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Great essay..... :o)
-----Original Message-----
From: Charles Wright <redeemed10@xxxxxxxxx>
To: omega-list@xxxxxxxxxx <omega-list@xxxxxxxxxx>
Date: Tuesday, August 11, 1998 9:23 AM
Subject: Re: Irrational exuberance
>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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