18-10-2002 19:41									#391
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My dear Dr rer oec,

"since the original debate was about whether a pick up in growth would affect stock market valuations"

I may have been sloppy in phrasing the long.term trend part, but I really didn't think I would have to make it explicit, as my original quote to which you objected was in reply to this from DanS:

"Rather, the nominal long-term GDP growth rate is assumed to be 6% (3.5% real growth + 2.5% unreal)."

Und unless I've completely misunderstood what he meant, he was making a case for a rate of long-term stock return. No idea you were talking about cyclical effects.

	18-10-2002 19:58									#392
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Ok then your statement _was_ a long term steady state one (and as I repeatedly said it makes more sense in this case) - but you lead me to believe above this was not the case. Perhaps it is my terminology that is confusing..........if so mea culpa.

In any case in assessing the long term return to stocks (which I think was the root of the debate - yes?) one must consider both the steady state analysis _and_ what will happen on the return to the steady state.

	18-10-2002 20:01									#393
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Oh and I got the .rer .oec reference btw.

	18-10-2002 20:30									#394
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I'm sorta confused where we're at now. The assumption is that over time, GDP growth has everything to do with profit growth, which in turn sets a fair value for equities, profits reinvested. This is because profit as a percentage of GDP fluctuates within a range that is unlikely to change without a major rework of our basic economic system (and social contract, etc.).

Does anybody have major problems with this, if we're talking rule-of-thumb kind of calculations?

	18-10-2002 20:33									#395
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"one must consider both the steady state analysis _and_ what will happen on the return to the steady state."

Yes, though the return to the steady state should not have a very dramatic impact at the moment.

"only makes sense at all in a steady state (though not quite as strict an interpretation as zero net investment)"

Well which steady state version are we talking about then ? Flat capital productivity ?

	18-10-2002 20:39									#396
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Dan:

"The assumption is that over time, GDP growth has everything to do with profit growth, which in turn sets a fair value for equities, profits reinvested."

My point was that roughly, the output (and therefore the capital share of income from that output) per unit of capital stays the same.

So appreciation of existing stocks comes from retained earnings under the assumption above. And there, earnings growth rates of 4 % mean a 4 % delusion of your share, and growth rates of 6 % a delusion of 6 %.

	18-10-2002 20:53									#397
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I was just thinking of what you said, a state where the capital stock grows in line with GDP and profit per unit of capital was constant. I have no problem with this as a long run thought experiment - in fact as I said right at the start I applaud that you tried to analyse the problem in this manner.

But as I said this isn't quite correct. The appropriate steady state is one where productivity improvements drive increases in effective capital stock (abstract from depreciation for now), profits and stock prices.

So @ Dan, yeah carry on

	18-10-2002 20:58									#398
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"The appropriate steady state is one where productivity improvements drive increases in effective capital stock (abstract from depreciation for now), profits and stock prices."

How do (I assume labour) productivity improvements drive increases in stock prices ?
You need some extra assumptions for that, don't you ?

	18-10-2002 21:08									#399
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"So appreciation of existing stocks comes from retained earnings under the assumption above. And there, earnings growth rates of 4 % mean a 4 % delusion of your share, and growth rates of 6 % a delusion of 6 %."

My little mind is having a problem processing this, so please edumacate me if I'm wrong.

This just means that on a portfolio including a proportional share of all productive capital classes, I will be making 6% per annum in perpetuity, rather than a rate above that, right? If so, why would this change the calculation?

	18-10-2002 21:10									#400
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It is not really a good assumption that all productivity increases enter through labour........TFP is a better concept.

	18-10-2002 21:17									#401
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Well TFP or not, capital productivity doesn't change much. Neither does the income share of capital.

	18-10-2002 21:22									#402
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Dan:

"I will be making 6% per annum in perpetuity, rather than a rate above that, right?"

Not what I meant.

Let's say all a company's capital is the stocks it issued. You own 1 of 100 shares.

Now it grows output and earnings at 4 %, but to do that it has to expand its capital by 4 % (104 shares). Your EPS stays the same.

Do the same with 6 %. Your EPS stays the same.

Individual companies vary widely from that behaviour, but it's quite close to the overall economy. And in that scenario the only interesting thing is the earnings yield. Be it as dividend or reinvested.

	18-10-2002 21:26									#403
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Those sorts of statements are misleading at times though........TFP is a much better concept entirely because the notion of marginal products (which are the first order _partial_ derivatives of the production functions), whilst immensely useful to economists, are sometimes tricky to interpret in practice.

	18-10-2002 21:29									#404
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Either way our differences aren't large here. I suggest you both come over to the capitalism bashing thread and help us educate some people.

	18-10-2002 21:31									#405
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I'm always confused about the exact meaning of TFP, MFP or TFP/MFP growth. You mean the statements are misleading because the technology component of TFP growth can change that ?

	18-10-2002 21:35									#406
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That's not Sava's thread you're talking about ?

	18-10-2002 22:15									#407
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Hehe I get this a lot.

Y (GDP say) = F(K,L)=AK^bL^c.

Now at times marginal products, which are the first order partial derivatives of this function are useful. Take for instance determining the wage of labour in the aggregate sense by using the marginal product of labour holding capital constant.

However, although people talk about labour and capital productivity, most of them do not understand what they mean.

Now growth comes from increases in the inputs capital and labour. But how should you measure the effect of productivity? Well you can try and attach the notion directly to an input (usually labour).......simple versions of the Solow model do this. Of course now all the return to productivity goes to labour, and the only reason for the capital stock to grow is depreciation. Alternatively you can use the shift parameter A as a measure of TFP. Now labour and capital can share the return, with the general equilibrium conditions ensuring that the capital stock expands to bring the return back to its original level.

Solow was and is a genius, which is why I linked to his interview above. Dynamic considerations are a nightmare to analyse, and with a few innocuous simplifications he changed how we think about these issues forever. Sure growth theory has come a long way since the Solow model, but IMO you can develop all your intuition from it.........the niceties can come later.

	18-10-2002 22:22									#408
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Well it's the old problem that if you take capital or labour in isolation, output would be pretty much zero.

Anyway do you think TFP has a big impact over time ? Real interest rates, capital coefficients and the income distribution between labour and capital look very stable.

	18-10-2002 22:40									#409
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quote: Originally posted by Roland Anyway do you think TFP has a big impact over time ? Real interest rates, capital coefficients and the income distribution between labour and capital look very stable.

TFP is of paramount importance, but for GDP growth. What is genius is formulating how the general equilibirum considerations lead to TFP being able to increase without violating the stylised facts you mention.

Anyways enough economics for me today.

	21-10-2002 04:33									#410
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good god, I have forgotten what TFP and MFP are...



I would be willing to bet all of DanS's money that if the real GDP was a constant growth number, then every firm this side of the international date line would buy in their equity capital to replace it with debt. EPS would go parabolic! Ah, the beauty of leverage and the equity risk premium!


I suppose I should be more concerned with the States Utd's reliance on external capital flows, but I think that the flows have more to do with 'good' demand for our investments from external sources, freeing domestics to do other things with their capital, rather than a true scarcity of available domestic capital.

To capital market participants, the method of measuring the savings rate is considered to be quite archaic and the meaningless result is substantially ignored - perhaps to our peril. "Japan's savings rate is c20% and their economy is in the shitter" is a common way to address nay-sayers.

	21-10-2002 08:44									#411
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"I would be willing to bet all of DanS's money"

I would be willing to bet all of your money that your booky wouldn't return your phone call because of the low stakes.

"Encouraging home ownership is a hands down public policy winner."

And nobody's going to be voted out of office for doing it either.

Last edited by DanS on 21-10-2002 at 08:49

	21-10-2002 12:58									#412
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Dr:

"TFP is of paramount importance, but for GDP growth."

Uhm... yes... but what's the impact on the macro "EPS" in your opinion....

"What is genius is formulating how the general equilibirum considerations lead to TFP being able to increase without violating the stylised facts you mention."

Are you talking about Solow again ?

Sten:

"the method of measuring the savings rate is considered to be quite archaic and the meaningless result is substantially ignored"

You could say the same about the method of measuring earnings. Until Enron & Co.

And the "good demand" is the same line Lawson used to explain the UK current account deficit during Britain's bubble economy of the late 80s.

	22-10-2002 02:57									#413
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The Enronesque earnings would have actually been the exact reverse - big numbers using new methods that investors fawned over.

I prefer debt based statistics like interest coverage, collateral coverage and cash flow.

I am just mad because the govy debt is too small for the investment market and the technical cart is driving the fundamental horse.

Now that the charts have turned negative, we may see a more balanced market - and higher mortgage rates. That should help reduce the American real (or imagined) estate "bubble."

	22-10-2002 03:07									#414
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quote: Originally posted by Sten Sture I prefer debt based statistics like interest coverage, collateral coverage and cash flow.

And I. But then you deal in fixed income securities IIRC - there is less possibility for you to invent silly stories justifying silly valuations.

	22-10-2002 05:06									#415
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Of course, though that raises the question whether "less" is statistically significant.

	22-10-2002 05:26									#416
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Hehe. I actually wrote the post as "no possibility", but I changed it to less because I know there is some scope. But the scientist in me wishes to test.

H0: Sten is a crook, responsible for the failings of corporate America

H1: Sten is an angel, who has never had anything other than 100% happy customers.

Since I have no data on the relevant distributions or parameters, and am unwilling in this case to impose such unknowns, I fall back on the methods of casual empiricism. 1 vote each.

I vote that there is insufficient evidence for H0 to be rejected.

	22-10-2002 12:45									#417
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"The Enronesque earnings would have actually been the exact reverse - big numbers using new methods that investors fawned over."

And it's the same with most of the new savings measurements that are being proposed. They're all about creative (national) accounting.

"I am just mad because the govy debt is too small for the investment market and the technical cart is driving the fundamental horse."

Well not to worry. If I'm right you'll see a budget swing like the UK in the late 80s or Japan, so a deficit of 5-7 % of GDP. Happy ?

"Now that the charts have turned negative, we may see a more balanced market - and higher mortgage rates."

I'm not sure this is the end of the bond meltup. The real recession is yet to come....

	22-10-2002 18:19									#418
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quote: Originally posted by Roland The real recession is yet to come....

Proposed inscription for Roland's tombstone.

	22-10-2002 18:28									#419
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Nah, we wouldn't want him to sound more optimistic than he really is.

	22-10-2002 18:30									#420
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quote: Originally posted by Adam Smith Proposed inscription for Roland's tombstone.

Famous last words.

But I intend to live beyond 2005.