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History provides a guide. Some things never change, human nature
being one of them. If an understanding of what the secular trends
were prior to the collapse of the Roman Empire doesn't cause one
concern if he sees the same trends in his time, he's in denial. Mark
Twain said it better: "History may not repeat itself, but it sure
does rhyme."
At some point, because of real credit spreads (cost of capital), asset
prices that aren't supported by real returns (and debt that can't be
really serviced) must be revalued to the point where owning an asset
is a profitable investment (i.e. the cost of the asset must decrease,
or its ability to cover the cost of the capital required to own it
must increase). If the asset were purchased with borrowed capital,
and it is marked to the market, the result may be a demand by the
lender for more equity, which will force the asset on to the auction
block, which will in turn mean a lower mark to the market next time.
It can turn into a funnel.
In periods of heavy speculation, too much is often paid for ill
advised assets -- that is, assets that only generate returns in
speculative markets (when much of the active capital is speculative)
-- what is a square foot of office space worth in Hong Kong right now?
Apparently, not nearly what it cost to build it).
See "The trouble with Prosperity," James Grant. There are real,
tangible, "laws" of economics that cannot be denied. They may be
suspended temporarily (i.e. in socialist and communist systems, or in
our own deficit system) but not forever. Our national debt is
growing, not shrinking. Just because we've managed, by fiscal
trickery, to put off repaying it doesn't mean we won't have to (or
won't be foreclosed upon).
It will take an entirely new currency (read: a coercive
redistribution of wealth) to repay our debt. It is occurring even
now, as in the tobacco settlements, state lotteries, antitrust cases,
environmental assessments,etc.
Perhaps we are in the middle of a big consolidation range for a leg up
to 19,000 on the Dow. Many fortunes will be made. But does that mean
that the economy is really worth it, in terms of real money? No way.
What will those fortunes be worth, really?
There is more to the picture than this. Economic prosperity that is
had at the expense of accounting fictions and ethical compromises
exacts a tangible toll on the soul of a nation -- yes, this cannot be
measured in dollars. A man that gives his son a $25,000 debt for his
18th birthday has made him a bondservant. And this is what we (a
generation) have done to our future generations.
Though this sort of talk doesn't wash among objectivists, atheists,
secular capitalists, perhaps most people. But it is common sense.
The truth is that economics is a moral issue...and bad economics has a
moral cost. Econometrics, on the other hand, is 'amoral' in that it
seeks to reduce the subject of economics to a science of numbers,
which it is not.
Boy, do I expect to get mail on this one!
Charles Wright
---Patrick Gamble <pgamble@xxxxxxxxx> wrote:
>
> Just what are the factors that decide what the 'right'
> PE ratio is?
>
> Was Japan overpriced at 32,000? Is it overpriced at
> current levels?
>
> Seems to me there is no very sound theory to decide
> what the level 'should' be as the link with bond yields
> seems to have broken down.
>
> If there is no theory, how can the market be 'expensive'
> or cheap.
>
> IMHO.
> be described as expensive
>
>
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