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HershOstropoler
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quote:
Originally posted by GP
... that proves your thesis that stock markets make short term moves (of a few years or so) because of Fed discount rates? I just don't buy it. It violates common sense and market efficiency. The markets dance a lot regardless of Fed discount rate. They are quite capable of moving up because they beleive the long term outlook is positive irrespective of the discount rate. |
You're obsessed with the simple connection. The point is not that the Fed cuts rates and everyone jumps happily into stocks for years. But a CB can create an artificial economic boom. Stock markets rise because they believe it's real. Everyone wants a piece of it (so it develops towards a pyramid game). At that stage easy money just helps the process.
"I suspect you are still a bit of a market-timer."
Only if I see a bubble economy.
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HershOstropoler
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quote:
Originally posted by Saras
Btw, I might be in vienna next mon-wed for the Euromoney CEE issuers&investors conference. Would be cool to have a beer and chat. How long does it take to get to salzburg? Or would you be able to come? |
Would be great. Salzburg is about 2.5 hours from Vienna; got work and possibly some private stuff to sort out next week though. If you go there I'll PM you my mobile nr, we could arrange something short-term....
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HershOstropoler
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"Well...we've already agreed that the markets can rise without any extra money supply"
So can prices for shoes. Or they can rise as a result of excess liquidity.
"Let them make their own judgements!"
Dine with me.
"As long as CPI is in control, I'm cool with the CB."
CPI is a very narrow aspect of the consequences of monetary policy.
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Sten Sture
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SF, CA don't call it frisco... Striker!!
Mar 1999
time: 21:23
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quote:
Originally posted by HershOstropoler
... a CB can create an artificial economic boom. Stock markets rise because they believe it's real. Everyone wants a piece of it (so it develops towards a pyramid game). At that stage easy money just helps the process.
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Well this is certainly true to some extent, if the CB has the faith of the markets, and the government coludes with underreporting inflation or overreporting nominal GDP. Perhaps this was part of the extra growth of the late 90s. The Fed eased in reponse to the Asian Crisis and the Ruble Crisis, before weaknesses in the US economy became apparent. That was a tough call at the time, but it seemed like the contagion risk was real. So we ended up with an extra 0.5% or 1% in GDP that flowed through to Real because of the Gov's poor modeling of Rental equivalency in CPI/Deflator. There is your economic 'bubble'.
The expansion from the early 80s gets thinner and thinner, to the point where only a handful of companies are reporting strong results, those companies attract most of the asset allocations from investors. The government inadvertantly helps those few companies by cutting the capital gains tax rate in half, encouraging investors to prefer raw stock price appreciation over fundamental valuation, and new companies come to market to absorb the reallocated capital by emulating Intel and Microsoft. Meanwhile the companies that represent 99% of GDP are just squeeking by and their share prices are wallowing. There is your investment 'bubble'.
It is hard to see how the Fed could have reduced the tech stock bubble without impacting an already weak manufacturing and service economy and chasing investors further into the one part of the market that was 'working' for investors.
Have some consumers over levered because of an unprecidented 17 years of expansion, sure. Are lending institutions less risk averse than they should be given the rise of consumer leverage, sure. Are lending institutions more diversified than ever before, and more statistically aware of the charateristics of their book, yes, that too. Does that fact make them more risky as a group, yes. Will this slow future growth, yes. Has the rise of comsumer lending and the securitization of mortgage loans contributed to the rise in the median home price, definately. Does a $140,000 median price constitute a bubble in housing prices, seems highly unlikely. At current rates that is a $670 per month - with two to three months free because of interest deductability. At $3.80 per hour after tax you can cover a mortgage on the median home - even I make that much. 
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TCO
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Richmond, VA
Jan 1970
time: 00:23
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Show me something as well-thought at as a chapter in Brealey and Myers, Roland, to support your basic viewpoint. You are wallowing in an over-intricate conspiracy theory of valuation without having ever studied and internalized the basics of corporate finance. I'm not that much more knowledgeable than you. But I can sense your weak spots.
Last edited by TCO on 10-01-2003 at 01:17
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HershOstropoler
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Sten:
"So we ended up with an extra 0.5% or 1% in GDP that flowed through to Real because of the Gov's poor modeling of Rental equivalency in CPI/Deflator. There is your economic 'bubble'."
There's a lot more to it. I'd guesstimate the extra at more like 3 %. Also I'm not sure how you think this effect relates to problems of national accounting, but there are also hedonic deflators, the problems of measuring service price inflation in general, divergences between income and spending side....
"Meanwhile the companies that represent 99% of GDP are just squeeking by and their share prices are wallowing. There is your investment 'bubble'."
What do you mean there? First the broad market was overvalued too, second look at consumption and investment growth rates in GDP.
About risk in the credit system, I think the market mechanism for that one has broken down completely, but we'll see how it plays out.
"Does a $140,000 median price constitute a bubble in housing prices, seems highly unlikely."
I think it's 160k existing, 180k new.
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TCO
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Richmond, VA
Jan 1970
time: 00:23
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quote:
Originally posted by HershOstropoler
What ****ing conspiracy theory ?  But maybe you'll explain how the broad market reached a p/e of 30+ according to "the basics of corporate finance" cause I cannot see any contradiction. |
1. P/e is a bad metric to use for valuations.
2. Volatility, random walk, Brownian motion. GO do a search on those in the Journal of Finance. But first read the first chapter of Brealey and Myers. It's a basic textbook. Well within your abiility. But it touches on some very good points and has references to literature. (I would also advise reading Valuation by Copeland, et al.)
3. I already went into the market's belief in "a water transmutation event". If the expected Internet manna from heaven had been real, then they would have been justified. Let the market dance.
4. You can play all the games you want with money supply, but for stocks to rise, investors have to beleive in the lkong-term prospects. (Not a time-now faucet opening.) Let the investors make their own decisions.
5. You have yet to show how investors have an incentive to bid stocks up based on short term Fed manipulations. If anything a gyrating policy ought to inhibit them. But regardless, their incentives are based on the long term outlook. Sure there is volatility and sure there are people with short term outlooks. But the fundamental value of the stocks is based primarily on long term outlook (you really ought to do the math in a DCF once to have some concept here). Sure people can have temporary overpricings. But there incentives will always tend towards correction of "pyramid schemes". I don't see any reason for the government to spend its time correcting them. Let the market discipline speculators. As long as CPI is coolio, I'm hip with the money supply.
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Maybe I was a little mean (and imprecise) to say conspiracy theory. (I have this tendancy towards a teensy bit of adhominem  .) I was thinking about it and about you and my view of your arguments and argumentation style. Maybe a little closer to my assessment is this: you tend to create a sort of house of cards of several questionable events of causality linked together. I am suspicious of such arguments. Especially if mutual casuality is needed. I also feel that you don't completely understand, nor internalize fundamental ideas of economics and corporate finance. (Not that I know that stuff all either. We are both smart guys with partial training here. But I know enough to start seeing holes.) I'm not sure that outlook is the only issue. I think part of the problem is not having studied the orthodox religion before wandering off into Reformation.
Don't push me for details. (I'm not making an argument here, counselor. ) Just sharing an assessment or at least trying to make it more precise. You can ignore it of course...especially if find me impertinant.
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HershOstropoler
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"P/e is a bad metric to use for valuations."
Good enough for me in the aggregate.
"Volatility, random walk, Brownian motion."
How is it relevant ? Stock markets can do crazy things on their own, why do you want to debate that ? But they can't throw an entire economy out of whack on their own.
"You can play all the games you want with money supply, but for stocks to rise, investors have to beleive in the lkong-term prospects."
I have no idea against whom you are arguing. But tell me, why are investors misjudging long-term prospects? Why were investors banking on 20 % returns forever?
"I don't see any reason for the government to spend its time correcting them. Let the market discipline speculators."
See above - " have no idea against whom you are arguing."
"As long as CPI is coolio, I'm hip with the
money supply."
While I don't agree with everything here, maybe it's worth a read: http://www.prudentbear.com/archive_...ntent_idx=19312
"I have this tendancy towards a teensy bit of adhominem ."
I'm shocked.
"you tend to create a sort of house of cards of several questionable events of causality linked together. I am suspicious of such arguments."
I've laid out the broader argument when we started these debates here. You are throwing around objections, but most of them are besides the issue.
"I think part of the problem is not having studied the orthodox religion before wandering off into Reformation."
Well that's the problem. Economics will always be a religion, never become a science. I just rely on a few basics rather than anilis superstitio....
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Sten Sture
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SF, CA don't call it frisco... Striker!!
Mar 1999
time: 21:23
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Let's all go to Vilnius while Shares is away! (can you imagine going to Austia for fun??)
Ost-land - here is an example of why market capitalization weighting an Index P/E ratio can be distorting to the valuation level of the broad market:
Lets look at two components of the S&P500 at the end of Q1 2000, roughly the market peak. The S&P500 was around 32x forcast earnings at the time.
GE was trading at 52x estimates, at ~$52 and had a market cap of ~$500 billion, and revenues of a little more than $110 billion.
Ford was trading at 4x estimates, at ~$25 and had a market cap of $44 billion, and revenues of $160 billion.
If you cap weight an index of F and GE, you get an index P/E of 48x since the index is 92% GE.
However, if you GDP/revenue weight the index you get a P/E of 23x, since the index is now 59% F.
Effectively what happened to the Indecies in the late 90s was the largest cap became the most expensive as investors tracking historical price performance took money out of the Fords of the world and bought the GEs. The cap weight bias got so bad that the 40 biggest market caps in the S&P500 accounted for more than 50% of the index, while accounting for less than 10% of the 'GDP' value. The average stock was actually getting cheaper while the top quintile was getting more and more expensive. Classic steal from the poor and give to the rich.
Has it been brought up on these boards that CNBC is owned by GE?? There's a conspiracy theory that has plenty of validity!!
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The markets were certainly out of whack, and the Fed, SEC, Treasury, or at least AIMR , or god help us the News! should have been more vocal about the potential problems.
Hedonic deflators are a good theoretical idea, nice new stuff can be better than old crappy stuff, but I doubt seriously if they will ever be properly implemented.
The consumer debt problem is a longer term issue that will certainly slow future growth rates, but I have no idea if it has run its course, or if it still has a long way to go. I have been thinking it is a problem since in the mid 80s...
I think you are correct on existing home medians at 160 vs 140, my bad. Out here everything is 800k, so 20k is just a rounding error! Existing outsells new production 10-1 iirc. Perhaps what we should be looking at for afordability is the 20th or 25th percentile. I can't buy a house or I'll screw-up the numbers!
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el freako
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Bristol, European Union
Oct 1999
time: 05:23
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Just thought I'd throw in a bit of analysis I did today:
Trend adjusted GDP per head at current PPPs (trend adjustment made using the D-P function).
data for 1991 and 2001, EU average=100%
Canada: 118%, 113%
United States: 147%, 138%
Australia: 110%, 104%
Japan: 117%, 104%
New Zealand: 87%, 83%
Austria: 106%, 111%
Belgium: 106%, 109%
Denmark: 112%, 114%
Finland: 102%, 104%
France: 113%, 101%
Germany: 105%, 104%
Greece: 61%, 64%
Iceland: 112%, 111%
Ireland: 77%, 111%
Italy: 105%, 102%
Netherlands: 103%, 114%
Norway: 121%, 123%
Portugal: 63%, 70%
Spain: 80%, 84%
Sweden: 107%, 102%
Switzerland: 133%, 118%
United Kingdom: 100%, 103%
What is striking is that the only country not in the EU to gain on the EU average was Norway - every other country saw slower income growth.
(source: OECD)
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09-01-2003 09:46
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