Tuesday, March 14, 2006

The rise and fall of industries and cities

This graphic came from a recent Wall Street Journal article on how much the financial industry currently dominates the S&P500 (I apologize for the small size - it's the biggest Blogger would let me do). The chart gives the percentage of total stock-market value for each industry in the S&P500 in 1979, 1989, 1999, and today. What's interesting is when you look at how some of these industries have shifted in importance over time and how that affected certain cities:
  • Note that the financial industry has rocketed from 6% to 10% to 14% to 21% of the market. That is a heck of a lot of money floating around, and it is directly responsible for New York's renaissance since the 1970s.
  • You can see the SF/Silicon Valley and Austin crash from 1999 to today as the tech industry fell from 30% to 15%, and Dallas' Telecom Corridor crash as telecom drops from 9% to 3%.
  • The 80s really were the "materialist decade" (as 'Material Girl' Madonna pointed out to all of us), with consumer discretionary and staples on top.
  • The rise of health care along with our own rapid rise of the Texas Medical Center.
  • The energy crash and its impact on Houston in the 1980s as it went from 21% to 12%.
  • The energy resurgence and our renaissance since 1999 as it went from 5% to 9%.
You can also see the impact of globalization and especially China in the decline of consumer discretionary, although, contrary to popular wisdom, industrials seem pretty healthy.

No industry seems to be able to stay on top for more than a decade (all bubbles eventually pop), which doesn't bode well for the financial industry. Based on Warren Buffett's recent comments about the outrageous fees of financial middlemen these days, financials and NYC may be in for a tumble sometime soon - probably to be displaced by health care as the next leader as baby boomers age. On the other hand, energy doesn't seem to have gotten overwhelmingly large, so Houston may be in good shape for a while.


At 10:41 PM, March 14, 2006, Anonymous Anonymous said...

A couple comments, just off hand:

As shares, these figures don't necessarily have to imply declines in various sectors -- just slower decade-to-decade growth versus overall market growth. (Off the top of my head, I'd imagine that firms dealing with consumer discretionary spending grew from '89 to '99, but as a result of an extremely strong market, grew at a rate slower than companies from other sectors.)

I don't think financial services is in for any huge tumble -- I'd imagine that the rise of financial services from decade to decade is a result of increased movement of capital, especially as a result of globalization, various national and international fiscal policies, new sources of capital, and new financial instruments. Additionally, I don't think that expansion into emerging markets has been fully fleshed out, so I'd imagine that finance is in fine shape.

And I'd agree that Houston's in great shape -- energy's not going anywhere, unless someone suddenly stabilizes cold fusion.

At 11:14 PM, March 14, 2006, Blogger Tory Gattis said...

> As shares, these figures don't necessarily have to imply declines in various sectors -- just slower decade-to-decade growth versus overall market growth.

True. These are market caps, which are generally multiples of profits, so it can also reflect a drop in profitability (or expectations of future profitability), even if revenues are growing.

At 7:44 AM, March 15, 2006, Anonymous Anonymous said...

I certainly can't predict a fall in the financial industry, but there are warning signs, to be sure. The S&L collapse in the 80s was precipitated by aggressive lending, resulting in many questionable loans, the failure of which caused the collapse. Today, many of these "creative" financing schemes that make home loans easier to get, if combined with a rise in interest rates and a fall in the housing market could trigger many failures. Further, the huge growth in sub-prime lending has built in risks. Lastly, the massive rewrite of Bankruptcy laws could actually hurt the very industry that pushed so hard for them. Bankruptcy was created to allow those who had fallen so deeply in debt as to become unproductive a chance to start over and become productive citizens. By and large, it has worked as intended (consider all of the successful oil men who were bankrupt in the 80s). But, the new law was written so poorly that virtually no one can file bankruptcy anymore. Whereas 20,000 per year filed bankruptcy in Houston prior to the new law, only 200 filed in the first 4 months of the new law. The intent of the new law was to force people to pay back at least SOME of their debt, a reasonable request. The new law requires them to pay more than they can afford to pay, so most just do not file. So, the 36% interest, late fees and over-limit fees continue to accrue, plunging the person further in debt. Because of the unpaid debt, banks will not lend them money. As the number of bad risks grows, the pool of borrowers shrinks, negatively affecting the banks. Because the US economy is 70% consumer driven, it could affect the entire economy, further hurting the financial industry.


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