GDP, M&A, EBITDA, P/E, NASDAQ, Econo-thread Part 11

[DanS]

"What prey tell is the "critical mass" ?"

The move from a unipolar economic world to a bipolar and then (in the future) multipolar economic world.

Not too long ago, the EU wasn't much compared to the US, but now it is, for instance (the critical mass being somewhere between 55% and 75% of US GDP). This has benefitted the US greatly over the last 7 years.

We can expect either or both China and India to make a similar run over the next century.

[Roland]

Originally posted by Case


Considering that a large slice of the last 5-7 years worth American investment was pissed away on the NASDAQ bubble, the US isn't doing too badly.

What investment ? Nasdaq and the rest of the stock market was hot air in and hot air out.

[Roland]

"Not too long ago, the EU wasn't much compared to the US, but now it is, for instance (the critical mass being somewhere between 55% and 75% of US GDP)."

You really have a lot of funny ideas. While this critical mass thing doesn't make much sense, how on earth do you arrive at the idea that this "started" in 1995 for the EU ?

[DanS]

"how on earth do you arrive at the idea that this "started" in 1995 for the EU"

I didn't say it started in 1995. Rather, I implied that the U.S. benefitted most starting in 1995. That steep rise in investment starting in 1995 came from somewhere!

[el freako]

That steep rise in investment came after a very steep fall in the early 1990's.

Net Private Investment moved in the range of 6%-10% of net output during 1950-1985, however it collapsed to 4% in the early 1990's.
The steep rise you mention took it back to 8% in 2000 the average for the pervious 50 years but since then it has fallen back to below 5%.

[DanS]

"That steep rise in investment came after a very steep fall in the early 1990's."

Yes, but we're talking investment from overseas, which started making a huge difference in 1995.

Edit: 1997 was just astounding. Foreigners increased their investment in the US by almost a trillion dollars. I can only assume that much/most of this was from Europe.

And don't tell me I'm looking at the wrong line item.

[el freako]

Here is the relevent spreadsheet if anyone want to see it:

[Roland]

I'd expect most of those net inflows to actually come from Asia and recycled petro dollars. Europe had nowhere the trade surplus to match such capital outflows, and in those dimensions the divergence would be serious.

Also don't forget that the US bubble and the japanese slump went hand in hand.

[el freako]

DanS

Ah, I see what you are getting at.

However that made me wonder what proportion of the US's net investment (both private and public) is 'financed' from abroad.

Taking 'net foreign investment' (line 19 on this table) as a share of total net investment I can see how 'dependent' the US is on foreigners to finance it's investment.

The results were surprising, possibly alarming, as they show an increased dependence on foreign financing.

Net Foreign Investment as % of Net Investment:

1981-95: 22%
1996: 22%
1997: 21%
1998: 29%
1999: 37%
2000: 51%
2001: 58%
2002: 76%

Admittedly much of the rise since 2000 has come due to falling net investment as net foreign investment has been static.

In Q2 2002 it hit 79%, the previous high was 44% in Q3 1987 - hmm what happened in that quarter?

[DanS]

ef: That's exactly what I'm getting at, although I didn't have clear %-ages in my mind.

Edit: I don't know enough to decide whether it is alarming or not. My gut instinct is to not be alarmed at all and look on it as a beneficial trend. Before now, nobody else would have had the wherewithal to even approach these levels, much less sustain them at least so far through a bear market of 73-74 proportions.

Roland: Well, the net direct investment inflows into U.S. companies comes about 80% from Europe. In many years, that's a substantial portion of all inflows.

[DanS]

The tables I was looking at to get a rough feel for foreign appetite for keeping and adding to U.S. assets was the following...

http://www.bea.gov/bea/di/intinv1976_2001.xls

[Case]

Originally posted by Roland
What investment ? Nasdaq and the rest of the stock market was hot air in and hot air out.

Huh? The bubble was good money in, and hot air out - many of the shares which investors bought at high prices are now totally worthless. This represents a massive waste of money which could have been invested in more productive areas of the economy.

[Roland]

"My gut instinct is to not be alarmed at all and look on it as a beneficial trend."

That gut instinct of yours makes we want to smash the wall in. Everything's good, little pinky fluffy clouds everywhere....

You can't run that deficit ferever. When you no longer do, you'll invest less or consume less. If you invest less, then net investment is about zero - and that means no output growth.

And foreign capital didn't flow into the US for the pinky fluffy clouds, but it wanted to play the bubble.

"Well, the net direct investment inflows into U.S. companies comes about 80% from Europe."

Only during the bubble, when european hot air (Vivendi, Vodafone or DT stock) was exchanged for american hot air. Inflated asset prices wreak havoc on the stats.

case:

"The bubble was good money in, and hot air out - many of the shares which investors bought at high prices are now totally worthless."

And where did the money go ? They had to buy the stocks from someone, you know....

"This represents a massive waste of money which could have been invested in more productive areas of the economy."

The waste of resources came with spending on useless capital assets, induced by the nasdaq bubble, artificially low interest rates and relentless cheerleading from the washingtonwallstreetmedia mafia. But it's not like anyone had put the now 6 or 7 trillion $ on the table that were now lost in the recent meltdown.

[Case]

Originally posted by Roland
case:

"The bubble was good money in, and hot air out - many of the shares which investors bought at high prices are now totally worthless."

And where did the money go ? They had to buy the stocks from someone, you know....

My point is that the money was spent unproductively - investors bought (generally overpriced) shares which were offered by the companies and the companies then burnt through this money and went broke.

While the investment certainly wasn't a total loss to the economy, the US would be in much better shape if that money had been invested in more viable companies and the investors had gotten their money back.

[Sten Sture]

The amount of money actually raised in IPOs of start-up crap tech companies was pretty small relative to the economy. That was part of the necessary mechanics - sell a small number of shares (3%-5%) of the company and create an artificial short. Rating the money flows by the last trade pricing of stock indicies overstates the magnitude of the bubble.

The real economic spending was by "normal" businesses and households to upgrade their technology infrastructure, and that wasn't good money chasing bad, it was good money chasing added productivity, albeit at a higher rate than should have been the case.

A post "crash" decline in the dollar, economic activity, and a rise in govt deficits is not symtematic of an impending collapse of the US economic system. We will continue, greatly to the annoyance of Roland , to be able to import vast amounts of capital. Indeed, US's most valuable asset is the ability to export the dollar and secure external funding as THE global safe haven.

The US is able to borrow money at 2% real. For 3% of GDP, please! Its immaterial. If you personally make 100k (after taxes) how big a deal is it to borrow 3k at 2% real? BFD.