Evidence of Fueling of the 2000 New Economy Bubble by Foreign Capital Inflow: Implications for the Future of the Us Economy and its Stock Market

41 Pages Posted: 31 Jul 2003

See all articles by Didier Sornette

Didier Sornette

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute; Southern University of Science and Technology; Tokyo Institute of Technology

Wei-Xing Zhou

East China University of Science and Technology - School of Business

Date Written: June 19, 2003

Abstract

Previous analyses of a large ensemble of stock markets have demonstrated that a log-periodic power law (LPPL) behavior of the prices constitutes a qualifying signature of speculative bubbles that often land with a crash. We detect such a LPPL signature in the foreign capital inflow during the bubble on the US markets culminating in March 2000. We detect a weak synchronization and lag with the NASDAQ 100 LPPL pattern. We propose to rationalize these observations by the existence of positive feedback loops between market-appreciation / increased-spending / increased-deficit-of-balance-of-payment / larger-foreign-surplus / increased-foreign-capital-inflows and so on. Our analysis suggests that foreign capital inflow have been following rather than causing the bubble.

We then combine a macroeconomic analysis of feedback processes occurring between the economy and the stock market with a technical analysis of more than two hundred years of the DJIA to investigate possible scenarios for the future, three years after the end of the bubble and deep into a bearish regime. We conclude that the low interest rates and depreciating dollar are the indispensable ingredients for a lower sustainable burden of the global US debt structure and for allowing the slow rebuilding of an internationally competitive economy. This will probably be accompanied by a weak stock market on the medium term as the growing Federal deficit is consuming a large part of the foreign surplus dollars and the stock market is remaining a very risky and unattractive investment. Notwithstanding strong surge of liquidity in recent months orchestrated by the Federal Reserve, this macroeconomic analysis which incorporates an element of collective behavior is in line with our recent analyses of the bearish market that started in 2000 in terms of a LPPL "anti-bubble." We project this LPPL anti-bubble to continue at least for another year. On the short term, increased availability of liquidity (M1) and self-fulfilling bullish anticipations may hold the stock market for a while.

Keywords: Foreign capital inflow, speculative bubble, new economy, dollar depreciation, depression

JEL Classification: C53, F47, R53

Suggested Citation

Sornette, Didier and Zhou, Wei-Xing, Evidence of Fueling of the 2000 New Economy Bubble by Foreign Capital Inflow: Implications for the Future of the Us Economy and its Stock Market (June 19, 2003). Available at SSRN: https://ssrn.com/abstract=418320 or http://dx.doi.org/10.2139/ssrn.418320

Didier Sornette (Contact Author)

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC) ( email )

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HOME PAGE: http://www.er.ethz.ch/

Swiss Finance Institute

c/o University of Geneva
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Switzerland

Southern University of Science and Technology

1088 Xueyuan Avenue
Shenzhen, Guangdong 518055
China

Tokyo Institute of Technology

2-12-1 O-okayama, Meguro-ku
Tokyo 152-8550, 52-8552
Japan

Wei-Xing Zhou

East China University of Science and Technology - School of Business ( email )

130 Meilong Road
Shanghai, 200237
China

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