growth in the 99 percent of the economy
once you take out computer hardware sector!
What Does Research Tell Us?
Greenwood & Jovanovic, American Economic
Review (1999)
% of GDP
1968 incumbents
Over the Counter
1968
80
34
1996
46
86
Dhawan, Journal of Economic Behavior and
Organization (2001).
Small firms are atleast 20% more productive than large
firms using U.S. firm level data for 1970-1989.
Economic Growth Accounting
3 Factors that Fuel Growth
1960-1970
1970-1980
1980-1990
1990-2000
2000-2010
2010-2020
Labor
1.7%
2.6%
1.6%
1.1%
1.0%
0.9%
Capital Technology
NA
2.9%
4.7%
1.7%
2.8%
1.1%
3.5%
1.5%
4.9%
1.6%
3.5%
1.8%
Inflation and Growth Evidence in U.S.
Averages
1975-1980
1980-1985
1985-1990
1990-1995
1995-2000
Inflation
8.9%
5.5%
4.0%
3.1%
2.4%
GDP Growth
3.6%
2.9%
2.9%
2.0%
4.3%
 1947 to 1998 correlation is -0.43
 1960 to1998 correlation is -0.48
 Lead Correlation is -0.59
A “Crazy” Theory of Growth
Take the typical growth model and extend it to
include inflation expectations (IE)
Yt = At F(Kt , Lt ; IE)
(1)
At, F(Kt, Lt : IE) = At,Kt  Lt 1 - [exp(IE)]   < 0 (2)
Doing the growth accounting Solow style one gets:
Growth in Y =
Growth in A +  [Growth in K] + 1- [Growth in L]
+  [deceleration in Inflation Expectations]
Why ?
“To paraphrase Chairman Greenspan, the
economy works best when inflation is so
low that businesses and households do not
have to take into account when making
everyday decisions.”
Governor Roger Ferguson Jr., Sept. 9th,1999
Mark Schweitzer and Erica Groshen“Identifying
Inflation’s Grease and Sand Effects in the Labor
Markets” NBER Working Paper #6061
Implications for a Central Banker
Reputation as Inflation Hawk is Worth
its Weight in GDP Growth.
1. US FED should Maintain Price Stability
2. Japanese Should Inflate!
ARE PRIVATE ACCOUNTS A GOOD IDEA?
THIS NUMBER HAS BEEN AUTHORIZED FOR
IS THERE REALLY A CRISIS?
Signature
Social Security Timeline
2018
Costs surpass income;
Trust-fund depletion
begins
2018-2041
100% of benefits are
covered by the trust
fund and taxes
1984-2017
Trust-fund surplus
builds to more than
$3 trillion
2042
Trust fund is empty. Tax
income covers only 70% of
promised benefits
1970
’80
’90
2000
’10
’20
’30
2040
’50
’60
Source: Social Security Administration; CBO; GAO; SSAB
’70
2080
The TRUTH About Social Security
How Much of a Retiree’s Income
Comes from Social Security
Who Needs it?
Spouses and children of
retired and disabled workers
(4.8 million)
Disabled workers
(6.2 million)
10%
100%
13%
14%
Retirees
(30 million)
63%
90% to 99%
50% to 89%
Less than 50%
Survivors of deceased
workers
(6.7 million)
Source: Social Security Administration; CBO; GAO; SSAB
20%
13%
32%
35%
How to Fix Social Security
Raise Taxes,
Trim Benefits
The Private
Account Fix
Bush Model
Add-on Accounts
Cartoon by Clay Bennett, The Christian Science Monitor, Boston
The Do-Nothing
Approach
What Crunch?
How Would the BUSH Plan Work?
THE PROS
THE CONS
Control
Risk
Better Returns
Debt
Offset the Pain
Uncertainty
Encourage Savings
No New Taxes
Undersaving
Delayed Reaction
Source: The Time, January 24, 2005; Cartoon: David Catrow Springfield, Ohio - The News-Sun
Anonymous Venters
Since when did Social Security
become a personal retirement plan?
It is a safety net for the elderly that must be preserved or
society will pay in the end
Social Security is not even close to being broke.
The government just does not want to pay back the
money it has looted from it over the years
Source: The Atlanta Journal – Constitution, The Vent, Jan. 30 & Feb. 10, 2005
Productivity Can Make Up the Gap
Needed Productivity Growth
Rate to DOUBLE
Per-Capita Income
Historical Growth Rate
(1980 – 2003)
France
Germany
Japan
Britain
U.S.
1.8%
2.0%
2.3%
1.7%
1.6%
1.5%
1.5%
2.0%
1.9%
1.7%
Source: Business Week, January 31, 2005
U.S. Long-Term Forecast
10 Year Averages for Years Ending:
2000 2010 2020
Real GDP Growth
3.4 3.2 2.9
Unemployment Rate (%)
5.6 4.7 4.9
Inflation (CPI Index)
2.8
2.5 2.5
10-Year Bonds
6.4
6.0 5.0
Real GDP Trend Growth: Starting to Accelerate?
(5-Year % Ch.)
6
5
4
3
2
1
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Actual and Forecasted
Fitted
Dependency Ratios just before
the Storm of Baby Boom Retirements in 2020
(Young Dependency Ratio)
0.420
(Elderly Dependency Ratio)
0.260
0.400
0.240
0.380
0.220
0.360
0.200
0.340
0.180
0.320
0.160
1980
1985
1990
1995
Ages 15 & under
2000
2005
2010
Ages 65 & over
2015
Health Care Cost Projections
Our forecast scenario predicts that
by 2020 share of medical
consumption in GDP will rise to
13% from the current 9%.
At 8% rate of growth the share is
21%
At 9% rate of growth the share is
30%
How Do We Solve This Problem ?
1. Tax Hikes and Benefit Reductions
2. Ship Boomers to India
3. Bring in 100 Million Immigrants
Ratio of Population Age 65+ to Population Age 20-64
(%)
60
50
40
30
20
10
Netherlands
Sweden
Japan
Now
2020
Spain
2050
France
Germany
Italy
US
Canada
Solution
“Work ‘em Until They’re Dead!”
Prof. Larry J. Kimbell
September 1997
What’s needed are medical advances that prolong the
productive life-span and not so much the actual one!
Prof. Rajeev M. Dhawan
September 1998
Working of Monetary Mechanism
FED Hikes/Lowers Short Term Rate
Immediately Hikes/Lowers Long Term Rates
First Hurts/Boosts Housing and Auto Sales,
Weakness/Strength then Ripples Through the
Economy
Rate Hikes/Cuts also Hurt/Spur Bank Lending
Which Hurts/Aids Business Investment
Accelerations of Inflation
Compared with Recession Timings
(% Ch. of Centered 7-Qtr. Moving Average of CPI)
15
+7.2%
12
+7.5%
9
6
+4.4%
+4.4%
+1.8%
3
0
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003
U.S. Macro Policy Issues
Past Fed actions:
– 1959-61 Mild recession-- killed Nixon
– 1967
False start -- mistake -- produced
“Growth recession”
– 1969-71 Recession, followed by price controls,
suppressed inflation, disaster in 1972-73
– 1973-75 WIN for Ford; bad recession; Carter
tried recovery when inaugurated in 1977, 2 yrs
after trough.
U.S. Macro Policy Issues
Past Fed actions: (con’t)\
– 1980 Carter/Volcker credit controls -- short
recession, sharp recovery, no cure, need drastic
“no quick fix” -- Volcker/Reagan
– 1981-82 Serious long recession in spite of
“rational expectations effort by
Volcker/Reagan.
U.S. Macro Policy Issues
Past Fed actions: (con’t)
– 1986-89 Fed tightens to head off excess growth,
might have succeeded except for Kuwait War.
– 1994-95 Fed heads off over-heating
successfully for the first and only time
– 1997 Fed’s tried to pop the asset bubble?
– 1999-2000 Rate hikes popped the asset bubble
– 2001-Now Containing the bubble and 9/11
damage
Forecasting the Fed
What Does Taylor Rule Predict?
Federal Funds Rate
= Real Interest Rate +
Targeted Inflation Factor +
0.5 (Current GDP Gr.-Trend GDP Gr.)+
0.5 (Current Inflation - Targeted Inflation)
What Does Taylor Rule Predict?
Current
Inflation Rate
3.5
Unemployment Rate
5.2
GDP Growth Rate
3.1
Target Inflation Rate
2.0
Trend GDP Growth
3.0
Predicted FFR
6.9
What Does Taylor Rule Predict?
Current
What If?
Inflation Rate
3.5
2.0
Unemployment Rate
5.2
5.5
GDP Growth Rate
3.1
3.1
Target Inflation Rate
2.0
2.0
Trend GDP Growth
3.0
3.0
4.5
Predicted FFR
6.9
Should the FED Have Been
Aggressive in Raising Rates in
the late 90’s?
The Answer Depends Upon
What are bubbles?
Can the central banker distinguish
between stock price growth due to
change in fundamentals--lowered
equity premiums and higher future
dividends-- versus irrational
exhuberance?
The Late 90’s!
What’s A Bubble
Tulipmania (1637)
South Sea Bubble (1720)
Railway Mania (1840’s)
Crash of 1929
Kuwait (1982)
Japan (1990)
What’s Not A Bubble
New Technology
Reduced Equity
Premiums
Higher Future
Dividends
Late 90’s Expectations
Greenspan’s Frank Admission
“To anticipate a bubble about to burst
requires the forecast of a plunge in the
prices of assets previously set by the
judgments of millions of investors,
many of whom are highly knowledgeable
about the prospects for the specific
companies that make up our broad stock
price indexes.”
August 27th,1999
Greenspan’s Worry
“People don’t perceive the savings
rate as negative. As far as they’re
concerned, they’re saving quite
adequately. They are looking at
their 401(k)’s !” -- May 27th,1999
Was The Euphoria Misplaced?
Yes! Implied that we were betting the
entire ranch on the expectation that
Greenspan will cut rates in case of a
crash/correction.
More Importantly the Central Banker
cannot distinguish between stock price
growth due to change in fundamentals
versus irrational exuberance.
Shiller’s “Irrational Exuberance”
 3 Factors: Structural, Cultural and
Psychological
Precipitating Forces: Internet,
Optimism & Demographic Shifts
Amplifiers-Naturally Occurring
Ponzi Processes
News Media & Wall Street
Analysts
“The current technology, Internet and
Telecom craze, fueled by the
performance desires of investors,
money managers and even financial
buyers, is unwittingly creating a Ponzi
pyramid destined for collapse.”-Julian Robertson Jr.
What Does Finance Theory Say
• Efficient markets imply stock
returns are a random walk.
• Valuation ratio (P/E) are stable
around the historical i.e. mean
reversion property.
Theory:
 Stock Returns are a Random Walk
Implication:
 Mean reversion of Dividend Payout
Ratio
Logic:
Returns (rt ) = Dividend + Price Appreciation
Price
= (Dt / Pt)
+ ΔP / Pt
If Dt / Pt Ratio  and “r” is constant :
 ΔP / Pt 
Price is a function of Expected Future Dividends
 Dividend Stream (Dt) must rise
 Dt / Pt ratio  to yield a constant “r”
Mean Reversion Property of Div. Payout Ratio
What Does Data Say
Prices move in direction that drives
drives the P/E to its historical mean
(Campbell & Shiller (2001) NBER paper
#8221).
Are Stocks Esp. Tech Stocks
a Bargain Now?
Question On Everybody’s Mind:
Going in Now Will I Get 10%+
Stock Returns?
“No one can predict with
any certainty which way
the next 1,000 points will
be.…”
- Wall Street Journal Monday
October 1, 2001
Jeremy Siegel on Stocks
The Worst is Over!
“Stock’s long-term return looks better now than at
any time over the last four to five years. This is the time
you want to go in. … But anybody who needs money in
the next few years should not be in the stock market.
Anything can happen to the stock market over short
periods of time”
Jeremy Siegel
Professor of Finance, Wharton
Source: Knowledge @ Wharton.com
“The Admiral of Index Funds ”
“They’re in a dream world…(with regard to their
overstated pension return assumptions)…
G.E. is by no means at the top of the list… there
are some companies projecting 10-½%!...
It’s pie in the sky!”
- John Bogle
Vanguard Group Founder
CNBC Interview, July 22, 2002
Max Darnell,
Partner, First Quadrant
Speaker at Our May 2002 Quarterly Forecasting
Conference
76 Years,
Prospects
Starting Dividend Yield
Growth in Real Dividends
Change in Valuation
Levels*
Cumulative Real Return
Less Starting Bond Real
Yield
Less Bond Valuation
Change**
Cumulative Risk Premium
Source: Attributing Return Ibbotson Data
Starting
Dec. 1925
5.1%
1.3%
1.1%
from
May, 2002
1.4%
2.0%?
** ? **
7.5%
3.4%±
3.7% (a)
3.3% (b)
-0.8%
** ? **
4.6%
0.1% ±
“The Bond King”
“I think the stock market is setting up for future
returns of 6%-7%...by providing dividend yields of
3%-4% which will require companies to increase
their current 2% yields… OR …the most probable
way is for prices to decline 25% or so…..
the DOW will rest in the 6000-7000 range.”
- Bill Gross
PIMCO Total Return Fund Manager
CNBC Interview, July 22, 2002
A perspective from Warren Buffet
“I never have the faintest idea
what the stock market is going
to do in the next six months, or
even the next year, or the next
two.”
Source: Fortune Magazine, December 10, 2001
“If GNP is going to
grow 5% a year
and you want
market values to
go up 10%, then
you need to have
the line go straight
off the top of the
chart.”
“That won’t
happen.”
Source: Fortune Magazine, December 10, 2001
A perspective from Larry Kimbell Professor
Emeritus UCLA
&
Ex-Director
UCLA Business Forecasting Project
Source: Forecasting Conference Nov 15th 2001
Lesson 1. Don’t stick your head in the sand
 Some anthrax victims have waited to the last minute to be checked
even though they were obviously “… at risk.”
Lesson 2. Don’t exaggerate risks
During WWII American statisticians
estimated German tank production monthly
fairly accurately, but the estimates used for
planning were 10 times too large.
The statistician (later my Professor at Yale)
passed the estimate to his superior, who
being a prudent man, doubled it and passed
to to his superior, who...
Therefore, face danger fearfully but realistically
 An in-depth psychological study of the attitudes of surgery
patients before and after surgery found:
– Best results when attitude prior to surgery was fearful
but realistic.
– Next best when patients were hysterical--since fears
were neurotic & not based on real threats.
– Worst results when patients had no fear. Later felt
angry at surgeons for “victimizing” them. Couldn’t
manage the pain.
 Realism requires empirical evidence.
Ibbotson evidence shows good returns on large
company investments: Kimbell thinks otherwise
Total Returns to Large (Safe) Company Common Stocks
Ibbotson Data over History:
Kimbell's Forecast--you can't play it safe
20.0
Annual % Return
15.0
10.0
5.0
0.0
1930
1940
1950
1960
1970
1980
-5.0
For Decade Beginning
1990
2000
2010
Ibbotson evidence show high returns on small
company investments
Total Returns to Small Company Common Stocks
Ibbotson Data over History: Kimbell's Forecast (including
reasonably priced dot-com related firms)
30.0
Annual % Return
25.0
20.0
15.0
10.0
5.0
0.0
1930
1940
1950
1960
1970
1980
For Decade Beginning
1990
2000
2010
Comments from the Author of
Irrational Exuberance
“Market timing has gotten an excessively bad
reputation … Conventional wisdom holds
that it’s a fool’s errand. It’s certainly not an
exact science, but I think people will come
back to it.”
Robert Shiller
Professor of Economics
Yale University
Source: WSJ, July 29, 2002
Source: Atlanta Journal Constitution, Friday July 19, 2002
Views From the Top of the Himalayas
Economic Fallacies & Forecasting Truths
Growth of Today is the Same as Yesterday’s
i.e. History Repeats itself
(if it really did then why call ME!)
-Inflation vs. Deflation era
-Lack of Pricing Power; Tech Wave
-Economies of Scale/Fixed Costs
-9/11’s Cost Factor
-BPM/Automation
“Nobody has the capacity to fathom
fully how the tragedy of September
11 will play out.”
Alan Greenspan, Sept. 20, 2001.
Real
GDP
Outlook
following
September 11
What If?
Most Optimistic
Scenario
2000 2001 2002 2004 2006
Time
I will NOT
I will
pump up
PUMP UP
interest
Kälifornia…
rates…
Economic Fallacies & Forecasting Truths
Stock Market is Where a 25+ Year Worker
Should Invest
-True as I Want Him/Her to Pay For My
Mistakes
-False when I look at the PE Ratio
The Marc Faber View
“Mr. Greenspan was one of the principal architects of
this debt explosion over the past 20 years. But I pray
he lives as long as possible and is replaced by Mr.
Bernanke, because the business of everybody in this
room has thrived on account of their policies. We must
be grateful to Mr. Greenspan. Every time there is a
shock to the system, more money is printed
and our businesses can continue to flourish”
- Marc Faber
Managing Director
Marc Faber Ltd., Hong Kong
Source: Barron’s, January 19, 2004
The Abby Cohen View
“Typically, I look at the median P/E, for the 250th
company in the S&P, which removes outliers. The
market is selling for 17-17.5 times 2004 earnings,
which is reasonable under a low-inflation scenario.
The market is modestly undervalued and will move
higher as earnings improve”
- Abby Joseph Cohen
Chair, Investment Policy Committee
Goldman Sachs, N.Y.
Source: Barron’s, January 19, 2004
The Bill Gross View
“There are two primary agendas in the world today. No. 1, the
US is trying to reflate its economy. No. 2, China is trying to
employ tens of millions of people. Both agendas are dominating
in terms of not only 1% interest rates in the U.S., but China’s
insistence on fixing the renminbi to the dollar. These agendas
are calling the shots for lots of currency moves, mini-bubbles in
asset markets and potential global volatility.”
- Bill Gross
Founder and Chief Investment Officer
Pimco, Newport Beach, Calif.
Source: Barron’s, January 19, 2004
Economic Fallacies & Forecasting Truths
Trade Deficit is a Bad Thing
The Marc Faber View
“But let’s distinguish between real and fictitious growth. In China,
there is tremendous investment in plant, equipment and
infrastructure, which is real economic growth. On the other hand,
it has now become fashionable, especially in the U.S., for men to
have cosmetic surgery. As a result, let’s say more hospitals are
built. More doctors have to be hired and employment goes up.
But to what extent does that create economic growth? A lot of
economic growth in the U.S. is artificial, essentially transferring
money from Peter’s pocket to Paul’s.”
- Marc Faber
Managing Director
Marc Faber Ltd., Hong Kong
Source: Barron’s, January 19, 2004
The Meryl Witmer View
“If the dollar is low enough, the
world can get its plastic surgery
here.”
- Meryl Witmer
General partner
Eagle Capital Partners, N.Y.
Source: Barron’s, January 19, 2004
Trade Deficit
(Bil. $)
0
-200
-400
-600
-800
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Net Balance In International Trade*
What We Buy From Them
What They Buy From Us
Crude Oil
-135.7
Airplanes
13.2
Vehicles
-123.2
Chemicals (Plastic)
10.9
Clothing
-67.9
Airplane Parts
10.5
Home Electronics
-67.8
Soybeans
6.6
Office Electronics
-65.6
Corn
6.0
Petroleum Preparations
-28.3
Wheat
5.0
Furniture and Bedding
-23.7
Scientific Instruments
4.5
Natural Gas
-21.1
Cotton
4.2
Electrical Machinery
-20.2
Metal Ores
3.2
Toys, Sporting Goods
-19.1
Animal Feeds
3.0
*Net Balance In Billions of Dollars
Passenger Car Production & Sales
Country
Production
Sales
Japan
8,117,563
4,289,683
Germany
5,301,189
3,341,718
Deficit/Surplus
 3,827,880
 1,959,471
U.S.
4,879,119
8,422,625
-3,543,506
France
3,181,549
2,254,732
926,817
S. Korea
2,471,444
1,065,161
1,406,283
Spain
2,211,172
1,437,192
773,980
Brazil
1,495,622
1,295,119
200,503
U.K.
1,492,365
2,458,769
-966,404
Canada
1,274,853
868,188
406,665
Mexico
1,000,715
667,565
333,150
China
703,521
780,604
-77,083
India
573,808
601,321
-27,513
Sweden
251,035
246,581
4,454
Source: Ward’s World Motor Vehicle Data 2002
Passenger Car Sales By Manufacturer
Sales By Country
774,691
3,578,130
4,470,238
U.S.
172,505
955,711
426,974
237,815
(733,649)
98,999
1,008,742
(1,954,009)
U.K.
93,348
113,799
290,000
Spain
35,167
20,897
335,590
France
35,836
52,592
257,215
Germany
1,587,882
(3,421,583)
Japan
-
China
-
70,326
358,213
Brazil
-
12,217
369,716
Source: Ward’s World Motor Vehicle Data 2002
-
International Trade Balance (2004)
Country
Exports
Imports
Net
Balance
Canada
190.2
255.9
-65.8
2.9%
Euro Area
127.1
210.1
-82.9
0.8%
Mexico
110.8
155.8
-45.1
-1.2%
Japan
54.4
129.6
-75.2
3.4%
United Kingdom
36.0
46.4
-10.4
-2.0%
China
34.7
196.7
-162.0
2.4%
Germany
31.4
77.2
-45.9
4.4%
Korea
26.3
46.1
-19.8
3.1%
Netherlands
24.3
12.6
11.7
2.9%
Taiwan
21.7
34.6
-12.9
6.9%
France
21.2
31.8
-10.6
-0.6%
Australia
14.3
7.5
6.7
-5.3%
In Billions of Dollars
Their Current a/c
as % of GDP
Net Foreign Investments and US Trade Deficit
(Annualized and Smoothed)
($. Bil)
0
($. Bil)
0
-100
-100
-200
-200
-300
-300
-400
-400
-500
-500
-600
-600
-700
-700
93
94
Inv estments
95
96
97
98
Trade Deficit (Right)
99
00
01
02
03
04
Net Foreign Purchases of U.S. Financial Instruments
(Annualized)
($. Bil)
500
400
300
200
100
0
-100
-200
90
91
92
Corp. Bonds
93
94
95
96
Agency Bonds
97
98
Stocks
99
00
01
02
Treasury Securities
03
04
The Bill Gross View
“The
Fed controls short rates. Intermediate
and long rates are determined by
institutions, individuals and foreign central
banks, such as China’s, which have been
massive buyers of Treasuries.”
- Bill Gross
Founder and Chief Investment Officer
Pimco, Newport Beach, Calif.
Source: Barron’s, January 19, 2004
10-Year Bond Rate and Trade Deficit
Source: Nov 2004, Forecast of the Nation
10-Year Bond Rate
CPI Inflation
Core
4.3
2.7
1.8
4.7
2.3
2.1
5.4
1.6
1.9
6.0
1.8
2.1
This is Happening Now!
5
Long-End is DOWN
by 60 Basis Points!
4.5
4
3.5
3
150 Basis Points
Hike in 7 Months
29-June'04
4-Feb'05
2.5
2
1.5
1
3-month 6-month
1-year
2-year
5-year
10-year
The Money$$ Diamond
RESIDENTIAL
REAL ESTATE
COMMERCIAL
REAL ESTATE
INTEREST
RATES
TRADE DEFICIT
JOB GROWTH
CONFIDENCE
OIL
EURO
Economic Fallacies & Forecasting Truths
Trade Deficit is a Bad Thing
 Fiscal Deficits Matter For Interest Rates
-Paper Money Vs. Goods: INFLATE AWAY!
-New Gold Brick of the World is the Dollar
(Euro will appreciate another 10%, so God
Save The Union!)
-Export-Led Growth Strategy of East Asia &
China is the New Player on the World Stage
-Deficits Matter for Long Term Growth But We
are All Dead in the Long Run!
Federal Deficit
(%)
2
(Bil.$)
200
100
0
0
-100
-2
-200
-300
-4
-400
-6
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Deficit as % of GDP (Left)
Deficit (Right)
-500
Explaining the Headache that is the Federal Deficit
by Dave Barry
What is the federal budget deficit?
It is a gigantic number of dollars - like 300 jillion skillion
drillion – that the federal government is spending, despite
not actually having it.
Is that legal?
It is if you have nuclear weapons
Why does the government spend so much money?
Because it must pay for important federal programs such
as Social Security, the War on Terrorism, and the artificial
rainforest in Iowa. The rainforest will also teach important educational lessons.
Such as?
Such as that Congress is as trustworthy with money as a crack addict who is
experimenting with heroin.
What is our political leadership in Washington doing about the deficit problem?
They're being total slime weasels. They're spending MORE. They're pandering
their brains out. The Republicans just added a hugely expensive new drug benefit
for senior citizens, which the Democrats have bitterly criticized because it isn't
expensive ENOUGH.
Source: Atlanta Journal-Constitution, March, 2004
Bush’s Budget Proposal
Winners
Losers
Homeland Security Department
6.8%
11.5%
Department of Housing and
Urban Development
Defense Department
4.5%
9.6%
Department of Agriculture
Treasury Department
3.9%
5.6%
Environmental Protection
Agency
Department of Veterans Affairs
Department of Justice
1%
2.7%
4.4%
2.0%
Source: The Atlanta Journal – Constitution, Feb. 8, 2005
Labor Department
Department of Energy
Source: Business Economics, January 2005
Source: WSJ, February 8, 2005
Source: Business Economics, January 2005
Cartoon: Nick Anderson, Kentucky, The Louisville Courier - Journal
Final Parting Advice!
25 Worst Clichés
6. "The euro set new lows for the session on signs of a U.S. economic
rebound”
We haven't the slightest inkling what the Connection is between the
euro and the U.S. economy. But there has to be some explanation for
the currency's tumble.
7. "Stocks are expected to open lower on Monday"
Sure, we're right only half the time. But Sammy Sosa would kill for that
sort of batting average.
9. "Bond prices fell in anticipation of higher interest rates"
Or maybe interest rates rose in anticipation of lower bond prices.
How could we possibly know? We majored in English.
10. "Many investors fear there's more stock-market carnage to come”
Everybody in the newsroom is totally freaked out.
Source: WSJ, March 19, 2002
25 Worst Clichés
13. "While many small investors have suffered big losses recently, few
can rival the dismal record of Mr. Warren, who owns just three stocks
-- Kmart, Enron and Global Crossing”
Can you believe this guy agreed to speak to us? It's amazing what
people will tell the press.
20. "The fund's risk-adjusted performance is among the best in the
growth-and-income category"
Its raw performance stinks.
24. "The fund's manager avoids swinging for the fences, instead aiming
to hit singles and doubles"
Maybe the sports page has some openings.
25. "Today's boardroom Sturm und Drang left many observers with a
sense of deja vu"
And if the foreign editor asks, tell her our Italian is also pretty good.
Source: WSJ, March 19, 2002