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Let's Talk About Feelings & the Economy! Final Presentation for Macro Econ

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Let's Talk About Feelings & the Economy! Final Presentation for Macro Econ

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Are bubbles always bad and can we use consumer sentiment to predict their burst? A little non quant's exploration into Macro Econ under the tutelage of UCLA Anderson's Ed Leamer

Are bubbles always bad and can we use consumer sentiment to predict their burst? A little non quant's exploration into Macro Econ under the tutelage of UCLA Anderson's Ed Leamer

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Let's Talk About Feelings & the Economy! Final Presentation for Macro Econ

  1. 1. “OUR ECONOMIC MODELS HAVE NEVER BEEN PARTICULARLY SUCCESSFUL IN CAPTURING A PROCESS DRIVEN IN LARGE PART BY NON RATIONAL BEHAVIOR.” LET’S TALK ABOUT FEELINGS A translation of the Testimony of Chairman Alan Greenspan February 28, 2001 MGMT 468 SPRING 2011 SUMMERS MCKAY
  2. 2. THE WORLD IN Q3 & Q4 2000, Q1 2001  Pets.com – A puppet closes it‟s doors  Feb 2000 - $11/share  Nov 6, 2001 - $.19/share  eToys.com raised $166M in May of 1999.  Oct 1999 - $84/share  Feb 2001 - .09/ share  Disney is in the game with Go.com but takes a $790M write off in Jan 2001  Webvan continues to expand operations!  Digital Impact, an email marketing company hires Project Manager, Summers McKay, September 2000  Clients include – Webvan.com Bevmo.com Pets.com and Overstock.com
  3. 3. CRAZY MAKING GROWTH ISN‟T A BAD THING  The past decade has been extraordinary for the American economy and monetary policy. The synergies of key technologies markedly elevated prospective rates of return on high-tech investments, led to a surge in business capital spending and significantly increased the underlying growth rate of productivity.  Translation: We had a great GOLD RUSH. We Got Some Gold from our Rich Orchard of Opportunity!
  4. 4. BUT  “Death is a normal consequence of life.”  Ed Leamer, The Life Cycle of US Economic Expansions, March 2001  The problem is, we don‟t know how to die gracefully, because fear of death and the confusion of loss are the most powerful of all forces.  Summers McKay, Final Presentation MGMT 468, Spring 2011
  5. 5. THE SKY IS FALLING!
  6. 6. SHOULD WE HAVE SEEN THIS COMING? Leamer: Life Cycles of US Expansions
  7. 7. WHAT ELSE DO WE SEE?  Changes in stock market wealth are an important determinant in shifts in consumer spending.  While corporate managers appear to maintain long term optimism, consumer spending on durables is declining.  Increase in information exchange and awareness of these market forces seem to be making consumers and lenders more risk averse and likely to withdraw from action.  We forecast a retrenchment following the excesses built up in 1999 and early 2000.
  8. 8. SHOULD WE HAVE SEEN THIS COMING? Leamer: Life Cycles of US Expansions
  9. 9. SHOULD WE HAVE SEEN THIS COMING? Leamer: Life Cycles of US Expansions
  10. 10. SHOULD WE HAVE SEEN THIS COMING? Leamer: Life Cycles of US Expansions
  11. 11. SO WHAT CAN WE LEARN AND WHERE DO WE GO?  Logic now might indicate yes, but our behavior simply hasn‟t been logical.  Are Gold Rush „Bubbles‟ Bad?  Information technology has catapulted; productivity, inventory management, communications, and perhaps global trade.  And you can place an order online at bevmo.com and pick it up on your way home already paid for and packaged up!
  12. 12. OF COURSE THERE ARE STILL TECHNOLOGY SKEPTICS  “An email declaration of „I love you‟ is more likely to be a virus than a credible promise of good things to follow.”  Edward E. Leamer & Michale Storper: The Economic Geography of The Internet Age, August 2001 A little foreshadowing……  Cupid.com has 23 million members, in 39 countries and generates more that £4 million a month in revenue.

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