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lecture13_slides - Table 6.2 Famous Bubbles Bubble Dutch...

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Unformatted text preview: Table 6.2: Famous Bubbles Bubble Dutch Tulipmania (16305) South Sea Bubble (17 10-1720) Mississippi Bubble (1717-1720) British first railway boom (1845—6) US. 1873 railway boom and crash Argentine Loans (1880s) _ Mosaic Viruses produce 1 interesting looking tulips; Initial Displacement prosperity of Holland Profits from conversion of government debt; supposed monopoly on trade With Spanish ruled parts of America Rapidly growing trade . with the New W orld: Law’s success as a finanCial organizer End of Depress10n; excitement over the new means of transportation End of the Civil War; settlement of the American west Strong demand on world markets for the staple products of Argentinian agriculture: large profits made by early investors Smart-Money Response Selective breeding oftulips; purchase by “inSiders” of broken tulips that can only reproduce slowly and asexually Insiders buy up debt in advance of the conversion scheme. then profit by presenting debt for full converSion Law plan to make money and acquire power by securitizing the French debt Many new railroad pI‘OJECtS Construction of govemment subsidized railroads Investment flows from Britain to Argentina; expanSion of railway network: construction of social overhead capital Sustaining the Bubble Development of tulip speculation contracts, which can be signed before notaries; appearance of trading Development of coffee house network for speculation: new subscriptions Govemment support; large expansion of credit by Law’s bank to support further purchases PonZi schemes by George Hudson (Le. use this railroad’s capital to pay the last railroads diVidends) Additional railroad charters; expectation that subSidies would continue New issues on the London exchange; creation of j omt-stock companies to speculate in Argentinian land Authoritative Blessmg "7‘7 Govemment approval; royal involvement Official government support. Duke of Orleans imprisons critics of Law—the president of the Parleinent de Paris and others Parliamentary bills passed for every railroad suggesting govemrnent approval; close links between George Hudson and London Society Henry V amum Poor and Charles Frances Adams Foreign investors ”grossly misled... by Argentinian president Barings’ express optimism that the situation might improve (hoping to avoid bankruptcy) u Crash 1637 1720 1720 No Crash gradual decline 1873 - Bankruptcy of Jay Cooke & C0,. beginning of mid 1870's depression Baring Bros. Bankruptcy November 1890 ! Political Reaction ! 00 ex post facto punishing directors: restrictions on use of the corporate form Fall of Law: end of efforts to refonn French finances until 1787 Reform of accounting standards; requirement that dividends be paid only out of earnings, not out of capital On Coup d’etat in Argentina: laws discriminating against foreign investment 19205 Florida Land Boom 19205 U.S. Stock Market Boom 19205 U.Si utility stocks boom 19605 Conglomerate mergers in the US Initial Displacement Great wmter climate; closeness to centers of American population: prosperity of the 1920‘s Decade of fast growth in the 19205; end offears of post WWI deflation; rapid expanSion of mass production Expansion of demand for power; economies of scale Two decades of a rising stock market during which investing in growth stocks had been profitable Smart—Money Response Building of railroads: development of Miami; land development proyects; ExpanSion of supply of shares; creation of new closed-end funds High leverage; expansion of scale to capture economies _ Sustaining the Bubble of a network of real estate offices selling Florida land. Regional exchanges: growth of margin accounts and brokers' loans Creation of public - utility holding companies With cascades of control Emergence of professional conglomerates: Harold Geneen’s lTT, Textron, Teledyne. etc. Stock swaps to create apparent earnings growth SubdiviSions; creation Authoritative Blessing William Jennings l Bryan boosts Florida land: close connections between mayors and developers Blessings from Coolidge, Hoover, Mellon and Irving Fisher (7") Harvard endowment takes large p051tions in National Student Marketing; McGeorge Bundy urges institutions to invest aggressively October 1929 and followmg October 1929 . and following 1970—1971 Political Reaction Fraud prosecutions Glass-Steagall Act: creation of SEC; public utility holding company act; election of FDR Breakup of large utilities, TVA a byproduct; substantial government regulation of : utility industries Reform of accounting practices: Williams Act l Did we have a bubble in the market in 1998—1999? —Valuations have been extraordinary 10-Year P/E on S&P 500 P/E Q‘LQQNQ 03,59ng eeee’beee — Even by recent standards Average P/Es Over Different Periods Average lO—Year P/E Period 1891 —Present 1 946-Present 1970-Preserlt____ 1 980-Present June 2000 1 (3800's 3—Year Annualized Growth in ES 160% 1 140% 1 120% g 100% 1 80% i 1 1 60% 40% 20% 0% V1993 V994 1/1995 1/‘996 1/1997 V398 1/1999 1/2000 Statistics for 20— year Growth of Rnal S&P 500 Earnings WWW _ Comgound Rani Earnings Growth ...
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