Renmin University of China School of Finance Bubble

Renmin University of China School of Finance Bubble or Burst An Exercise in Forecasting Jim Cook Global Technology Management Council December 20, 2001

Preliminary Remarks Ø "I hold that man is in the right who is most in league with the future. " Henrik Ibsen (1828 -1906) Ø "We live in a moment of history where change is so speeded up that we begin to see the present only when it is already disappearing. " Ronald Laing (1927 -1989) Ø "The trouble with our times is that the future is not what it used to be. " Paul Valery (1871 -1945) Ø "Life must be lived forwards, But can only be understood backwards. " Søren Kierkegaard (1813 -1855) Ø "Research is to see what everybody else has seen, and to think what nobody else has thought. " Albert Szent-Gyorgyi (18931886) Ø "We are continually faced with a series of great opportunities brilliantly disguised as insoluble problems. " John Gardner (1912 http: //globatech. com/bubble. ppt 2 / 19 )

Today’s Agenda Ø Why is prediction so difficult? Ø A short course in Uncertainty, Complexity, and Reality Ø Lay down your First Principles - >95% confidence Ø Make your Basic Assumptions - >80% confidence Ø Gather Data and Analysis and Models http: //globatech. com/bubble. ppt Ø Develop your own Scenario 3 / 19

Prediction Difficulties Ø The "Real World" is Complex AND Non-linear (9/11) Ø Any model of the "Real World" must be highly dimensional Ø The "Real World" is a times series with many lags Ø Much behavior is to mitigate known future difficulties (y 2 k) Ø The Scientific Method doesn't apply for three basic reasons: Ø controlling experiments is impossible (it's too complex) Ø repeating experiments is impossible (events don’t repeat) http: //globatech. com/bubble. ppt 4 / 19 Ø Reductionist approach impossible (subject is

Uncertainty, Complexity, and Reality Ø Uncertainty: (Enlightenment, 1927, Lorentz) Ø Complexity: (Dimensionality, Recursion, Chaos) Ø Reality: Ø Cycles appear where momentum causes excesses Ø Life-cycles occur where new things go to extinction Ø Trends appear often because a linear fit is so easy 5 / 19 http: //globatech. com/bubble. ppt

First Principles Ø No one can reliably predict the future in any detail. Ø There will be good times and bad in the 21 st Century. Ø China's spectacular growth will come to an end. Ø Chinese adapt to any adversity, no matter how severe. Ø Time reduces uncertainty of events, http: //globatech. com/bubble. ppt monotonically. 6 / 19

Basic Assumptions Ø Political and Social Ø WTO will proceed for next 10 years Ø China will not be in war nor uprising Ø Inequality will become a top issue Ø Monetary and Fiscal Ø RMB will remain around its current exchange level Ø Chinese saving rate will continue high Ø Bad debt problem will be resolved Ø Economic Ø China's dependency on exports will increase Ø WTO will increase competitive pressures Ø Growth will subside and expose weaknesses http: //globatech. com/bubble. ppt 7 / 19

Data and Analysis and Models Ø Data – Urban Unemployment increasing to 8% (1998) http: //globatech. com/bubble. ppt 8 / 19

Data and Analysis and Models Ø Data – Per capita income in RMB growing (1997) http: //globatech. com/bubble. ppt 9 / 19

Data and Analysis and Models Ø Data – Urban Rural Income Disparity Increasing (1996) http: //globatech. com/bubble. ppt 10 / 19

Data and Analysis and Models Ø Model – Kondratieff Long Wave Economic Model http: //globatech. com/bubble. ppt 11 / 19

Data and Analysis and Models Ø Where are we now? http: //globatech. com/bubble. ppt 12 / 19

Data and Analysis and Models Ø Economic Expansion – the best of times (1950 -1970) Ø Ø Investment begins, unemployment drops Goods and services availability increases Wages rise, buyers abundant, but prices do not rise Money becomes plentiful, employment full, prices rise! Ø Plateau – (1970 -1985) Ø Products abundant, but buyers are not Ø Capacity increases, supply excessive, prices drop Ø Stock & bonds rise, costs drop, performance flattens Ø Economic Contraction – (1985 -2005) Ø Employment begins long and sustained contraction Ø Mergers & Acquisitions fuel growth, corporate debt increases Ø Investment contracts, ends with debt repudiation (defaults and crash) http: //globatech. com/bubble. ppt 13 / 19

Data and Analysis and Models Ø Model – Fisher-Pry For Life Cycles (diffusion) Ø Where is Real-Estate Building in the Life Cycle? http: //globatech. com/bubble. ppt 14 / 19

Data and Analysis and Models Ø Model – Fisher-Pry For Life Cycles (diffusion) http: //globatech. com/bubble. ppt 15 / 19

Data and Analysis and Models Ø Model – Fisher-Pry For Life Cycles (math) Where: t = time, measured from the 50% instant of diffusion f = the % of diffusion having already occurred at time t http: //globatech. com/bubble. ppt a = ½ the duration from 10% diffusion to 90% 16 / 19

One Scenario Ø Beijing will do OK with WTO because every company operating in China will have a Beijing Representative Office. Ø Beijing City Government will promote Chao. Yang and Haidian Build-up for the Olympics and “Silicon Valley” Ø Beijing citizens will do much better than elsewhere as the Central Government gets bigger Ø Rural unemployment will create an abundance of construction labor that will build a large supply of housing Ø Right now, much vacancy is hidden, and it is growing http: //globatech. com/bubble. ppt 17 / 19 Ø Supply will exceed demand in housing causing a

Our Homework Ø If we could get the following data we could make a good prediction: Ø The building history (Beijing new housing is a diffusion case) Ø The true pricing and vacancy figures Ø Test critical points early and often, use contingencies, and act prudently. Ø Don’t think of action as an event, but rather as a process http: //globatech. com/bubble. ppt 18 / 19

Concluding Remarks Ø Questions and Answers Ø Thank you, again. You can find a copy of this lecture (320 KB) on the Internet at: http: //globatech. com/bubble. ppt 19 / 19