Stock Market Valuation Exceeds Its Components' Actual Value

An anonymous reader writes: James Tobin, a Nobel Prize-winning economist, developed a concept called "Q-value" — it's the ratio between two numbers: 1) the sum of all publicly-traded companies' stock valuations and 2) the value of all these companies' actual assets, if they were sold. Bloomberg reports that the continued strength of the stock market has now caused that ratio to go over 1 — in other words, the market values companies about 10% higher than the sum of their actual assets. The Q value is now at its highest point since the Dot-com bubble. Similar peaks in the past hundred years have all been quickly followed by crashes.

Now, that's not to say a crash is imminent — experts disagree on the Q-value's reliability. One said, "the ratio's doubling since 2009 to 1.10 is a symptom of companies diverting money from their businesses to the stock market, choosing buybacks over capital spending. Six years of zero-percent interest rates have similarly driven investors into riskier things like equities, elevating the paper value of assets over their tangible worth." Others point out that as the digital economy grows, a greater portion of publicly traded companies lack the tangible assets that were the hallmark of the manufacturing boom.

Comments

Does not understand the market, obviously.

[Anonymous Coward]

Stock valuations are based not only on actual assets, but future growth and earnings potential. If I buy company X, it's because I think company X has a good product, business plan, and management and is going to be able to grow faster than inflation and faster than their competitors. I certainly don't want them to liquidate their current assets and give me my money back.

Re:Does not understand the market, obviously.

[Enry]

Yeah, we're done with this article.

Re:Does not understand the market, obviously.

[ScentCone]

Stock valuations are based not only on actual assets, but future growth and earnings potential. If I buy company X, it's because I think company X has a good product, business plan, and management and is going to be able to grow faster than inflation and faster than their competitors. I certainly don't want them to liquidate their current assets and give me my money back.

You've missed an important detail. They're not comparing the stock valuation to the assets alone. They're comparing the stock valuation to what the company would sell for if purchased. When you sell a company, you're also selling the "good will" and other value inertia things like brand familiarity, the value that will come from having the company in the future, etc.

Re:Does not understand the market, obviously.

[Anonymous Coward]

And those who "understand the market" don't believe that past investors invested on future growth and earnings potential? Kids these days. They are what drive the bubbles, but I ain't mad - I've got money riding on a reverse S&P 500 index.

Re:Does not understand the market, obviously.

[Anubis IV]

Stock valuations are based not only on actual assets, but future growth and earnings potential.

That's the theory. In practice, it looks and smells like Mr. Market more often than not.

Re:Does not understand the market, obviously.

[Anonymous Coward]

All the more reason this is a good indicator of potential bust. The more people are betting on future rather than current value the more speculation is involved. The more speculation involved the harder the crash when people realize companies aren't worth that much and won't all be able to grow at expected rates.

Re:Does not understand the market, obviously.

[fustakrakich]

Man, it's faith based (you might have to go through google), and one of the best 'new' scams in the business. It could even cause the expected burst this fall or next summer. Great stuff.

Re:Does not understand the market, obviously.

[Austerity Empowers]

, but future growth and earnings potential

But most of that future growth and earnings potential is going to come from some other company on the market. If you make a smartphone, you are taking money from other smartphone companies, as well as to some degree companies that make computers. Once you get successful enough, you may also be in a position to reduce margins to the companies who provide components for your smartphone, so you're taking their money too.

A little bit of money comes from "new" sources, the larger you are the more that may be available, but generally your profit comes at someone elses loss. Part of why Wall St. tolerates only a small amount of competition and we always end up with 2 or 3 real competitors.

Re:Does not understand the market, obviously.

[Anonymous Coward]

The problem is that what goes in must come out:

Say a company has $100 in assets. Its stock value winds up $110. Someone pays for the gains in that stock, and that will be future shareholders, or the taxpayers. The company magically doesn't get $10 extra because people say it is worth that much. It only means someone is going to get soaked for that $10 sooner or later.

Lets ask ourselves this: In 1930, the stock market was in the $200 range. Now, it is over 100 times that. Realistically, is this sustainable, especially with the fact that China wants their own banking system, so they can control the world's markets, and the fact that there are a lot of bubbles, especially with the dot.com 3.0 bubble of ad-supported stuff, as well as real estate bubbles (Austin for example is having another California... but Austin doesn't have the infrastructure to handle the growth.

Stocks are like any other scheme... people coming in make money... but that money made comes from -somewhere-, and those are the people who get soaked when their stocks hit the skids. GM is a good example of that. The people who had that in their pension paid with their own cash other people's gains.

Zero sum system - for someone to gain, someone else gets soaked.

Re:Does not understand the market, obviously.

[Marginal Coward]

Right. It's been rare in recent decades for even individual companies to sell for less than their asset value, for precisely the reason you mention: that nearly any functioning business is worth more than the sum of its assets. The canonical example is Coca-Cola (KO), which Yahoo Finance indicates is currently selling for a price-to-book ratio of 6.28. Should we expect something like the Coca-Cola company, which has had a strong business for over a hundred years consisting of a brand name known worldwide, a worldwide distribution system, and of course its famous "secret formuler" to sell for just the price of its property, plant, and equipment? Of course, Coke is an extreme example, but it illustrates a point that could be made less emphatically for nearly any successful business.

Although I don't disagree that the market is fully valued or even over-valued at the moment, this single q statistic isn't any reason to panic. As indicated in TFS, it's attributable in large part to near-zero interest rates. With nowhere else to go to earn money, investors flock to the stock market. That certainly has some potential for inducing a bubble, but I don't think we're there yet. These extremely low interest rates can't last forever, but since they're controlled by policymakers who are keenly aware of the implication of raising them, no interest-hike-induced stock market panic is likely to ensue. So, move along Citizens.

Re:Does not understand the market, obviously.

[NostalgiaForInfinity]

Tobin's q uses book value. That can indeed include "good will" and other intangibles. Of course, those numbers are just guesses and there are many motivations for companies to guess high or low. Furthermore, different industries account for these differently. Furthermore, "good will" and other intangible assets often can't be sold. For example, the "good will" towards Nokia changed entirely when they company was acquired by Microsoft. Altogether, the q value seems pretty useless, since its denominator is pretty inconsistent.

Re: Does not understand the market, obviously.

[ArmoredDragon]

You're referring to the law of threes. That isn't due to collusion, rather it's due to how consumers tend to develop brand loyalty. It manifests particularly hard in the tech sector where independent developers tend to pick two platforms to support and ignore the rest. Microsoft has been fighting this tooth and nail with their windows phone platform, which can't seem to catch a break, because the other two players have everybody's attention.

Re:Does not understand the market, obviously.

[Anonymous Coward]

1999 called and wants it's silly justifications back

Re:Does not understand the market, obviously.

[Mr D from 63]

I only scanned the article, but what I think may be missing is the shift to outsourced manufacturing. Apple has few manufacturing assets, compared to the old days when IBM was building all of its own PCs. If that manufacturing asset is private, it won't show up in the totals. If it is public it will show up in the totals, but may be valued lower due to location or other factors. And finally, the efficiency of the asset to deliver more for less is not factored in. We should expect the trend to continue as long as mass centralized outsourced manufacturing increases.

Re:Does not understand the market, obviously.

[Anonymous Coward]

Stock valuations are based not only on actual assets, but future growth and earnings potential.

Stock prices are based on supply and demand.

The current total market cap for NYSE and NASDAQ is somewhere around $16 trillion. The current assets of Social Security (OASI) is around $1.6 trillion. What happens to the prices of all the stock in these markets if the Republicans invest OASI into it as they keep agitating to do? How would that change in stock pricing reflect a change in future growth and earnings potential?

Re:Does not understand the market, obviously.

[Anonymous Coward]

Stock valuations are based not only on actual assets, but future growth and earnings potential. If I buy company X, it's because I think company X has a good product, business plan, and management and is going to be able to grow faster than inflation and faster than their competitors. I certainly don't want them to liquidate their current assets and give me my money back.

Ah, let's be honest for a moment.

When was the last IPO announcement you heard that the valuation was anywhere near a reasonable number?

Regardless of this future potential you speak of, companies that manage to have a fucking app go viral are not magically worth eleventy gazillion dollars.

Oh, and that whole liquidate comment. Whether you want that or not isn't up to you as an investor. In fact, it's not even up to regulators that control monopolies anymore because we don't care about controlling monopolies, legal or otherwise. If an existing monopoly wants to buy you up today and liquidate everything you have, they'll do it, and with a smile knowing they can no matter what.

Re:Does not understand the market, obviously.

[ChrisMaple]

The stock market is demonstrably not a zero sum system. It represents, roughly, the ownership of all production of goods and services. It increases in proportion to the population multiplied by average purchases (i.e. the GDP), both of which have been increasing over time.

People make stuff and do things to improve their lives. That activity is mostly in the context of investor-owned corporations, which is reflected, long term, in stock prices.

Re:Does not understand the market, obviously.

[Actually, I do RTFA]

Should we expect something like the Coca-Cola company, which has had a strong business for over a hundred years consisting of a brand name known worldwide, a worldwide distribution system, and of course its famous "secret formuler" to sell for just the price of its property, plant, and equipment?

Well, that's a pretty bad example. Coca-Cola famously sold off all it's bottling plants, etc. The fact that it has a monopoly on supplying syrup to a second company makes it harder to do this kind of comparison.

But secondly, book value includes intangibles, such as goodwill, brand name, distribution chain, etc.

Re:Does not understand the market, obviously.

[Firethorn]

Right. It's been rare in recent decades for even individual companies to sell for less than their asset value, for precisely the reason you mention: that nearly any functioning business is worth more than the sum of its assets.

Part of the deal with this, I believe, is that if a company has a Q-value of less than one it's a prime indication that it would be worth more broken up, and is thus a prime target for corporate sharks to come in and liquidate it, dissolving the company or selling the remnants to suckers after having sucked the worth out of the company.

A q-value of less than 1 is an indication of a company that's NOT efficient with it's assets.

Re:Does not understand the market, obviously.

[Maxo-Texas]

You are ignoring consumers giving their money to companies for goods and services.

The most obvious case are companies that pay dividends but earnings growth and resulting stock price growth also represent the same thing.

Compare a CD / Bond to a stock.

The CD pays 1% per year. If you put $10,000 into it, you will get $100 per year in interest.

Say you have a company that pays $200 per year on $10,000 of stock. Is $10,000 a fair price? Or are people likely to bid it up until it is paying about 1% per year? There is some risk, but it's likely the stock will go up until it pays a rate closer to the CD. So the stock might go to $18,000 and pay you $200 per year.

Now say the company is increasing earnings by 10% per year. So it will pay $220 next year, $242 the year after that and so on. So reasonable people will now pay even more for the stock. It might go up to $19,000 this year (and more in the future).

Finally, say bad news -- the companies earnings are not going up to $242 as planned but instead are dropping to $180 because of a new invention, new law, or new competitor. And it's earnings are likely to be $160 the year after that. So now, a reasonable person might only want to pay $14,000 for the stock.

---

Just to make things interesting make a lot of this a matter of opinion and not facts. A new law *may* be passed... a new competitor *may* start up. And different people have different opinions on how likely that is to occur.

---

And then add oscillation around the "ideal" value. Every time the stock price moves- it slightly overshoots. it takes it time to stabilize on a ideal value and by the time it is going to- some fresh news changes the ideal value. And of course-- occasionally a majority of people will be afraid and unwilling to buy the stock at it's ideal value and other times a majority of people will be irrationally exhuberant and willing to buy the stock above it's ideal value.

---

Anyway.. long story short- it's not a pure ripoff. For the most part, you don't "get rich" but you do preserve purchasing power adjusted for inflation. Mainly, you need to save hard. People who try to get rich are gambling- some will win big- many will lose big.

Re:Does not understand the market, obviously.

[Anonymous Coward]

Not really: Most valuations are primarily based on supply and demand.

As someone who've spent 5 years researching the topic more than full time (that's a very short time compared to those who find success in this game), there's no lack of indicators like these, ie. indicators that seem to predict market tops and bottoms when looked at in hindsight. However, looking at past performance and market data, there's roughly 50% chance of finding the very pattern you're looking for at any given time and at any given timeframe / time period. The markets may reward fools and punish geniuses for long enough time to humble the latter and enrich the first.

However, I've come to realize the markets are not a function of efficiency and rationale, thus, using any such notions to evaluate future prices, ie. wether prices are too high or too low, is a fools game. If you believe some fundamental data leads price, you need to compare them with price. Quite often, price leads any fundamentals enough to make them meaningless to base trading decisions on. This is a function of supply and demand playing out in the market place, and not the fundamentals themselves.

Re: Does not understand the market, obviously.

[DrLang21]

When you sell a company, you're also selling the "good will" and other value inertia things like brand familiarity, the value that will come from having the company in the future, etc.

These days it is often far dumber than that. Unless a company is paying a dividend, the only value you have is what someone else is willing to pay for it. In the age of worshiping the Almighty Growth, dividend payouts are more scarce than they once were and you can't expect a fledgling company will ever pay out. Stocks like that are little more than trading cards. It's just a popularity contest slightly regulated by supply. Actual earnings reports in these cases are only meaningful in the sense that people make buying decisions based on them, but with them having no direct impact on actual value.

Re:Does not understand the market, obviously.

[Darinbob]

Future growth and earnings potential are all calculated by analysts who don't have a clue about how a real company works. They're as much influenced by hype as Apple customers are. The analysts are helping with the trend away from rating a company based on actual profitability and reliable dividends (investment) and towards raw growth and potential for growth (gambling). Which is why companies that have never turned a profit can have high valuations and companies that are solid and sustainable are not exciting enough to be highly valued.

Re:Does not understand the market, obviously.

[complete loony]

The stock market increases when people borrow money to buy into it. It is the biggest ponzi scheme around.

Re: Does not understand the market, obviously.

[BlueTrin]

Sure you do ... You must have done very well !!!

Re:Does not understand the market, obviously.

[cheesybagel]

A lot of us know that Apple stock is inflated yes.

Re:Does not understand the market, obviously.

[pepty]

Stock valuations are based not only on actual assets, but future growth and earnings potential. If I buy company X, it's because I think company X has a good product, business plan, and management and is going to be able to grow faster than inflation and faster than their competitors..

That's a very quaint view, which is definitely not held by the parties which conduct the most trading. Stocks' values are mostly determined by what institutional traders think will happen to the stock's value in the next 3 seconds to 30 days.

Re: Does not understand the market, obviously.

[fatwilbur]

Stocks like that are little more than trading cards

It only seems this way because you're a tiny player in the market. Believe me, those common shares come with significant legal rights, and if you collect enough of them (usually 10% will do) you can elect the board of governors to be you and your friends and run the company.

Re:Does not understand the market, obviously.

[Anonymous Coward]

This is actually "Fundamental Valuation": take the NPV of future profits or revenues (depends) plus current assets and that should be the stock price. It DOES account for things other than liquidation value - it takes ALL FUTURE REVENUES into account.

This is completely reasonable. In fact, if any stock price above this, that price is 100% fantasy because if you can't attain even these optimistic future revenues there is ZERO possibility that you are correctly priced. For example, if you assume that Amazon could magically attain growth rates of 100% over the next 30 years at even the outlandish 20% interest rate, you will find that Amazon stock is crazy overpriced and always has been.

It really gets down to whether you believe in rationality or do you believe in rainbows, unicorns and the Easter Bunny. It's that black and white.

Re: Does not understand the market, obviously.

[Anonymous Coward]

That's the point, they couldn't afford to give you your money back if everyone else also sells.

higher value, pre-assembled?

[Anonymous Coward]

a sandwich is more valuable than two slices of bread.. and it's ingredients: it's component assets.
Surely* this is not a surprise? Am I missing something here?

*Don't call me Shirley

The value hinges on the definition of "asset"

[Anonymous Coward]

Intellectual property, trademarks, goodwill and copyrights are propping up stock prices like you wouldn't believe.

Re:The value hinges on the definition of "asset"

[bobbied]

Yea, "Profit" and "Earnings" have NOTHING to do with this....

Assets valuation?

[Kwyj1b0]

I wonder how they value assets? Clearly, sharing a few songs is theft of several million dollars - which makes my MP3 player a treasure trove. Also, patents and other intellectual property cannot be cheap at any price.

I'm curious as to the exact valuation methodology. The links take me to the federal reserve site, which links to balance sheets. While it does list intellectual property, how do you accurately value something that isn't sold/bought on a market? If a company holds a patent that they never try to sell, how can it be valued accurately?

Re:Assets valuation?

[wienerschnizzel]

And it's not only about intellectual properties. I find that the value of a company lies in large part in the capabilities of its employees, in their productivity, in the ability to adapt to new conditions, in the efficiency of management and the expediency of making decisions and so on. None of these can be readily evaluated. But the stock market still looks for these values to a degree.

For instance, Apple's stock value fell when Steve Jobs died as the shareholders probably fellt that an important manager/designer/marketer left the company for good. But did Jobs count in the proclaimed "actual assets value" of the company in the "Q-value"? Don't think so...

The fact that the Q-Value is so close to 1 would indicate that either the companies are undervalued or that they are inefficient poorly managed monstrosities worth only their liquidation value.

Re:Assets valuation?

[bondsbw]

"Value" and "cost" are separate things that we try so hard to conflate. They look similar but are quite different.

Say you have 50 wheelbarrows and I have none. If I need a wheelbarrow, and you don't need 50 wheelbarrows, then a wheelbarrow has higher value to me than it does to you. I might trade you $50 cash in exchange for the wheelbarrow. You value the $50 more than each wheelbarrow, while I value the wheelbarrow more than the $50.

This is the problem with placing monetary valuation on any object or service; value is in the eye of the beholder, and that includes the value of money itself.

Re:Assets valuation?

[jandrese]

Employees don't really seem to be assets as far as the stock market is concerned. They are an expense that you suffer so the business will still operate. Assets are things that you can sell, like buildings and equipment.

Re:Assets valuation?

[Firethorn]

This is the problem with placing monetary valuation on any object or service; value is in the eye of the beholder, and that includes the value of money itself.

That's why everything ends up being estimates, but with something like a wheelbarrow there's a number of stores you can get a wheelbarrow in, so you end up with a standard price for wheelbarrows, which is the general range where the person who needs a wheelbarrow can count on being able to buy one, and where a person with a wheelbarrow can count on selling it.

So you might 'value' your wheelbarrow at $100, but if the price of wheelbarrows actually traded is around $50, that indicates that you're not looking to sell. If a dude values his at $20, but can sell it at $50, he's probably going to adjust his valuation to ~$50 and sell it at that price.

So the guy with 50 wheelbarrows values them at ~$2500 and puts that on his value sheet. He might value them a bit more, but if he went to liquidate or had to replace the wheelbarrows(theft, natural disaster, accident), that's what they'd be worth.

The idea is that with a large company, unless you have systematic errors, it should be 'pretty' correct in most companies, despite the individual value of things like 'name brand', IP, and such being hard to estimate correctly.

Re: Assets valuation?

[BlueTrin]

Know how and culture can be part of the goodwill of a brand

Valuation is in the eye of the beholder

[ArcadeMan]

Why are people paying different amounts for different crypto-currencies? Why is a Dogecoin worth more than a Reddcoin? Etc.

Re:Valuation is in the eye of the beholder

[Anonymous Coward]

That is simple. Dogecoins come from a dog's butt. You follow the dog around and scoop them up into little plastic bags. Reddcoin on the other hand is based on the value of the Ruble - and as we all know, the Ruble is in free-fall and is therefore worth less than dog droppings.

Re:Valuation is in the eye of the beholder

[Anonymous Coward]

Because more people want to use Dogecoin. The value of each cryptocurrency comes mostly from its features and network of users.

Re:Valuation is in the eye of the beholder

[pla]

You could ask the same about why a US dollar has a higher value than a Mexican Peso.

From what I read elsewhere...

[__aaclcg7560]

The small investors are sitting on the sidelines, keeping their cash from inflating and popping a bubble. Stock buybacks are keeping the market afloat, as many corporations want to keep Wall Street happy than reinvest the money back into the economy to keep Main Street happy.

Re:From what I read elsewhere...

[Anonymous Coward]

Well then small investors are dumb, because they are missing the good returns. I'm not sure where you read that anyway, because how would sitting on the sidelines "keep their cash from inflating"? Makes no sense. But you will get +5 insightful I am sure.

Re:From what I read elsewhere...

[__aaclcg7560]

Past bubbles were inflated and popped when small investors rush into the market because they don't want to miss out on the frenzy, not realizing that pros have already made their profits and moved on to something else. The current market isn't being inflated by the small investors, but corporate buybacks that aren't being reinvested back into the real economy.

http://www.theatlantic.com/politics/archive/2015/02/kill-stock-buyback-to-save-the-american-economy/385259/

Re:From what I read elsewhere...

[smoot123]

Stock buybacks are keeping the market afloat, as many corporations want to keep Wall Street happy than reinvest the money back into the economy to keep Main Street happy.

Buybacks are the new dividend. In both cases, the board is saying "We've earned more money than we need (that's kinda the point) so here's your return for investing in us." The investors can then choose to invest somewhere else or spend it all on blow and hookers. All it's changing is who gets to make the investment or consumption decision (oh yeah, and the tax implications).

Sounds good to me. Unless the board needs to re-invest the money in the company, they should give the excess earnings to me.

See?

[Unknown74]

I keep telling everybody the stock market operates in la-la land. Here's the proof!

Re:See?

[bobbied]

I keep telling everybody the stock market operates in la-la land. Here's the proof!

No it's not..

Where "book value" is an important component of a company's stock value, so is Price to Earnings. "How much money are they making?" is a more important question. You can have nearly zero book value, but if you are raking in the cash with a low cost of sales your company is worth a lot, even if it has no real assets.

That's not to say P/E ratios are not at pretty high levels too, but some academic's statistics isn't proof of anything.

sounds like a decent number

[Anonymous Coward]

Sounds like a decent number to take into account what a company is worth.

I know many times I take into account debt to savings ratios that companies have. A company that owns lots of 'land' may be debt heavy because they are using loans to drive the business. But someone who has been in business for 80 years and owns all of its buildings should have low debt unless they are rebuilding something.

It is just another number to take into account like PE. But you need to understand what sort of business it is.

CRASH

[Anonymous Coward]

A crash IS going to happen, but it's the dollar collapsing that will cause it

Re:CRASH

[Dunbal]

Crashes are part of the cycle. Crashes are survivable. In fact, crashes are the absolute best opportunities for wise people. If you're smart, you are always in a position to take advantage of the next crash which is the only time you can buy stocks at near what they are actually worth. If you're not so smart, you're all in at the top and the ride down is one margin call after another. Most people are not so smart, so they're afraid of crashes.

Re:CRASH

[Required Snark]

You almost got it right:

crashes are the absolute best opportunities for rich people.

. Everyone else gets screwed.

Re:CRASH

[ChrisMaple]

55% of Americans are invested in stocks. Are you saying that 55% of Americans are rich?

Re:CRASH

[Anonymous Coward]

Crashes are great if you are insulated from the economy (for example, on a trust fund.) However, when a crash happens, the first things businesses do is bust out the axe and start laying off people. Not many people are in a position that they can profit from a crash.

Re:CRASH

[Bob the Super Hamste]

crashes are the absolute best opportunities for rich people.

Everyone else gets screwed.

Really?
While most would consider my household to be rich (top 10% of households) it isn't one that appears to be rich, modest house, older but reliable vehicles, trying to save for retirement and college for kids, etc. It is however a comfortable upper middle class life with some nice things every now and then, but not top 1% or top 0.1% type of thing that people envision in their minds eye.

Since the crash of 08 various accounts have over tripled from their pre-crash highs and we remained in the market the whole time. We have been saving the same amount of money each month for years and buying when the market just took a dump is great as when it finally decides to rebound you own a whole shit ton of assets that were previously inexpensive and are now rising. A little while ago I went to do another prudent thing and re-balance my work 401k and got to see a nice big number and then asked my wife if she wanted to see a big number as a joke.

Re:CRASH

[Dunbal]

If you're "invested in stocks" then you are going to take a beating in the next crash. It's the guy who is NOT invested in stocks and gets invested near or at the bottom who gets rich. And of course the rich guy who has cash in reserve who will take a beating on his stock portfolio during the crash, well he's the guy who cashes out his bonds at a premium when everyone moves out of stocks and into the "safety" of bonds, takes the cash, and buys stock at ten cents on the dollar. Rinse, repeat. Always do the opposite of everyone else.

Re: CRASH

[BlueTrin]

I take it you don't take your own advice, you would have noticed that without being invested in stocks for long periods of time you would lost much to inflation. A better solution is to use defensive stocks.

The Component Ph

[pubwvj]

The excess above the ratio is the percent of Hope called Ph not to be be confused with PhD or pH. This value of Ph represents optimism for the future and is directly correlated with the height of skirts above women's knees based on historical data related to how well the economy is performing.

Re:The Component Ph

[AthanasiusKircher]

This value of Ph represents optimism for the future and is directly correlated with the height of skirts above women's knees based on historical data related to how well the economy is performing.

Except the skirt theory has problems as an indicator -- it worked well up to the 1960s or so, but other economists have proposed a "lipstick index" (women buy more small luxuries like lipstick when the economy is bad) to the idea that the height of heels is a much better predictor (dubbed by some the "footsie" index... har, har).

Apparently heels go up in lean times, while skirts go down. But given the better correlation with heels, it seems that the skirt phenomenon may not be the driving trend. If heels go down, women's legs appear shorter, thus requiring skirts to go up to maintain constant L (i.e., the "legginess" factor). QED.

Can I have my Nobel Prize in economics now?

Re:The Component Ph

[gerddie]

Can I have my Nobel Prize in economics now?

There is no Nobel price in economics

Re:The Component Ph

[AthanasiusKircher]

There is no Nobel price in economics

Yeah, yeah... I know the controversy. It was partly ironic in my post which was obviously intended to be funny.

On the one hand, I think most of the field of "economics" has severe methodological problems. On the other hand, I find those people trying to claim it's "not a real Nobel prize" are making a bogus argument too. Yes, it wasn't in Nobel's will, but who is Nobel to determine what fields deserve prizes for all time? It's not like the "peace" prizes are awarded with any accountability for intellectual rigor either. And the Nobel Foundation authorizes these prizes, chooses them basically using similar criteria to other fields, and awards them on the same day in the same ceremony.

Do I think there *should* be a Nobel prize for economics? Probably not. But pretending there isn't one is just stupid, until the actual organization that regulates Nobel prizes decides it will no longer award one or will call it something else.

Not too interesting

[Anonymous Coward]

Considering stock price has always been a higher value than a companies balance sheet (Assets - Liabilities).

So how does this turn Q value on its head when subtract that actual value of the assets after paying all debts? Companies with assets greater than the value of the stock+debt were always at risk of being bought up and liquidated.

So whats new here? What am I missing?

Re:Not too interesting

[bobbied]

So whats new here? What am I missing?

Not much, of course chicken little is always talking about the sky falling and that little boy keeps crying wolf. Usually they are both wrong... Usually...

Look, a stopped watch is right twice a day and the stock market will go up, and it WILL go down so the bulls and bears have their share of days they are right. The issue here is if you know how to manage things so you don't loose too much when the markets don't do what you expect. The average casual investor doesn't manage their risks well and are usually the ones who get stuck.

My advice to investors is that you KNOW WHAT YOU ARE DOING, or only use money you can loose. Of course this applies to ANY investment, not just stocks.

pay no attention to the man behind the curtain.

[nimbius]

Similar peaks in the past hundred years have all been quickly followed by crashes.

statistical historical trends, the bedrock of science rears its ugly head oncemore...

Now, that's not to say a crash is imminent experts disagree on the Q-value's reliability.

s/experts/investors/. Laszlo Birinyi is an investor, but for all intents and purposes economics shouldn't be misconstrued as a science. most of it is, at best, premised on laughably distorted statistics designed to reduce uncertainty among investors and promote open trading on stock exchanges. The employment of utterly bullshit mathematics in the art of economics is the reason high speed trading systems have the ability to "undo" sales or purchases with impunity. Large firms also have this ability because without such a control feature markets could be plunged into a dark age from which no amount of bailout would save the cloistered elite. Economics is the sack of magic chicken bones that investors wave over the market and quickly dismiss once wrack and ruin occur as "events that could not have been foreseen."

Re:pay no attention to the man behind the curtain.

[Livius]

The problem with 'economics' is that the word is used to identify two mutually-exclusive concepts:

The scientific investigation into human responses to scarcity, and

Mathematical techno-babble designed to disguise the wishful thinking of politicians and the wealthy who own politicians.

By random chance, the two are occasionally the same thing.

Re:pay no attention to the man behind the curtain.

[fustakrakich]

Ah, but the science of economics is knowing how to successfully exploit the human response to scarcity, usually by creating some

Re:pay no attention to the man behind the curtain.

[SpankiMonki]

Well said. Meanwhile the real metric, earnings, is at a reasonable level. SP500 P/E at 17x next year's earnings is still buyable.

Nothing to see here, carry on.

I do agree with you that the best metric is P/E, but...

P/E for next year's earnings? Didn't someone use "bullshit mathematics in the art of economics" to come up with that estimate? Don't you contradict GP's main point?

The fact is, all the largest trading firms in the world employ teams of economists - and they don't do it in order to throw their money away on a "sack of magic chicken bones".

Re:pay no attention to the man behind the curtain.

[Anonymous Coward]

The article you linked to doesn't blame the economist per se, it blames the US media for creating alarm among the great unwashed:

"...the American public realized that there had never been a shortage to begin with: rather, it had been artificially created by a pop culture frenzy.

Re:pay no attention to the man behind the curtain.

[SpankiMonki]

... but for all intents and purposes economics shouldn't be misconstrued as a science. >

Sorry, game theory has demonstrated it's predictive ability for some time now.

But whether economics is science or not is beside the point. The discipline has proved it's utility over and over, and the marketplace recognizes this.

BTW, your comment about economics as the reason that "high speed trading systems have the ability to undo sales or purchases with impunity" is complete and "utter bullshit". Perhaps you should go back to whatever "science" you feel is valid and stay out of finance.

Re:pay no attention to the man behind the curtain.

[fustakrakich]

I'm not talking about the pundits. The ones who set policy are who the media serve.

Re:pay no attention to the man behind the curtain.

[Anonymous Coward]

Yeah, well it seems to me you were talking about the economist and insinuating he was responsible to the shortage scare. The article you linked to doesn't support that assertion.

Re:pay no attention to the man behind the curtain.

[Bob the Super Hamste]

I'll just leave this here.

Re:pay no attention to the man behind the curtain.

[fustakrakich]

The article I linked to was a facetious but factual analogy of how it's done. Scarcity is artificially created. Using the media to create a panic or a rush is nothing new. None of it belies the fact that the Stock Market is a scammers paradise, again pumping up junk bonds.... POP!

Re:pay no attention to the man behind the curtain.

[Anonymous Coward]

Scarcity is artificially created.

You're either joking (I don't get it), or you're out of touch with reality.

None of it belies the fact that the Stock Market is a scammers paradise, again pumping up junk bonds.... POP!

OK, I can kinda get behind that - except for the junk bond stuff.

Re:pay no attention to the man behind the curtain.

[complete loony]

Economics, in it's current form, is not much better that Ptolemy's vision of an Earth centric universe. Sure you can add cycles to explain the observations of planets, but the paradigm is not useful for making predictions.

Economists need to learn how to model the economy as it actually is, instead of making so many simplifying (and wrong) assumptions as to make their models useless. They need to learn from fields like weather forecasting, where complex dynamics have been embraced.

Re:pay no attention to the man behind the curtain.

[fustakrakich]

No joke... Scarcity is nothing but the result of a dispute over the price. Or maybe you weren't around in '73 or '79. Or maybe you didn't follow the Enron thing. It's simple manipulation. Why would you doubt such a thing? Because they deny it? And you believe them? Eh, your choice. But you only show that you are the one that's out of touch.

Re:pay no attention to the man behind the curtain.

[Anonymous Coward]

You evidently have never had a Market Maker undo one of your transactions.

What else is new?

[no-body]

Stock- or commodity market values are speculative, Netherlands(?) tulip frenzy comes to mind.
That this system fails does not seem to enter peoples mind since the greed of getting rich or more rich overrides everything else.

What one my think about is who will have to work and pay for all those "profits" taken and why the "bubble up" to the top - what is it - 1 % works to groom the cream of the crop even more and the propaganda of "trickle down" is a fairy tale.

Re:What else is new?

[bobbied]

Oh come on...

The difference here is NOT being rich or not. The difference is in managing your investments and your risks. You can make a LOT of money in stocks, but you have to take huge risks if you want to get rich quick. Huge risks mean failure is likely, so if you don't want to be poor you have to manage your risks.

Rich people generally know how to manage their risks, or they don't stay rich very long. The trick to making money is not being lucky, but being smart.

Stop approaching wall street like a giant casino where you place your bets and spin the wheel. LEARN about investing, understand the investments you make and learn about ways to limit your risks. Because until you learn what you are doing, you may win some, but you WILL loose more.

It's like learning card counting and playing blackjack. FIRST you need to learn the rules and play the odds to even the risks, then you can learn to count cards to get better odds. But it takes time to learn each new step. Investing is the same kind of thing...

Don't have time to learn all this? Then stick with letting the pros manage your money for you and stay in those mutual funds, preferably those with low expenses and good rates of return.

Re:What else is new?

[no-body]

Yawn.... look at the history, the holy cow of "investing", stock market, mutual funds, compound interest, and what else have you on the current favorite fairy tales resulting in periodic crashes and always the larger part of a population is at a disadvantage and suffering.

There is no doubt that the wealth of the larger part of general population along with effective income is shrinking and may have never been different - the so-called American Dream may have been working for a short period after WW II and became another pipe-dream as it is now.

Just look at the US "democracy" - a totally corrupt undertaking; every politician is "bribed" or won't exist.

A consequence of what? Amassing of wealth and power in a small segment of population and all this is driven to a great part by the hyped Indexes where ups and downs are announced on all public media and people getting hypnotized by it's moves from early childhood on, imprinted for life as a religion.

Dream on....

   

Re:What else is new?

[bobbied]

And the alternative is?

Nobody out there claims capitalism is perfect, surely there are problems with it. However, I dare you to look though history and find any better examples of an economic system that works long term.

All the "solutions" to the above problems (perceived or real) don't work out so well. They kill economies, kill governments, and kill lots of people in the process. Give me capitalism, even with the wide gap between the rich and poor, because in that system the poor are better off and there is at least the chance of working one's way above their current station.

Capitalism is the best system we have, even with it's warts..

On the fall of democracy... I think this has been WAY overstated. Politics is not always just about money, though it may seem so at times. There are ways though to "fix" this and I think term limits at the federal level is the best place to start. Say we put a 12 year limit on congress in both houses combined and you are out after that. It won't fix everything, but it will surely make the money going to incumbents get spread around eventually once the member's time is up.

Re:What else is new?

[SpankiMonki]

Rich people generally know how to manage their risks, or they don't stay rich very long. The trick to making money is not being lucky, but being smart.

Rich people generally (i.e, exclusively) pay *others* to manage their risks. I guess you could characterize that as "smart", but it has nothing to do with financial acumen.

Re:What else is new?

[bobbied]

I'm not necessarily a avid supporter of "Think and Grow Rich" but the guy pushing all that stuff is right about one of the major differences between the "rich" and the "not so rich" is mind set.

How many stories have you heard about people who won large sums of money but ended up bankrupt a few short years later? How does this happen? It's how you think about money, and how you choose to live. Change the way you think and manage your money instead of letting your money manage you.

Haven't you seen the news stories of the guy that dies and leaves millions to charity but nobody suspected he had money? One story is about a guy who worked as a janitor all his life, invested wisely and lived modestly and retired with nearly 10 million. How can this guy do this? Was he just lucky? I don't think so, I think the difference was his attitude about money.

I knew an older gentleman in my pre-teen years. He was rich, literally worth tens of millions in today's dollars but you'd never would have known. He drove an old pickup, lived in a log cabin with two bare electric lights and a small wood stove for heat. He spent his days working his ranch, moving cows, cutting and bailing hay and the like. He died about 15 years after I knew him, worth millions, but he lived happy. His secret? Don't let money define you, don't make it the measure of your success, manage it instead of letting it manage you.

Re:What else is new?

[SpankiMonki]

How many stories have you heard about people who won large sums of money but ended up bankrupt a few short years later?

Haven't you seen the news stories of the guy that dies and leaves millions to charity but nobody suspected he had money?

I knew an older gentleman in my pre-teen years. He was rich, literally worth tens of millions in today's dollars but you'd never would have known.

Anecdotal. And none of those anectodes prove that those with the resources to pay others to manage their finance have more expertise than those that don't.

Re:What else is new?

[bobbied]

Never said they didn't. I'm saying that it's about how you THINK about money that really matters in most cases... Drop a boat load of money on somebody and how they think about money determines where they will be in 10 years, not how much you dumped on them in the first place. So, if you are wrong headed about money, it doesn't matter if you make a bunch of it, you will still be poor. If you are wrong headed, you won't manage your money the correct way, you will just spend it. So hiring somebody to manage your assets is really an example of the mindset you need to stay rich, and it is the mindset is what keeps you that way.

Re:What else is new?

[SpankiMonki]

Never said they didn't..

LOL

Re: What else is new?

[BlueTrin]

If it was only a matter of paying the right people why don't you just remortgage and pay them. There is still and element of selection and decision.

Re:What else is new?

[no-body]

... Give me capitalism, even with the wide gap between the rich and poor, because in that system the poor are better off and there is at least the chance of working one's way above their current station.

a - there is research about the spread in income/wealth and societies where this spread is smaller, people are happier, so your claim "better off" = "happier" goes towards pipe dream.

b - your fairy tale about the chance being able to "just work your way up, the opportunity is there", that's the religious opium pipe dream spread creating hope to simple people and if you just look at the reality of the US educational system - equal opportunity for everyone, sure. You can find societies/countries where such a slanted system does not exist and they fare better in life experience.

Re:What else is new?

[bobbied]

Shaking head.... Our education system has failed you...

Goodwill, fluctuating valuations

[davidwr]

Many companies own assets that are hard to value or quickly fluctuate in value so any expert appraisal of the "asset value" of a company should be assumed to have non-trivial "error bars."

Also, some "assets" like "goodwill" are very difficult to measure reliably. Let's take the company that makes Blue Bell Ice Cream. It's got 100+ years of "goodwill" stored up in the minds of Texas Ice Cream and once they get their production going again, their ice cream will fly off the shelf in Texas simply because many customers will buy it "as a show of support".

However, the current recall as "spent" a good deal of that "goodwill": If they have a similar recall any time in the next 30 years, or if they do anything that indicates they don't care about their product's quality, they won't have it nearly as easy a time if they have another corporate disaster.

Price to book?

[goombah99]

How is Q different than the usual Price-to-Book ratio, which formally has the same english definition of the share price to the per-share Asset value of the company? The price-to-book value doesn't go below 1 usually because a leveraged buyout of the company could fund it self by selling off the pieces. The Q-value seems to define assets as replacement value which is unclear. Is replacement value to be taken as what the assets would trade for in their used shape, or what they would cost to buy new.

Re:Price to book?

[Actually, I do RTFA]

Book value is the amount the company could expect to sell its assets for, assuming odd things like "goodwill" being something you can auction off. Other subcategories of book value eliminate the non-transferable or intangible.

Q is based on how much it would cost to replace a company if you had to start from scratch.

These are different. In art, for instance, the cost a specific Picasso was determined at auction to be 180 million. That's its book value. I have no idea how it's replacement value is determined. Is it the few grand it would take to hire an accomplished painter to recreate it pretty well? The 55 grand it takes to use that machine reproduction thing some museums have experimented with? Or the cost of buying and holding a sufficient number of paintings such that in 75 years you had a seminal work of a major artist (minus the liquidation value of the rest of the works)?

Economics is a science!

[Okian Warrior]

Now, that's not to say a crash is imminent — experts disagree on the Q-value's reliability.

Economics is a weird and wonderful science.

Always looking backwards, always telling us *why* something happened, never making future predictions.

In the days since Adam Smith penned his first thoughts on economics, engineers have taken us to the moon, physicists have split the atom, doctors invented antibiotics, philosophers invented human rights, chemists invented plastics, farmers quadrupled the per-acre food yield, programmers invented the internet, and much *much* more.

And economists, always backwards looking, now think that the Q-value might explain past crashes.

What a world we live in!

Re:Economics is a science!

[Okian Warrior]

Also, looking at this graph of Q-ratio, I notice that Q-ratio does not predict the 1992 crash or the 2009 crash (reputed to be a bigger crash than the great depression).

For this hypothesis, what observations would invalidate the predictions made by this theory?

But maybe I'm not spending enough time looking at the numbers, maybe I'm not reading deeply enough.

Perhaps we should look at the "percent from its arithmetic mean", or maybe the "change from its geometric mean", or the "real S&P composite and the Q-ratio adjusted to its arithmetic mean", or the "net worth over market values outstanding"...

All of which can be found on this fine article.

If we look at the numbers in enough ways, I'm sure we'll find something that has a P < 0.05, then we can publish!

Re:Economics is a science!

[khr]

never making future predictions

Economists make never-ending future predictions. Maybe not accurate, but they do make lots and lots of future predictions.

Re:Economics is a science!

[MobyDisk]

In their defense, it is because eEconomics perfectly follows t his Douglas Adams quote:

There is a theory which states that if ever anyone discovers exactly what the Universe is for and why it is here, it will instantly disappear and be replaced by something even more bizarre and inexplicable.
There is another theory which states that this has already happened.

As soon as an algorithm is created that can accurately predict the market, investors will start using it, thus altering the market so the algorithm no longer works.

This kind of economic theory is really attaching a name and a measurement system to a phenomena that is already understood. To say the Q-value predicts bubbles is a bit backwards since the Q-value is defined in terms of bubbles. So it really isn't a predictor of anything, any more than a ruler is a predictor of the length of an object or a scale is a predictor of the weight of an object.

Re:Economics is a science!

[phantomfive]

Always looking backwards, always telling us *why* something happened, never making future predictions.

Economics makes plenty of predictions, and gets them right. MV=PQ is well-tested as a theory, and you can predict things based on that.

The problem is predicting what we want to know......how can we end the recession?, for example. This is like asking how can we make a warp drive? and then proclaiming physics is a failure when it can't answer.

Re:Economics is a science!

[Anonymous Coward]

if you don't know your past, then you don't know your future.

Re:Economics is a science!

[Anonymous Coward]

The scale predicts how much damage the object will cause when dropped on you.

Re:Economics is a science!

[trout007]

Economics is a science with predictive capabilities. The problem is knowing when this science leaves the world of economics and into the unpredictable world of human choice.

Economics similar to physics can tell you what will happen if some action is chosen.

If you let go of this bowling ball it will fall due to gravity. It doesn't say whether you will let go.

Similarly Economics will tell you that creating money out of nothing and giving it to people will cause distortions in the economy . What is can't tell you is if that money will be created, who it will be given to, and what they will spend it on.

It can tell you if you raise the minimum wage above the market clearing wage that marginal jobs will be lost. But it can't tell you what the market clearing wage is, if the minimum is above it, or which jobs will be lost.

Re:Economics is a science!

[Livius]

Adam Smith got so much right that in order for new economists to say anything new, they have to knowingly and wilfully say something they know not to be true.

Re:Economics is a science!

[Anonymous Coward]

It's because economies are a chaotic system. In other words, short range predictions can be made with reasonable accuracy, but anything more than a month or so out is impossible. Too much can change due to unforeseen events.

A good example of this is the recent oil price crash. Before it happened, it was merely a thought probably being bounced around the table in private at the Saudi King's meeting room, and no-one knew about it. Then it actually happened, and it for a time sent shockwaves throughout the world economy.

Now imagine trying to predict stuff like that? Yeah, didn't think so.

Re:Economics is a science!

[Anonymous Coward]

Which is why so much of economics is snake-oil masquerading as mathematics.

If it ain't predictive, it ain't science.

(Cue the AGW lightweights...)

Re:Economics is a science!

[Tablizer]

The problem is that economics is tied to human behavior, and human behavior is part of the science of psychology and social science, which are still in an infant stage because we don't really understand how the human brain works; and measuring the impact of changing fads and culture and opinions of the masses is tricky.

In short, it's doing science with too many variables to isolate and tame in a systematic way. Intuition and guesswork thus have to be the substitute in many cases.

For example, let's take the analysis of Keynes-style stimuluses. The history of them doesn't look that good on paper, but it may because researchers cannot factor out the general drag on the economy from a recession. Stimuluses are usually used if it looks like a recession is coming or growing worse. The recession itself is a drag on the economy such that if the stimulus doesn't result in a return to normal, it's hard to know if this is due to the drag of the recession, or the lack of power of the stimulus.

Ideally, we'd fork Earth and run one branch with the stimulus and one branch without. But we cannot do that (yet*). Thus, we have to guess what portion of the drag is caused by the recession, which often depends on consumer and producer perception and their economic worries. Recessions are often a self-fulfilling prophecy: a feedback loop of worry.

* Quantum "splits" may someday be found and be observable

Re:Economics is a science!

[MobyDisk]

Which one hurts more when dropped on you: a pound of iron, or a pound of feathers?

Re:Economics is a science!

[Idou]

In the days since Adam Smith penned his first thoughts on economics, engineers have taken us to the moon, physicists have split the atom, doctors invented antibiotics, philosophers invented human rights, chemists invented plastics, farmers quadrupled the per-acre food yield, programmers invented the internet, and much *much* more.

Impressive, but let's see smart engineers do all of that without capitalism (like in a country like North Korea).

Seriously, though, all those things you list are easy compared to trying to predict human behavior. I think most people fail at predicting human behavior (whether they are an engineer or economist seems irrelevant. . . ) and those that succeed become crazy rich and never reveal their secret (or, if they do reveal it, it no longer applies since human behavior constantly adopts new knowledge).

Re:Economics is a science!

[Anonymous Coward]

That could just mean that early 1990s and 2009 crashes were caused by something outside of the stock market. In 2009 it was housing debt, so maybe if you had an "H-ratio" for housing then you could have predicted it.

Re:Economics is a science!

[Actually, I do RTFA]

Always looking backwards, always telling us *why* something happened, never making future predictions.

That's just false. Stagflation in the 70's was predicted by some theories but not others. The theories that did not predict stagflation were scrapped or modified. The fact that it takes 10+ years of watching to decide between two competing models is annoying, but does not mean that predictions are not made. You just cannot show it in a classroom, like with fruit flies that breed once a day to show genetics/adverse selection.

Re:Economics is a science!

[ChrisMaple]

Supply and demand. Fracking petroleum increased supply, so price falls. Economics can't predict discoveries, and can only give good guesses that at certain prices levels previously uneconomic supplies would slowly come to market, driving down prices.

That bit sounds easy, but there are lots of things going on in the world, and they interact. Some long term trends can be predicted by honest, intelligent, and informed economists, but many things are outside of good prediction. What these good economists can do is point out that certain types of government policy will tend to cause what types of results.

Re:Economics is a science!

[Registered Coward v2]

In the days since Adam Smith penned his first thoughts on economics, engineers have taken us to the moon, physicists have split the atom, doctors invented antibiotics, philosophers invented human rights, chemists invented plastics, farmers quadrupled the per-acre food yield, programmers invented the internet, and much *much* more.

And economists, always backwards looking, now think that the Q-value might explain past crashes.

What a world we live in!

\

Well, an economist did invent Marxism...

Re:Economics is a science!

[Bob the Super Hamste]

Depends on the velocity of the feather

Re:Economics is a science!

[micahraleigh]

What alternative to economics do you have?

Re:Economics is a science!

[SpankiMonki]

As soon as an algorithm is created that can accurately predict the market, investors will start using it, thus altering the market so the algorithm no longer works.

Like LTCM.

Re:Economics is a science!

[scamper_22]

The problem with looking at the economy by numbers is that so much of the numbers are set by people (Governments, ordinary citizens, bankers...)

People want to treat it like a scientific physical system, but it simply isn't.

When when interest rates go up/down? Entirely a political decision.

How much demand is there for housing? Depends largely on government policies (immigration, proprety tax rates, green belts, urban sprawl policies...)

How much are people investing? What tax shelters are there ( TFSA, RRSP by the government)... Related to the interest rate... do people feel like they have to invest because their money is always losing money...

Taxes, investments, subsidies, big infrastructure programs... all decided on a whim by governments.

Re:Economics is a science!

[Concept Cars]

Now, that's not to say a crash is imminent — experts disagree on the Q-value's reliability.

Economics is a weird and wonderful science.

Always looking backwards, always telling us *why* something happened, never making future predictions.

In the days since Adam Smith penned his first thoughts on economics, engineers have taken us to the moon, physicists have split the atom, doctors invented antibiotics, philosophers invented human rights, chemists invented plastics, farmers quadrupled the per-acre food yield, programmers invented the internet, and much *much* more.

And economists, always backwards looking, now think that the Q-value might explain past crashes.

What a world we live in!

Now, that's not to say a crash is imminent — experts disagree on the Q-value's reliability.

Economics is a weird and wonderful science.

Always looking backwards, always telling us *why* something happened, never making future predictions.

In the days since Adam Smith penned his first thoughts on economics, engineers have taken us to the moon, physicists have split the atom, doctors invented antibiotics, philosophers invented human rights, chemists invented plastics, farmers quadrupled the per-acre food yield, programmers invented the internet, and much *much* more.

And economists, always backwards looking, now think that the Q-value might explain past crashes.

What a world we live in!

Ironbe a blog about news of car, price, mpg, msrp and release date all brands of cars

nobody saw it coming...

[Anonymous Coward]

amazing how often that phrased is used after a crash by the same people who said anyone questioning market valuations on way up "does not understand the market"...

Re:nobody saw it coming...

[Archangel Michael]

THIS!

History repeating itself, because the people who know history are shouted down by those not willing to learn from it.

Re:nobody saw it coming...

[NostalgiaForInfinity]

History repeating itself, because the people who know history are shouted down by those not willing to learn from it.

Stock markets go up and down. Business cycles exist. Government intervention cannot prevent that. It's not a bad thing.

What else do you want people to "learn" from it?

Re:nobody saw it coming...

[Anonymous Coward]

THIS!

History repeating itself, because the people who know history are shouted down by those not willing to learn from it.

THAT! SOMETHING ELSE! DITTO! Spare me the "this's". Everytime I see one, it makes me think someone's responding by rote instead of by considered thought.

Re:nobody saw it coming...

[RabidReindeer]

It's different this time. Isn't that what they said back in 2000?

Re:nobody saw it coming...

[ShanghaiBill]

History repeating itself, because the people who know history are shouted down by those not willing to learn from it.

The problem is, that "last time" people started shouting "bubble" in 1996. Then again in 1997, 1998, 1999, and 2000. Then in 2001, the crash came, and they said "I told you so", despite the fact that the bottom of the crash was still higher than when they first started shouting.

If you really think you are so much smarter than the market, then feel free put your money where your mouth is, and sell some shorts. Then when the crash comes, right when you predicted, you can come back here and brag about your new yacht.

Re:nobody saw it coming...

[Third Normal Form]

Stock prices have reached what looks like a permanently high plateau.

Re:nobody saw it coming...

[transporter_ii]

The only thing you can learn from history, is that history repeats itself. Or that is what I always say...

Re:nobody saw it coming...

[jandrese]

Markets always crash. It's how they operate. People make money not by owning stocks, but by owning stocks that are moving. It's not in their interest to have a stable marketplace. That's why the stock market will always be volatile, because the people who run it need the volatility to skim off their percentage.

Re:nobody saw it coming...

[magarity]

What else do you want people to "learn" from it?

They should learn not to keep all their "investments" in options and other derivatives. Then be amazed when the market reverses and wipes them out. That's called "gambling". Derivatives should only make up a small portion of your portfolio as a hedge and then only when you really know what you're doing.
I had a couple of uncles who had millions in call options in early '99 who blasted me for being a fool for telling them to get out. A year later they were singing the "but nobody saw it coming!" song.

Re:nobody saw it coming...

[AthanasiusKircher]

The problem is, that "last time" people started shouting "bubble" in 1996. Then again in 1997, 1998, 1999, and 2000. Then in 2001, the crash came, and they said "I told you so", despite the fact that the bottom of the crash was still higher than when they first started shouting.

Meh. I'd have to look back at the detailed stats here for those years, but just because it takes a long time for a "bubble" to burst doesn't mean that there wasn't evidence of a bubble developing.

And just because the "bottom of the crash" is higher than the start of the "bubble" doesn't mean that the "bubble" people were completely wrong -- the market "correction" may not fall as much because the damage is restricted to a particular area or because overall economic growth since the beginning of the "bubble" predictions means that the new "floor" is higher, etc. Also, often the people talking about "bubbles" also tend to point out particular areas where problematic behavior is emerging, rather than the overall market. It may take quite a few years for that problematic behavior to become so widespread or extreme that prices become severely inflated -- but again, the causes may go back further in time.

In sum, you're right that evidence of an emerging "bubble" should be met with some skepticism. We shouldn't believe idiots shouting "Sell! Sell!" anymore than we believe idiots shouting "Buy! Buy!"

If you really think you are so much smarter than the market, then feel free put your money where your mouth is, and sell some shorts. Then when the crash comes, right when you predicted, you can come back here and brag about your new yacht.

This is a flawed idea, since it depends on the assumption that the market is fundamentally rational and non-chaotic. If one could predict a crash precisely in time, then the market would be so rational and efficient that there would be no bubbles in the first place.

On the other hand, that doesn't mean that there can't be indicators that suggest a particular trend is unlikely to be sustainable in the long run. In fact, many adventurous business plans depend on things that are obviously unsustainable, whether it's over the span of a couple months or a couple years or a couple decades. Noting that such a trend is apparent doesn't mean an imminent crash, but it may mean the "gambling odds" are changing.

Re:nobody saw it coming...

[micahraleigh]

Government intervention can make business cycles experience milder highs and milder lows (but the long term trend is plateaued by doing this, and it's hard to campaign on long term wins).

Re:nobody saw it coming...

[Bob the Super Hamste]

I am always amazed with people's belief that "but this time it is different" so it is ok to ignore the standard prudent financial advise and then as you so aptly put it "but nobody saw it coming!". In 04 when my wife and I bought our house we got the bog standard boring 30 year fixed with 20% down that we could still afford if one of us lost our job. Everyone thought we were dumb because we didn't get some exotic loan for as much as we could afford in the hope of riding the equity bubble to the moon because this time real estate was going to keep going up for ever. Fast forward a few years and now we look like fucking financial geniuses because we didn't have to downsize to a tiny town home or file for bankruptcy because we weren't leveraged to the hilt, even though we did buy our house at the top end of the market and took a bath in the loss of equity. Then again we didn't buy our house to use it as an investment, instead we bought it so we could live there and raise a family. Even the mortgage broker thought we were nuts, somehow we qualified for a 3/4 million dollar loan that we wouldn't have been able to even make a single payment on, when I made him work backwards from a monthly payment we could actually afford to figure out what loan amount to get. Now go forward a few more years and we refinanced to a 15 year loan from the 30 and saved 7 years of payments for only $18 more a month.

Re:nobody saw it coming...

[im_thatoneguy]

I bought Tesla Stock at a marvelous point in time for my portfolio's value. But I realized it's grossly overvalued. But... just because something is grossly overvalued doesn't mean it won't go up.. and it has, over and over and over. If I had sold it off where I thought Tesla was actually valued I would have missed out on enough of a bump that short of the stock going bankrupt and hitting $0 I can take a pretty huge bubble pop and still come out ahead of where "sensible" people would have bailed. But people aren't sensible. And I don't see people getting sensible any time soon.

Re:nobody saw it coming...

[ShanghaiBill]

Meh. I'd have to look back at the detailed stats here for those years

Everything is "obvious" in hindsight.

... doesn't mean that the "bubble" people were completely wrong

No, but it does mean their opinion is worthless. Just saying "the market will crash" is meaningless, unless you can predict the timing and the magnitude. Saying "there will be an earthquake" means nothing unless you can say where, when, and how big.

Re:nobody saw it coming...

[Anonymous Coward]

the market can remain irrational longer than I can remain solvent... so... knowing that it's irrationally priced now does not really help you (nor drive the corrective behavior that such a rational view of the market dictates should happen).

Re:nobody saw it coming...

[Anne Thwacks]

Government intervention can make business cycles experience milder highs and milder lows

Government intervention can make pigs fly. However, I am not sure that is a good thing either.

More likely, the government is composed of not-very-smart people with their snouts in the trough, who are will stuff things up. There are precidents.

Re:nobody saw it coming...

[NostalgiaForInfinity]

Government intervention can make business cycles experience milder highs and milder lows

Well, yes, basically by wrecking the economy to various degrees. That's of course always an option.

Re:nobody saw it coming...

[complete loony]

Hyman Minsky "Stability is destabilizing". When projects do well, capitalists take larger risks in order to make more next time.

Re:nobody saw it coming...

[complete loony]

The market can stay irrational longer than you can stay solvent.

Re:nobody saw it coming...

[NostalgiaForInfinity]

They should learn not to keep all their "investments" in options and other derivatives

Another constant of the universe is that there are always some fools.

However, most people don't touch options or derivatives, and if you want to trade in them, you have to acknowledge explicitly a lengthy explanation of the risks, and that you are competent to deal with the risks.

That's about as much as "they" and "we" can learn from the past.

Re:nobody saw it coming...

[AthanasiusKircher]

No, but it does mean their opinion is worthless.

Agreed, *IF* your goal is to "beat the market."

But since I basically believe (on the basis of various statistical studies) that ALL advice trying to "beat" the market is worthless, which also somewhat negates your earlier complaint. ALL advice is crap, whether it's somebody yelling about doom-and-gloom or some ideas trying to get you to buy the most recent boom (gold! oil! etc.).

But the advice is only "worthless" if you measure of "success" is maintaining the market status quo. If that's all everyone wanted to do, everyone would have a 100% stock portfolio. Most people don't. Most people want to diversify, based on volatility, and at various points in their lives, they may prefer less volatility, even if it means lower returns overall.

In that sense, an imprecise bubble prediction, particularly for a specific sector ("This rise seems unsustainable in sector X and will likely bust in the next few years") can allow investors who do not wish to gamble as much to exit that sector.

Your assumption is that a bubble prediction is only useful if it allows someone to OPTIMIZE profits. That's the only reason you need to know exact time and magnitude. Other people may be much happier with less lofty goals -- and simply want to assess risk to balance a portfolio in a reasonable fashion.

Re:nobody saw it coming...

[delt0r]

I don't think you understand how shorts work.

Re:nobody saw it coming...

[micahraleigh]

Nice. You are bold for posting that on /. !!

Re:nobody saw it coming...

[micahraleigh]

A daring post on /.

Another example of "basically by wrecking": everyone can be paid the same.

And OP is retarded.

[Anonymous Coward]

Ever heard of a bubble? There is NO OTHER PLACE LEFT to try to save your money from being inflated away aside from the stock market which is a high risk environment. This is what happens when your central bank cartel keeps interest rates at ZERO for a decade.

Check out Zero Hedge if you want real economic information.

Re:And OP is retarded.

[__aaclcg7560]

If you're worry about your money being inflated away, convert your fiat currency into precious metals like silver and gold.

Re:And OP is retarded.

[NostalgiaForInfinity]

There is NO OTHER PLACE LEFT to try to save your money from being inflated away aside from the stock market which is a high risk environment.

NO OTHER PLACE, other than real estate, precious metals, art, education for yourself, a private business you start, etc.

Re:And OP is retarded.

[Anonymous Coward]

I'm on the fence here.

One the one hand, half of your examples are pretty bad. Real estate is no less out of control as the stock market and education (outside of financial schemes and political networking) is a losing proposition.

On the other hand, "start a business" allows me to ridicule armchair "businessmen" who don't put forth any effort and then cry how it's somebody else's fault they're not rich. Sometimes business really is hard, particularly at the beginning, but too many people just don't even try (they're lazy, abusive, dishonest, have no/poor ideas, etc) and skip straight to "waaaah! government! because reasons!"

Re:And OP is retarded.

[__aaclcg7560]

When the dollar collapses and your paper assets (i.e., stocks, 401k and IRA) are worthless, you will sell your real estate to me for 30 ounces of silver to buy a loaf of bread. Bwuhuhuhaha!

Re:And OP is retarded.

[Anonymous Coward]

Heh, depending on how badly things go, that scenario may not be that far off. If things go badly, you can probably buy a small house with ten gold. If things go really badly, that house is abandoned, and we're stuck with no currency and pure barter instead. Either way, I don't want to live in that world, but having purchased 100 silver (RCM four nines) a few weeks ago at $17.5/oz shipped, I'm prepared to do it. captcha: retired

Re:And OP is retarded.

[Culture20]

Precious metals are only worth something because other people want them. Because they think the metals are worth something because other people want the metals because they think they're worth something because... They're pretty, they're partly lasting and they're rare. Until they're not: aluminum used to be a valuable metal. Now I coat my armpits with it every morning, and half the metal objects I own are aluminum.
If you're expecting a big crash, you're better off purchasing items of utility or improving your land for raising food.

Re:And OP is retarded.

[rwa2]

All those things used to be "the conventional wisdom", but nowadays all of those things have been proven to be quite volatile.

I never believed in "making money from money"... I guess that's called "financial engineering" nowadays? That kinda insults me as an engineer, since we generally abide by physical laws. With financial laws, you're pretty much playing games using other people's rules. Other people who profess to love money above all else, and play the game to generate more money out of "nothing", and if you would just give them some of your money to play with, they'll help you "grow" your money too for a cut of the "take". But they don't add any value to the economy... they "multiply" it. And then they can just take "a little bit off the top", because no one will notice.

I'd love to invest in actual production... you know, things that add value and subtract costs instead of just "multiply" monopoly money. What options are there for that kind of thing?

Re:And OP is retarded.

[__aaclcg7560]

Never mind that gold and silver were used as money for thousands of years before the printing press made it possible to issue fiat currency.

Re:And OP is retarded.

[Anonymous Coward]

I'd love to invest in actual production... you know, things that add value and subtract costs instead of just "multiply" monopoly money. What options are there for that kind of thing?

Ebay. You can literally buy a factory of production tools for under $20k, about the price of a new car and almost trivially affordable if you are really an engineer. So buy a factory and start producing if it is that easy.

Re:And OP is retarded.

[Sique]

The volatility of precious metals is known since the Ancient times. Precious metals have never been a good storage for monetary value, their main advantage was their ability to be measured easily (either by weighing them or by counting minted coins), and to be carried around easily - advantages you also have with paper money or with the numbers on a banking account.

Compare for instance the prices for platinum and gold, two precious metals with very similar properties: Same frequency of occurrence in the Earth crust, same properties (density between 19-20 g per cubic centimeter, does not oxydate easily, can be cast and cold formed), same usages (mainly jewelry, some industrial usage, some coined or cast into bars to be stored as assets). Their prices have been so volatile recently, that platinum was about twice the price of gold, and vice versa within just a decade. Compared with that, the dollar/euro exchange rate is an example of long time stability.

Re:And OP is retarded.

[jandrese]

Real Estate will always be worth something. Even if we decide that precious metals are worthless (maybe someone invents a Star Trek replicator), land will always have value. At the very least you can farm it and feed yourself and your family.

Re:And OP is retarded.

[Anonymous Coward]

Sort of. Precious metals are valuable because they're rare (so the supply and the production rate is relatively constrained, which has disastrously proven false several times in history) and this keeps inflation under control. The extraction of gold, silver, and copper from ore is very simple and has been well understood for millennia. Like in the past, the only thing that can inflate the supply of these is the discovery of a massive supply (a big vein or an asteroid) or the ability to process huge amounts of earth to collect all of the trace deposits.

Aluminum was never rare. Pure aluminum was difficult to extract until the current process was discovered, but there is no such process that will turn common materials into precious metals. Except transmutation, I guess (I make copper from nickel in my lab, but the end product is extremely tiny and extremely radioactive and doesn't stay copper for long!).

Re:And OP is retarded.

[Anonymous Coward]

Look up the naked shorts on the COMEX. There's a really good reason that metal prices have been manipulated, or that the dollar prices have been manipulated around the metal prices. We are just experiencing a little dip in the "value" of PMs in the long-term scheme of things. When the bottoms fall out of the fiat currencies, PMs will continue on their merry little way.

Re:And OP is retarded.

[Maxo-Texas]

Mostly but not always true. A lot of real estate in the middle of the country became worthless after 2000. Recall that they were bulldozing thousands of houses in some towns and offering to let people swap into a different house closer to town while also cutting services/road repair to those who remained further out.

Changing climate or moving rivers/coastlines also render property worthless at times.

I agree that land does tend to hold value better than other assets but it's not an absolute.

Re:And OP is retarded.

[jandrese]

The land was only "worthless" because it had liens exceeding the value of the property. So it was secretly expensive land disguised as incredibly cheap land.

Re:And OP is retarded.

[Anonymous Coward]

...which won't matter in the least if the "big crash" is big enough. People won't want gold or silver, they'll want guns and canned food.

Re:And OP is retarded.

[gbjbaanb]

30 ounces of silver... pah. I bought a shotgun and lots of ammo. In the situation you describe, I won't be buying anything off you ;-)

Re:And OP is retarded.

[Enry]

Silver is just as worthless in an environment where nobody has anything. If things really go to hell, it'll be whomever has water/shelter/food, so don't bother hoarding precious metals as they won't be so precious if you can't get clean water.

Re:And OP is retarded.

[Enry]

So were rocks and salt. Your point?

Re:And OP is retarded.

[Anonymous Coward]

>more money out of "nothing

It's not from nothing. Every gain is someone else's loss.

Re:And OP is retarded.

[Anonymous Coward]

It depends on what you mean by "invest" in actual production. You can buy stock in companies that produce things, but unless its a sale of new shares, the company doesn't get a boost from you buying the shares. If you want to directly finance production of products, buy bonds sold by a company that produces things.

Re:And OP is retarded.

[Dcnjoe60]

Real Estate will always be worth something. Even if we decide that precious metals are worthless (maybe someone invents a Star Trek replicator), land will always have value. At the very least you can farm it and feed yourself and your family.

It may always be worth something, but not necessarily anything close to what you paid for it. As for land always having its value, tell that to the people in Centralia, PA or Times Beach.

Re:And OP is retarded.

[Dcnjoe60]

Silver is just as worthless in an environment where nobody has anything. If things really go to hell, it'll be whomever has water/shelter/food, so don't bother hoarding precious metals as they won't be so precious if you can't get clean water.

On a small scale, you are correct. Simple bartering for goods and services works well. Unfortunately it doesn't scale up and some common means of exchange is always developed, whether it be silver, gold, sea shells or even bitcoins.

Re:And OP is retarded.

[tnk1]

You had thousands of years of stability where upper classes could form which would make use of those sorts of metals. Gold is too soft to use for most applications, and really has more decorative uses. Silver is somewhat more useful as a practical matter, but is still beat out by metals like iron.

If you have an apocalyptic scenario, you're going to have a premium on things that people can't get easily which they actually need for survival. Gold will be worthless until an upper class is re-established that likes shiny metal.

I will say this... gold and silver are worth what people think it is worth. If enough people think it has value, then it will. Which means that it would have many characteristics of a fiat currency.

However, survival will tend to override anything that isn't actually practical. If you have people unwilling to turn over food or materials for some shiny metal that they are not certain they can use to exchange for things they need, precious metals will be useless. And depending on the scenario, it could remain useless for decades, even centuries until a basis for value was restored.

Re:And OP is retarded.

[AthanasiusKircher]

Never mind that gold and silver were used as money for thousands of years before the printing press made it possible to issue fiat currency.

Nonsense. Gold and silver can be "fiat" currency just as paper money can be. Fiat currency just means that a currency derives part of its value from the government's declaration that it shall function as a currency.

For example, the U.S. government says that the "dollar" must be used to pay taxes. It could equally say that "gold" must be used to pay taxes, in which case gold's price would probably go up, since it would be more useful to pay for things with. That addition in value due to the government's endorsement is what produces "fiat" money.

People who don't understand what the term "fiat" means assume that "fiat" currency is always based on something that they consider "valueless" while whatever alternative "non-fiat" currency has some sort of "inherent value."

Except who determines that "inherent value"? Where does it come from? Food and water will always have some inherent value for humans, since they need it to survive. Other goods that fulfill basic needs (shelter, protection, etc.) also generally have a pretty basic value.

But gold only has value because it's rare and shiny, but there are many things in the world that are rare and shiny. Under sufficiently dire circumstances (e.g., being lost in the desert), your gold brick might be worthless compared to a canteen of water.

In sum, other than basic human needs, things only have value because as a society we agree that they have value. If a society starts valuing other things, the old "inherent value" items will lose value. Do I think it's likely that gold will become worthless anytime soon? No -- but its price in relation to other goods has and will fluctuate the same way a supposed "fiat currency" does. It's true that in sufficiently dire circumstances (e.g., hyperinflation) "fiat currencies" may lose significant value.

But in sufficiently dire circumstances, "all bets are off," i.e., what people may want is to trade for food or water or weapons or whatever -- they won't want gold unless they know that someone else will be willing to take it in exchange for food or water or weapons (and that's not always guaranteed in sufficiently dire circumstances).

Re:And OP is retarded.

[Bob the Super Hamste]

Salt actually has value though, and depending on the rocks they may be worthwhile to have as well if they are mineral bearing ones.

Re:And OP is retarded.

[Enry]

Which means that in a massive economic downturn, your silver is going to be just as worthless as dollars. The only reason that silver is worthwhile is because people assign a value to it. If it has no value, then it's worthless. If you can't get access to water or food and the people around you have no need for silver because they value their food/water higher than your silver, then you're kinda stuck.

Re:And OP is retarded.

[Enry]

So let's say the world goes to hell in a handbasket. The job creators Go Galt and leave the rest of us with nothing. Civilization burned to the ground. Dog and cats living together, etc.

Salt has value since it's a preservative, flavorant, and necessary for life though it's fairly easy to get for most of humanity that lives near the oceans. It might have value for people further inland that don't have access to the shore, but that's because salt is needed to survive. Silver has some antibacterial properties and gold is malleable and shines, but other than that neither are required in order to support life so their value is pretty much 0 in this scenario.

Re:And OP is retarded.

[Anonymous Coward]

I'm an engineer too. I used to think as you did. After getting an MBA it widened my perspective. I'm still an engineer, but now I understand how modern finance benefits society. Allocating capital efficiently is valuable. Decreasing interest rates is valuable. Deconstructing a debt it various risk components and selling those risks to person who are best equipped to understand those risks is also valuable. I encourage you to learn about finance. No, it is not as cool as engineering, or is it as useful, but you are mis-characterizing it.

--AC

Re:And OP is retarded.

[Spy Handler]

So let's say the world goes to hell in a handbasket... Civilization burned to the ground. Dog and cats living together, etc.

I hear this a lot from anti-gold people. Yes if the entire world civilization collapses and 98% of humans on earth die, then gold will be worthless. However I would point out that such a scenario has never happened in all of recorded history.

I'm not saying a worldwide apocalypse is impossible... of course it's possible. It's just very unlikely. A far more likely scenario is a local collapse of civilization, like a famine and civil war in Middle East or a governmental collapse/economic ruin in South America or Germany getting frisky again and getting bombed into oblivion by Russians/Americans.

Such local collapses (local SHTF in survivor speak) have occurred many times in history, some quite recently. And in all such cases, gold has never become worthless. In fact gold has been the gold standard of stored wealth.

As long as there is civilization somewhere that people can hope to escape to, gold will be what people will expect to hold value.

Re:And OP is retarded.

[plopez]

Land you can farm. Silver is worthless.

Re:And OP is retarded.

[slew]

...gold will be what people will expect to hold value.

So basically it has value because people expect it to (just like currency)... It's just the expectation holds for a broader number of eventualities...

Re:And OP is retarded.

[Maxo-Texas]

Mainly the land was worthless because no one could find work there any more. Demand for the land dropped precipitously as thousands of people left the area and moved elsewhere. The world is littered with similar ghost towns.

There is not much value in unmanaged woodlands. Perhaps in 20 to 30 years they could grow trees there that could sell.

Re:And OP is retarded.

[Enry]

Maybe. Gold didn't necessarily help here in the US in 2008.

Re:And OP is retarded.

[plopez]

1) Start a business. If you are an engineer with a PE stamp you can do it.
2) Invent something. Preferably something that helps people.
3) Buy into a start up and help it grow. One that you can desconstruct and see if the people are just BSing you. Risky.
4) Like 3, microfinance. Also risky.

Besides you engineering training you should learn a little accounting and finance. This is required if you want to understand the basics of investing.

Re:And OP is retarded.

[njnnja]

You don't need an upper class to have need for a currency. Humans have been trading for thousands of years and even in a post apocalyptic scenario that will probably continue. A technology for currency is useful even at low levels of civilization, and gold and silver have proven to be pretty good technologies for that.

For example, let's say the "world ends" but you and your (extended) family have established a nice little homestead with a farm and plenty of ammo. You have two neighbors within a few miles who have done the same. But while you know how to cultivate wheat, one neighbor knows how to raise draft animals and your other neighbor is a doctor. While it's possible for you to barter with your neighbors to get what you want, your neighbors will find it hard to barter directly with each other. So maybe they use your wheat for a currency of sorts to facilitate trade; when the rancher's kid gets sick, he pays the doctor with extra wheat that he gets from trading a horse to you.

But this is a problem because the wheat will rot, and attract mice, and therefore has storage costs. And the doctor isn't going to sell his services on credit, so he wants something today. That something should be relatively rare, easily verified, have low carrying costs (i.e. doesn't rust or rot), and be somewhat portable. Gold and silver fit the bill, and those characteristics as a vehicle for trade are just as important as the edibility of wheat or the strength of a horse or ox.

Re:And OP is retarded.

[Dcnjoe60]

Which means that in a massive economic downturn, your silver is going to be just as worthless as dollars. The only reason that silver is worthwhile is because people assign a value to it. If it has no value, then it's worthless. If you can't get access to water or food and the people around you have no need for silver because they value their food/water higher than your silver, then you're kinda stuck.

And if you are one of the people with food/water and the people around you need it, your pretty much at their mercy, too. Think of all the zombie movies, even though you can actually kill people, you can't kill or defend from all of them and eventually, you, too, will be over run and without food and water.

The best solution is to stop the apocalypse before it gets that bad because if it really happens we're all screwed.

Re:And OP is retarded.

[schnell]

You are absolutely correct. I think the thing that people who dislike "fiat currency" or advocate a return to the Gold Standard tend to forget is the single core principle that, since Adam Smith's days and before, has always defined market-based economies: "A thing is only worth what someone is willing to pay for it."

And the same holds true for gold, silver, salt or Beanie Babies: whatever you think it's worth means nothing if you can't find someone to sell it to for that price. "Inherent value" of a commodity is a lie in the sense that it is never truly fixed and an unalterably safe store of value. Today, most people in the developed world think that a small piece of paper with a dead white American politician on it is worth something, and they agree on what that value is. You could say to them, "but I have gold!" but to most people that is actually worth nothing to them except for what they could turn around and convert it back into currency for. The only thing that has inherent worth is whatever you are trying to buy or sell from someone thinks has inherent worth.

Re:And OP is retarded.

[Anonymous Coward]

> I never believed in "making money from money"... That kinda insults me as an engineer, since we generally abide by physical laws.

I have a degree in physics, and like you I was confused by stock markets, "How can there be more money in the stock market this year than last year?" I thought there should be a rule, like "conservation of value" or something...something didn't seem right. Then I finally realized that the "market" isn't a closed system: resources from outside the market are constantly being pulled in. These resources include things like minerals in the ground that were sitting idle.

Re:And OP is retarded.

[Bob the Super Hamste]

I was thinking more along the lines of more useful minerals like iron, tin, lead, copper, etc that can smelted with a fair amount of ease and used to produce useful things. Lets say the worlds goes to hell Mad Max style having someone who knows how to smelt metals with the materials to do so is very valuable.

Re:And OP is retarded.

[afidel]

That something should be relatively rare, easily verified, have low carrying costs (i.e. doesn't rust or rot), and be somewhat portable. Gold and silver fit the bill,

So does the greenback, and in the modern world it's used a hell of a lot more extensively than gold or silver. Unless the fed goes full retard and starts printing physical bills at a rate significantly greater than inflation (would be basically impossible to do with the current infrastructure) that's not going to change.

Re:And OP is retarded.

[erice]

So let's say the world goes to hell in a handbasket... Civilization burned to the ground. Dog and cats living together, etc.

I hear this a lot from anti-gold people. Yes if the entire world civilization collapses and 98% of humans on earth die, then gold will be worthless. However I would point out that such a scenario has never happened in all of recorded history.

In all of recorded history up until somewhere about the 19th century, there were multiple essentially independent civilizations. It would take a staggering coincidence or a global physical catastrophe (like a dino asteroid) to take them all down at once. In the modern era there is just one civilization. Every place is interconnected with every other and becoming more so. A large enough, fast enough, regional catastrophe could bring everything down if the areas not directly affected can not replace what was lost quickly enough to keep their own machinery from grinding to a halt.

Further, modern technology has given us the means to create global catastrophes. We don't need to wait for the exceedingly rare natural global catastrophe.

Gold is a good hedge against economic chaos causing fiat currencies to lose value. But if the machinery actually stops, it is pretty worthless.

Re:And OP is retarded.

[MaskedSlacker]

The world is littered with similar ghost towns.

In the old days we just called those "ancient Roman ruins.'

Re:And OP is retarded.

[Anonymous Coward]

A can of spam will be worth 20 lbs of gold if things get bad..

Re:And OP is retarded.

[Anne Thwacks]

It's not from nothing. Every gain is someone else's loss.

Karl Marx, is that you?

Re:And OP is retarded.

[afidel]

When the bottoms fall out of the fiat currencies,

Most people will be dead as it will be the result of total war. Nothing else is going to rock the worldwide markets so thoroughly that all 6 major reserve currencies have their value evaporated.

Re: And OP is retarded.

[Anonymous Coward]

If things get really bad it may as well worth your life

Re:And OP is retarded.

[rednip]

And what makes you think that gold will be a reliable currency? Personally, if I were the 'prepping' type, I'd stock up on fools gold and nitric acid (for testing) rather than risking too much on real gold.

Re:And OP is retarded.

[Anonymous Coward]

That does hold true in speculative markets, like short term stock trading, or forex. It's different from trading food for money for example. In food for money I gain food you gain money. In stock and money exchanges you pretty much bet that you'll reverse your trade later at a profit, and since you're pulling one side of a two-sided rope, one of you wins the other guy's wager, ignoring the async order of things (the other guy might be wining when you win too, but in the grand scheme of things somebody loses for you to win).

Re:And OP is retarded.

[rwa2]

Thanks.. I'm sorta at a point in my life where all of those are actually options that are available to me, and I sorta have lower time commitments to my employer & family and a workshop area to start tinkering with some of that on the side.

I'm not at the point where I can actually start using any of my 401k savings towards any of that, though. Supposedly I have an OK but still somewhat aggressive portfolio, but I try to ignore it and let the fund managers do their thing until I see stories like this that remind us that, yes, we're due for another bubble bursting soon, and it could well be some combination of tech/realty/edu loans/energy or even something we don't expect to all come tumbling down.

Re:And OP is retarded.

[NostalgiaForInfinity]

That kinda insults me as an engineer, since we generally abide by physical laws. With financial laws, you're pretty much playing games using other people's rules. ... But they don't add any value to the economy... they "multiply" it. And then they can just take "a little bit off the top", because no one will notice.

I doubt that you are an engineer, because engineers actually understand how this works. An iPhone is objectively more valuable and useful than the equivalent pile of raw materials. And if one iPhone is 100x as valuable as the raw materials, then 10 iPhones are 1000x as valuable as their raw materials.

I'd love to invest in actual production... you know, things that add value and subtract costs instead of just "multiply" monopoly money. What options are there for that kind of thing?

Buy stock in a company that makes stuff. It's not a good investment because "stuff" isn't all that valuable anymore to people in the era of 3D printers and rapid manufacturing, but hey, if it makes you happy...

Re: And OP is retarded.

[BlueTrin]

You are right on a long scale, however gold was not very valuable during a large famine for example. At the time of a catastrophe your silver won't be worth much.

Re: And OP is retarded.

[BlueTrin]

So you would prefer to live in a world where you have to pay upfront everything ? Your house would start being built when you have the full amount to buy it ? Everything would be so slow without securitisation and the fractional reserve system.

Re:And OP is retarded.

[Anonymous Coward]

the other guy might be wining when you win too, but in the grand scheme of things somebody loses for you to win

Not at all. Most stock transactions are effectively between people who have different preferences for cash vs investments; that is, both sides gain what they actually want. Likewise, what you call "speculation" usually is simply investing based on statistical predictions.

Re:And OP is retarded.

[Bite The Pillow]

An IPO is where you get stock in exchange for investing in actual production. Or expansion of production.

I bought CMG when it was $25. Except that, to qualify to participate in an IPO you have to be tied in to a financial organization, win a lottery, and show that you can hold on to stock without just flipping it on day 1.

So how was I able to buy it for $42 on day 1?

First, let me say that it's $636.10 right now. Second, I was a long time customer before the IPO, so I knew they had a good business plan that just needed expansion.

I was able to buy it because someone broke the rules. Not the rigid, enforced rules, but the ones that allow that person to participate next time.

That person created money from money, and is likely going to be allowed to participate in the lottery again. You might not believe in making money from money, but these people do.

On that subject, investing in actual production is how you make money from money. I have no actual skin in the game, but I have money in the game.

At the time, per share, the company had a reasonable valuation. Now, it has all of the stores that it expanded into, plus brand recognition, plus a more stable supply line. Plus all of the non-GMO movement energy. Customer loyalty, and piles of stuff that it didn't have before.

Piles of stuff that are not asset-measurable.

Now, for this:

NO OTHER PLACE, other than real estate, precious metals, art, education for yourself, a private business you start, etc.

responding to:

Ever heard of a bubble? There is NO OTHER PLACE LEFT to try to save your money from being inflated away aside from the stock market which is a high risk environment. This is what happens when your central bank cartel keeps interest rates at ZERO for a decade.

Check out Zero Hedge [zerohedge.com] if you want real economic information.

So you're saying that "real estate, precious metals, art, education for yourself, a private business you start etc." are quite volatile.

Real estate is, because it expands faster than it should, then contracts. If you value it properly, it's still a great investment. Buying a house to flip it is not going to work all the time. Precious metals can be manipulated by FUD, and have no inherent value. Art will basically always get more expensive, because you set a reserve at auction. And Picasso is not making more paintings. A private business is basically either going to succeed or fail, all or nothing. Of course they are volatile.

There are no places left to the average investor, other than stocks, because interest rates are zero. T-bills, money market, CDs, interest savings, and lots of other things are losing money due to inflation.

How much money am I going to invest in real estate? I don't, as an average person, have enough for a second mortgage. Precious metals? no. Art? Can't afford. Education? I have a degree in one field, and work in another. I don't need education. Private business? I don't have enough cash to be a franchisee, so I have to place it all on a private business.

And then there's your core objection. You don't believe in the secondary stock market, where the money doesn't go to the business, but to the people who bought in early. And you oppose having someone manage your funds, so you do a little better or a little less worse than someone else - you pay someone to watch the markets and make an informed decision on what to trade. That's the little off the top you talk about, and people do notice.

But I also make my own picks, and I've been overall successful because I take the time to understand the business before buying secondary market stocks. I don't have the time to do that full time, so I pay someone to do it.

So your argument is left to pedantry, the kind where you want exclusive ownership of the now genericized "engineer" tag. well, fire up the coal engine on a choo choo train or shut the hell up.

Re:And OP is retarded.

[Pseudonym Authority]

Or maybe I would kill you and take your silver.

Re:And OP is retarded.

[WaterDamage]

Ever hear of Noah's Ark? Whether you believe in it or not, ancient scrolls have documented cases where we have had this happen in the past. If enough glaciers melt fast enough we might end up like Noah one day, maybe not in our lifetime but prob in 100 years.

Re:And OP is retarded.

[Anonymous Coward]

The games of money and finance are not always a zero sum game. There are plenty of financial zero sum games out there and also plenty of financial games that are not. Trading commodities is an example of a zero sum game while trading private businesses are not.

Re:And OP is retarded.

[WaterDamage]

So explain to me why diamonds which happen to be even rarer than gold have no resale value after you pony up $10k+ for a nice set?

Re:And OP is retarded.

[Pfhorrest]

Also, even if it's not arable or otherwise productive land, you need a place just to exist, and if you don't have one of your own, others will demand payment to exist in their places. Having land first and foremost saves you from servitude to someone else; its productive use is secondary, and its resale value merely tertiary.

Re:And OP is retarded.

[Pfhorrest]

Not every gain is someone else's loss. If we each need a widget and a sprocket, I have two widgets and no sprockets, and you have no widgets and two sprockets, we can both gain by trading each other one widget for one sprocket.

But a large class of gains, namely rents, certainly are at someone else's loss, and those, not merely free trade as above, are the defining characteristics of capitalism and the finance industry.

Re: And OP is retarded.

[rwa2]

<shrug> isn't that exactly what the rich people with all of the money do? :-D

"real" rich people, I mean... I realize that a lot of people who "live richly" are actually in massive debt. As they say... owe the bank a million dollars, and they own you. Owe the bank a billion dollars, and you own the bank.

Re:And OP is retarded.

[bingoUV]

1. Somewhat less easily verified than gold.

2. Not divisible - the worth is proportional to fourth power of size, depending on other factors. And serious technology is required to divide it, except along the lines at which a piece of diamond wants to be divided.

So you have a diamond worth 20 horses, but you want only one horse. By dividing the diamond into 20, you have reduced the worth of your diamond by many orders of magnitude. IF you are able to divide it into 20 at all.

Re:And OP is retarded.

[bingoUV]

platinum and gold, two precious metals with very similar properties

They are extremely dissimalar.

1. Platinum is harder than pure iron - though matches gold in ductility and malleability if enough force is applied. It is much much harder to work with than gold.

If you have raw gold as money, you can divide it into pieces with relatively little skill or force. Not so with platinum.

2. Platinum is much much rarer than gold.

Re:And OP is retarded.

[Concept Cars]

2016 Release Date Car

Re:And OP is retarded.

[Hognoxious]

And people made tools from rocks for thousands of years before bronze was invented.

Your point was what, exactly?

Re:And OP is retarded.

[Sique]

Platinum occurrence in the Earth crust: 0,005 ppm. Gold occurrence in the Earth crust: 0,004 ppm. A difference of 20%, and platinum is slightly more prevalent.

Re:And OP is retarded.

[bingoUV]

Yes, I forgot to mention that though theoretical rarity is similar as you say, practically orders of magnitude more mined gold exists than platinum. So they cannot be said to be similar from a practical perspective.

Given the physical dissimilarities, calling them similar is very wrong.

Re:And OP is retarded.

[ULTROS]

Gold is very useful to Monster Cable. They get 100X the value on the market.

Re:And OP is retarded.

[njnnja]

By "world ends" I mean the one of the many standard post apocalyptic scenarios of a natural or man made cataclysmic disaster where it doesn't make sense to put resources into keeping high technology printing presses working at the expense of other important infrastructure such as power plants and factories. And since dollar bills rot, the carrying costs are high (they would need to be stored carefully to avoid flooding, etc), and when handled regularly they have an average lifespan of only about 18 months. In a low technology world, precious metals are a pretty good technology for facilitating trade.

Re:And OP is retarded.

[rwa2]

An IPO is where you get stock in exchange for investing in actual production. ...

I was able to buy it because someone broke the rules.

Thanks for that story! Yeah, it sounds like that was pretty lucrative, and that's why they have those kinds of rules to keep the plebs out. Good that you were able to get in.

I did manage to pick up a bit of Boeing stock while I worked there in the early phase of my career. Yes, I broke a lot of risk guidelines by investing substantially in one stock that also happened to be my employer. It's certainly time to "make good" and sell it off now, since it easily overshadows all of my other conventional managed/index funds, even though I had originally allocated a smaller fraction to it than anything else. But I'd also just as soon hold on to it for many rationalizations:
* BCA used to go in fairly predictable 7-year cycles, but since they merged with their defense wing, that smoothed things out a bit. Also helps that the defense side tends to have revenue during wartime and the commercial side tends to have revenue during peacetime.
* I still have plenty of smart friends on the inside so I'll have some warning when they jump ship. For now it sounds like they've been happy with the trimming down of the top-heavy management hierarchy from the time I was there.
* They're quite good at spinning the media to keep their stock prices elevated.
* As the largest US exporter, they're probably too big to fail(tm), so I'm not too worried about them going under suddenly without some kind of US taxpayer intervention :-P

At the same time, I wouldn't buy any more stock at current prices :P And since it was from an early phase of my career, it's not even really all that much money to spend time worrying about.

Education? I have a degree in one field, and work in another. I don't need education.

I'd love to invest in education (well, I sorta did by marrying a teacher). But there are lots of indications that we're in an educational loan bubble right now which has both driven degree prices way up so high that the students you invest in will likely never be able to pay you back.

So your argument is left to pedantry, the kind where you want exclusive ownership of the now genericized "engineer" tag. well, fire up the coal engine on a choo choo train or shut the hell up.

Eh, this is one of the few pedantic things that I feel ought to worry us. "Financial Engineering" is a disparaging term that drags down all engineers in ABET-accredited fields. A lot of us work in the public trust, and are held accountable for our fuck-ups, even choo-choo or building HVAC engineers. Financial managers who know how to use "the calculus" to do risk management and manipulate the market to jump off the roulette wheel while it's high and leave the mess to everyone else are just plain sociopaths.

Re: And OP is retarded.

[BlueTrin]

This is because you associate capitalism with evil: in many cases debt can be a useful tool. For a rich entrepreneur it can allow to diversify his exposure to a single business without realising the capital gain tax for example. For people with good ideas, it allow to allocate the capital to something with a higher return on investment. This is why finance is actually useful, it allows some allocation of money more efficiently than if you tried to do it with a single entity which becomes invariable corrupt. The post above my previous reply is totally oblivious to the fact that many of the recent changes in the last centuries are probably more due to modern economy and liberalism allowing the economy to flourish and scientific progress to be made.

Re:And OP is retarded.

[Anonymous Coward]

Deconstructing a debt it various risk components and selling those risks to person who are best equipped to understand those risks is also valuable.

Speaking of mis-characterizing...

Selling risks to a person who understands it is not valuable. Selling a high risk to someone who you persuade to think it is a low/no risk... Now THAT is profitable and thus a valuable transaction. For the seller anyway.

Re:And OP is retarded.

[Anonymous Coward]

You're forgetting that you can't just print/inflate gold, as you can with fiat currency.

Re:And OP is retarded.

[plopez]

Don't use your retirement for this! Too risky. Only money you can afford to lose.

Stock valuations are nonsense

[Anonymous Coward]

Stock valuations are nonsense.

A stock is worth exactly what somebody else is willing to pay for it.

Re:Stock valuations are nonsense

[Dunbal]

A stock is worth exactly what somebody else is willing to pay for it.

I would add "at that specific time". But yeah. This.

Re:Stock valuations are nonsense

[Anonymous Coward]

A stock is worth exactly what somebody else is willing to pay for it.

I would add "at that specific time". But yeah. This.

I thought that "at that specific time" was implied, but yeah.

Something hilarious

[Dunbal]

I have never met a rich stock analyst. Just like I've never met a psychic who won the lottery. All these little theories and formulas are swell, but let's see them put their money where their mouth is.

Re:Something hilarious

[Actually, I do RTFA]

Just like I've never met a psychic who won the lottery.

That's why Randi's contest always seemed like BS. I could make way more than a million dollars if I was psychic... but probably not if everyone knew I was. Maybe, if my descendants were non-psychic, I would admit it on my deathbed.

Re:Something hilarious

[Okian Warrior]

If psychic ability were real, it would be an enormously successful survival trait.

The fact that *everyone* doesn't have it is 'kinda suggestive...

Re:Something hilarious

[Anonymous Coward]

Just like I've never met a psychic who won the lottery.

That's why Randi's contest always seemed like BS. I could make way more than a million dollars if I was psychic... but probably not if everyone knew I was. Maybe, if my descendants were non-psychic, I would admit it on my deathbed.

The Randi challenge covers lots of 'abilities' that wouldn't help you win the lottery. Dowsing, telekinesis etc.

Re:Something hilarious

[Actually, I do RTFA]

The lottery uses balls that flip around willy-nilly. Telekineses would be really helpful.

But all the Randi challenge proves is that some abilities with low alternate value don't exist. But I don't even know what those abilities would be. For instance, buying land with water rights in the desert, and then reselling it (or oil, if that's what you can dowse for), would be extraordinarily profitable. But if everyone knew, you would never be able to buy anything.

Re:Something hilarious

[Actually, I do RTFA]

I'm not saying psychic powers exist. I'm saying the Randi challenge is dumb.

Also, your response is dumb.

1. You're assuming there are not stable populations that are psychic, possibly with taboos against breeding outside the group. (See, some rumors about gypsies)
2. You assumed that this hypothetical psychic ability is genetic.
3. You assume that this survival trait would lead to more children. In reality, it would lead to fewer unwanted pregnancies. Further, with the ability to avoid pregnancies lethal to the mother/child and the ability to avoid dangers, you would need far fewer children to ensure X reach adulthood.
4. You assume that a competitive advantage would not reach equilibrium. See how lefthandness conveys and advantage in a right-handed world, and yet remains consistent at 10%
5. You assume that people want to reproduce.
6. You assume that psychic ability doesn't channel ectoplasm through your genitals and sterilize you.

It's not suggestive at all.

That said, I don't think it exists. You know, because of how physics seems to work.

Re:Something hilarious

[Anonymous Coward]

You're making the large assumption that it doesn't come with trade-offs or outright downsides.

Book value is illusory

[Anonymous Coward]

Book value is a illusory. What someone will pay today for an asset is different than what someone will pay tomorrow. But I agree that the market is overvalued by several metrics. The Fed's 0% interest rate policy is lethal. It has crowded money into stock looking for a decent (but risky) return. It has destroyed savers, particularly the elderly. Rates should be normalized now. The Fed will have no monetary response when the next recession comes, and it is closer than we think.

Risk is Risk!

[Anonymous Coward]

This is nothing new. The problem is, when that crash happens, it wipes out a large portion of the working classes retirement funds. The market should not be risking the nest eggs of 50+ Million Americans who are set to retire in 5-10 years time.

When that happens, several things will become a reality:
- The labor pool is increased greater that than what it would have been before the event, for a longer period of time. Irrelevant if job growth accomodates, but let's be real here.
- Increased stress is put upon bank lending as forefeiture risk increase due to retirement incomes vanishing beyond that of the Federally backed amounts (* not always applicable). Interest rate changes can in turn effect new draftees.
- Increased cash flow from retirees expenditures to other areas, dries up. Referenced as many retirees tend to travel.

All in all, it's hard to say you or I don't have a hand in this, since that company retirement account that is set up in our names is all about Mutual, Roth, or other Funds. Scary thing is, you and I have a hand in it, and it's entirely possible we have no timely control to divest before a crash!

As silly as market cap.

[Anonymous Coward]

It's all based on models that have some fundamentally flawed assumptions, like that the instantaneous share price bears anything more than a passing resemblence to what the company is "worth" , any more than the price of tulip bulbs bore any resemblence to anything during tulip mania. Okay, maybe a little more, in that price tends to track company value, but it's only a tendency. Back in the 1990s there was a point where Apple stock was selling at such a low point the "market capitalization" amounted to less than Apple had in the bank.

There are many factors that go into what someone is willing to bid or offer for stock, and humans being the irrational (but rationalizing) animals they are, many of those have little to do with what a company is actually worth or might be worth in the future.

It surprises me not at all that market valuation exceeds actual value, because despite the invisible hand, the market is imperfect.

Re: As silly as market cap.

[BlueTrin]

But don't you think that if a company was under asset value and has liquid assets it could be bought and sold off asset by asset ?

It's all good

[benjfowler]

It's different this time.

Print some bucks

[Tablizer]

Inflation is too low. The best economies have historically had an inflation rate around 2.5% annual. US inflation has been hovering around 1.7% for a good while. More money in the economy juices things up and would flow to consumers, who have been reluctant to spend because their job doesn't pay well or is uncertain.

Thus, companies are waiting for consumers to come, and consumers are waiting for raises and job stability before they spend more.

Such a catch-22 stand-off is usually a sign to print more money (inflation). Otherwise, companies will play financial games instead of invest in expansion.

It's a difficult political sale because raw materials have been increasing in price (due to world-wide population growth and newly industrial nations), and general inflation will make it look worse. If we can get over that fear, then our economy can run at full capacity instead of the stalemate we have now. A better overall economy is more important than keeping prices of raw materials lower.

Re:Print some bucks

[jfengel]

Effectively, they have been. The Federal Reserve has been keeping interest rates at levels that should be causing significant inflation. The goal is to prevent a deflationary spiral by pumping up the money supply: when you can borrow lower than inflation, people should borrow and pay it back with tomorrow's less-valuable dollars.

They've been doing that for nearly a decade now, and it has successfully prevented the deflation, but it's a little baffling that it hasn't touched off more inflation than it has. The consumer confidence is hovering around 100, which should be a decent level for a stable economy. Unemployment is still higher than we'd like but it's well off the bust years.

My hypothesis is that people have gotten too used to boom economies. If people aren't getting triple-digit returns they don't want to invest. What we've got is a very stable economy, exactly the kind that people should be able to take risks in, but without a real estate boom or dotcom boom or other scheme to get people to dump their whole life savings and then borrow on margin, they just don't bother.

Stability means that those who have been left behind continue to be left behind. That's the worst thing that can be said about the economy. There just isn't an engine of growth.

There are a lot of other factors, I'm sure. Europe went mostly for less aggressive measures, and their economies haven't come out as well, meaning fewer markets there. China's growth has ceased to be ridiculous. Oil prices should have sparked some kind of boom, and I've got a nasty cynical feeling that Wall Street is ideologically predisposed not to invest in the emerging energies as much as they should.

But a lot of it is the catch-22 you mentioned. Consumers and investors each seem to be waiting for the other to go first. We've been technically out of recession for more than five years, and it's gotten past the point where the recovery could be called mere accounting. It's real. But America just hasn't gotten its feet back under it in the way that it usually does.

Re:Print some bucks

[__aaclcg7560]

Thus, companies are waiting for consumers to come, and consumers are waiting for raises and job stability before they spend more.

That haven't stopped Apple from designing new products, creating demand and selling like crazy.

Re:Print some bucks

[Tablizer]

That's true, but one product category alone is not going to keep an economy afloat. Plus, most of the money and jobs spent on their products ends up in Asia. It's not "trickle down", it's "trickle across".

China appears to gear their system (some would say "rigged") to be job-friendly rather than consumer-friendly. This is because people would riot and overthrow their dictatorial government if they had no jobs. Since they are not used to being consumers, they won't riot over lack of products. Therefore, their government subsidize exports using myriads of subtle tricks to escape the notice of "fair trade" inspectors.

Re:Print some bucks

[ChrisMaple]

The federal government is continuing to make more and more regulations to inhibit business activity. Two obvious examples are Obama's threat to destroy the coal industry and opposition to the pipeline from Canada. When a business can't be sure it won't be regulated out of business or have its profits stolen, it tends not to invest in new production, no matter how easy it is to borrow money to finance growth. There will be no recovery until Obama is out of office and it is known that his replacement is much better.

Re:Print some bucks

[__aaclcg7560]

My point is that Apple created demand by putting money into developing new products that people didn't know that they wanted yet. Most companies that hoard cash aren't doing much of anything while waiting for the public to start spending money again.

Re:Print some bucks

[Anonymous Coward]

Krugman calls it the liquidity trap:

http://krugman.blogs.nytimes.com/2014/10/04/nobody-understands-the-liquidity-trap-still/?_r=0

Re:Print some bucks

[Orange Crush]

If there's consumer cash sitting on the sidelines, waiting to be invested, where is it hiding? I'm not sure it's really there, having evaporated on gone to debt payments. There was a massive wealth transfer from the "consumer" class to the "investor" class during the last crash and the upcoming consumer generation has record levels of student debt. Wage growth has also been flat to negative.

Re:Print some bucks

[jfengel]

It's the corporate cash, rather than the consumers. A lot of it is sitting in the Fed itself. Bank reserves with the Fed have skyrocketed:
https://research.stlouisfed.or...

They've been sitting at about 3 trillion dollars. They could invest that in new products, but they don't seem to think that the consumers have the money to make that investment worthwhile. I think they're wrong. Consumers are starting to borrow again:

https://research.stlouisfed.or...

after a substantial blip during the crisis itself.

So I think (and I believe you agree with me) that this is really caused by the investor class failing to invest. That's an odd economic choice, since that kind of stagnation should mean that inflation gradually eats their nest egg. They've managed to keep inflation low. The Fed is offering free money, and instead they're putting their cash into the bank.

A lot of economists would say that it's time for even more forcible inflationary measures, since the current low rates only barely seem to be staving off deflation. The Fed hasn't been willing to go that far (they'd rather that the legislature do it if the investors won't), but they have repeatedly refused to raise interest rates. That's the action they take when they're afraid of inflation; it's the punch bowl they take away when the party gets going. And this party is stuck; it's not completely moribund but it's getting mediocre small talk (and many are shut out entirely.)

Re:Print some bucks

[phantomfive]

They've been doing that for nearly a decade now, and it has successfully prevented the deflation, but it's a little baffling that it hasn't touched off more inflation than it has.

The formula is MV=PQ, where PQ is the cost of everything in the economy, M is the money supply, and V is how quickly money changes hands. M has gone up dramatically (which you mention), but V has gone down just as dramatically, which means banks (or others) have not been spending their money, they've been keeping it.

Essentially what has happened with the federal reserve: keeping interest rates low has given banks free money. They needed money after the crisis, because otherwise they'd be bankrupt. TARP was the initial attempt to give them money, but that didn't work out politically so the Fed found another way to do it.

So, the Fed printed a lot of money, but it just ended up in banks who eventually will use the money to write off bad loans.

Re:Print some bucks

[complete loony]

You need to look at the rate of growth of debt. Without accelerating credit, the economy can't grow. As a population we have accumulated more debt than at any point in history, and we have little desire for more.

Re:Print some bucks

[RuffMasterD]

I think investors are fully invested. I am. What else can we do? It's just the companies aren't translating that into increasing productivity. There is less R&D, fewer new production facilities opening (even in China), barely any wage growth (stagnant consumer spending, catch 22 right there), keeping old machinery rather than replacing with more efficient machinery, little product innovation, I haven't seen anyone expanding into foreign markets (quite the opposite), etc. It's as if everyone looked around at everyone else, collectively shrugged their shoulders, and said "I dunno".

What companies ARE doing is borrowing at really low interest rates and buying back shares. There are multiple reasons for that. It's a cheap shot at raising share prices. By buying on the open market there is one more bidder nudging the share price ever so slightly higher, and reducing the number of shares that can be sold. It also reduces the number of shares, thereby artificially raising earnings per share. Remember, many CEOs are partially paid in stock options, so they benefit directly from higher share prices. They were supposed to do that by improving market share, revenue, margins, etc, but they just found the path of least resistance instead. I don't know how to fix everything else, but CEO stock options and share buy backs should be mutually exclusive at the very least. Heck, pay it back as a special dividend and let me decide if I want to buy more shares or spend that money.

Inflation might work. Japan is trying that after decades of mediocre growth. Doing so by raising interest rates risks stalling what little progress there has been though. If the fed does do that then they should have started a year ago, because the higher markets go, the further they fall.

they forgot something

[slashmydots]

I doubt it takes into account complete BS assets like "customer good will" and "estimated patent value" and monetary estimations of "brand recognition." They're sort of maybe almost worth something. If a company was only worth its building, computers, inventory, and furniture then the company is probably about to go bankrupt so at least SOME intangible assets are worth something.

What's the best value for inflation?

[Okian Warrior]

Economics is a science with predictive capabilities. The problem is knowing when this science leaves the world of economics and into the unpredictable world of human choice.

You're obviously more familiar with economics than I am - I've got a question, help me out.

What's the best value for inflation?

Meaning, what's the numerical value that we should be shooting for, for best results?

If it's complicated, then what's the formula for the complicated value? If you have time, how "flat" is that calculation? (Meaning: is it a spike or a gently rising/falling mesa? How important is it to hit the best value exactly?)

The calculation of inflation doesn't depend on human behaviour, does it?

So tell me - what's the best value for inflation?

Re:What's the best value for inflation?

[Alomex]

Currently believed to be about 4%, but it does heavily depend on human behavior. To wit, when we need deflation humans do not like to explicitly reduce wages, they would much rather simply not give you a pay increase and let inflation erode your wages away.

Because of this we need 4% inflation rather than the 2% inflation target proposed nearly two decades ago, which had ignored this all too human variable.

Re:What's the best value for inflation?

[ChrisMaple]

First, you have to define inflation. Classical economics defines inflation as any increase in the money supply. It would not be unreasonable to modify that to read that inflation is an increase in the money supply beyond the increase in population. Modern misinformation says that something like the cost of living index is inflation. Note that the CPI, for example, is a measure requiring much calculation and subject to political pressure, which is a strong argument for not using it.

For money to be a store of value, the rate of inflation must be very close to zero. This is more important than any illusory economy boosting that comes from large amounts of inflation, and inflation always creates political pressure for more and faster inflation. However, the damage caused by negative inflation probably exceeds the damage caused by an equal amount of positive inflation.

My judgement is that the target value for inflation, strictly enforced, should be that the money supply should increase between 0% and 0.5% faster than the population.

Re:What's the best value for inflation?

[WhiplashII]

OK, here it is:

1) High inflation is unstable inflation. Instability is bad for all humans (controllers and workers), as it means only every other generation gets to retire and the other have to be euthanized. So, high inflation (meaning roughly 10% and up) is extremely bad, and the closer you get to that the more unstable it is - so you would preferably be farther away from it.

2) Low (or negative) inflation is bad for typical worker humans. It is superficially the best for banks (controller humans), as the assets they are holding get more valuable. Long term, this is not true though - the controller humans are dependent on the worker humans, and so long term they have to allow them to get a good deal or no one will let them control anything. The most obvious downside to low or negative inflation is that debts become harder to pay off. A less obvious, but arguably more important downside is that instead of giving everyone constant raises (which make everyone feel good), any worker only performing "average" (as in half of all workers) has to have their pay cut each year (which makes them feel bad). Not that the silly humans would actually be making the same amount either way (in hamburger buying power, for example), but for whatever reason humans feel bad when you take something away from them even if it increases their value position.

So, you want to stay above 0%. You want to be far from 10%. For a long time, the Fed said that we didn't know more than that, and refused to give a hard number. Recently, the Fed have given a "soft" number of 2% as the ideal, base on history and simulations. You could argue the details, but you will almost certainly come up with a number that is materially the same as 2% - remembering, of course, that this is not a directly controllable (or even perfectly measurable) number anyway.

That's why everyone fights about how much inflation really happened - it is basically impossible to measure, so you have to take any particular measurement and only apply it when the situation is "normal" for that measurement. (The classic example being including the price of oil in inflation, and then predicting starvation or the poor because of high inflation)

Re:What's the best value for inflation?

[trout007]

Inflation is an increase in money supply. In a free market money would be provided by the market. Precious metals, IOU's, American Express travelers cheques, bitcoins, etc. Human choices would determine what the supply of money would be. For instance if the price for precious metals rose in relation to other goods you would have price deflation. You could buy more goods with less gold. If it became profitable to mine for gold than people would do so which would increase the supply reducing the price and reducing inflation.

So there is no optimal value of inflation. Central banks inflate because it benefits them, the politicians, and those that get to spend the money first.

Market Cap to GDP: The Buffett Valuation Indicator

[ed1park]

"it is probably the best single measure of where valuations stand at any given moment." - Warren Buffett

http://www.advisorperspectives...

Both Buffett Indicator And Shiller P/E Continue To Imply Long Term Negative Market Returns; 2015 Market Valuation
http://www.forbes.com/sites/gu...

Yes, the market is looking a bit frothy. Locally here in NYC, assets such as real estate are looking pretty high...

worthless technique

[gurps_npc]

Take a pimped out car. Let's say it's worth $50,000 on the open market. But if you break it apart and sell the pieces, you can probably get $80,000 or more - even admitting they are used. People don't like to do that, inpart beause it's a lot of labor - sometimes more than $30,000 to do dismantle the car and sell the pieces, even online.

With corporations, it often works the other way around - the whole is worth a lot more than the parts. Sum of it's parts is not a reliable way to price something. A prime example would be Apple corporation. If you were to break it up, so that the phone, music players, computers and tablet were all held by different companies and they would be worth a LOT LESS than the whole. It is the integration, the compatibility, that makes those things valuable.

Another good example is Amazon. Break it up into 3 different companies - a book company, an electronics company, amazon prime video, other physical products, and an internet fee processing company and it suddenly becomes far LESS valuable. Amazon makes it's money in large part by being the 'one stop' shopping location.

Management is also either worth something or a drag on the earnings.

Sum of it's parts is not a reliable method of pricing. It is at best, a 'ballpark' method, where things should be worth no more than 3 times that value, and no more than 1/2 that value.

Rich stock analysts

[sjbe]

I have never met a rich stock analyst.

I'd be happy to introduce you to a few. They're not particularly hard to find. They also don't have to be particularly good at analyzing stocks to do very well financially for themselves. They just have to be able to get people to listen to what they say.

All these little theories and formulas are swell, but let's see them put their money where their mouth is.

Companies like Goldman Sachs do exactly that and do it very successfully. What you have to remember is that stock analysts are really salesmen, not advisers. Their interests may not actually align with yours and often that is where the profit for them lies.

Re:Rich stock analysts

[Dunbal]

You're right. Let me rephrase that. I've never met a rich stock analyst who made his money by doing exactly what he told everyone else to do.

Re:Rich stock analysts

[WhiplashII]

That is true - but I know lots of rich economists who made his money by doing exactly what he told everyone else to do...

They just aren't the liberal economists that you see on typical news programs...

Re:Rich stock analysts

[dj245]

You're right. Let me rephrase that. I've never met a rich stock analyst who made his money by doing exactly what he told everyone else to do.

I've only ever found 1 who seems to do that. This guy. One of his rules is that he discloses what he is currently investing in. He also revisits his predictions later, identifies how he was wrong , and offers some commentary, as in the last table of this article.

I have not actually subscribed to his services, but have read his (Free!) newsletters for many years.

Re: Rich stock analysts

[BlueTrin]

This is a ridiculous statement, there are plenty of rich analysts in Private Equity ...

Ridiculous...

[Anonymous Coward]

...a company's value SHOULD be greater than the value off their assets. If they aren't, it is more efficient for the market to liquidate them as the resources aren't being used very well.

Congratulations!

[Anonymous Coward]

You've discovered the price/book ratio!

A company's stock price is the perceived value of ALL FUTURE BUSINESS conducted by the company.

A company's BOOK price is the current value of all tangible assets belonging to the company, less actual liabilities.

The problem is not looking backward

[aepervius]

All science does is look backward (gather data points of past experience) then construct a model which enables us to look forward. And that is the problem. If there is no predictability power , then you are not making science, you are reading entrail of fish.

What's the takeaway?

[CaptainDork]

"The economy depends about as much on economists as the weather does on weather forecasters."

~ Calvin Coolidge

BITCOIN

[Anonymous Coward]

There is a concerted drive to pump the value of Bitcoin. Much of this activity has its roots in Bloomberg's garden. This article just happens to be more good compost.

You don't understand the market at all.

[DogDude]

Stock valuations are based not only on actual assets, but future growth and earnings potential.

No, stock valuations are based on what people will pay for the shares.

duh

[bigdavex]

Investors and directors think the assets are more valuable combined than separated. Of course they think that, or else they would just sell the assets.

Companies Are Supposed to Be Worth More...

[Stormy Dragon]

...than just the sale value of their assets. If they weren't, there would be no reason to bother with running the company; you could just buy a pile of assets and store them somewhere.

Yea, but this time is different

[Maxo-Texas]

It won't happen again.

Actually, if you look at Monthly R.S.I., it's also doing interesting things.

I think the government trying to stop the ordinary business cycle recessions is making the recessions worse when they finally do occur.

And don't forget "hype"

[tomhath]

Because so many eCompanies are valued mostly on vaporware and hype.

Asset Price ...

[PPH]

... is based (among other things) on the supply of assets available to trade. So when the market is high, that means many investors value their held assets and don't make them available to trade. This reduces the supply and increases the value/price of the remaining assets still 'in the market'. There may be some other mechanisms at work that are artificially sopping up liquidity, like HFT.

If everyone put their portfolios up for sale, prices would drop fast and far.

Quantitative Easing

[tomhath]

Obama has been printing almost a Trillion dollars per year for the past several years; that's what Quantitative Easing is - adding to the quantity of dollars in the economy.

The reason it hasn't pushed up inflation is because there's still no demand, and there's no demand because so many employable people are either on Unemployment or out of the labor market. Changes to SSI Disability that were made a few years ago took over a million people who would otherwise have to work for a living off of the welfare and unemployment roles (and is trashing Social Security in the process). But SSSI and Disability are a bare minimum on which people can live so they can't consume much. Same with all the extensions to Unemployment Compensation, for a while people could collect for almost two years.

Financial Services industry.

[Anonymous Coward]

Stock valuations are based not only on actual assets, but future growth and earnings potential.

The financial services industry has done an excellent job in convincing people that they can predict the future - the psychics on late night TV could learn from them. They use jargon, incorrect usage of statistical techniques, and other BS to convince us that they're commissions and fees are warranted when in fact; their performance is all chance. It never ceases to amaze me how smart educated people get duped by them and the really pathetic part is that the people in the financial services industry actually believe their nonsense. And don't get me started on the CFAs - I think of them the way Scientologists think of psychiatrists.

You are missing the same point still

[SuperKendall]

Originally said:
Stock valuations are based not only on actual assets, but future growth and earnings potential.

You replied:

They're comparing the stock valuation to what the company would sell for if purchased. When you sell a company, you're also selling the "good will" and other value inertia things like brand familiarity

Goodwill is ALSO something that can increase in the future, just like monetary assets - you buy stock with the idea that the entire company value (including goodwill) will grow. So the original point is still a sound one.

Get rich quick schemes

[sjbe]

You're right. Let me rephrase that. I've never met a rich stock analyst who made his money by doing exactly what he told everyone else to do.

Bingo. It's exactly the same phenomena as guys who promise to teach you how to rich quick in real estate or forex trading or something else. If what they were selling actually worked, why would they not just use that information to get rich themselves? The ONLY way a stock adviser would be worthwhile is if they could beat the market average (S&P 500 etc) and most of them demonstrably cannot beat the market. Any time you can show an above average return others will pile into that opportunity and make it evaporate. The only way to prevent that from happening is to have an informational advantage which you would lose by advising others in most cases.

There ARE a few stock advisers out there who actually have a record of getting better than average returns. The problem is that you generally cannot tell a bad stock adviser from a good one until after the fact. Someone who has had a good track record for 10 years is no guarantee that next year they will have good returns.

Intangible Assets @ 10%?

[Anonymous Coward]

Intangible assets such as brand recognition, copyrights, etc... don't show up on balance sheets yet they still hold value, perhaps more than 10% of their stock price. Look at Coca Cola. Is their fizzy drink product really that much different than any other caramelized sugar fizzy drink?

A golden riddle

[Anonymous Coward]

Here's a golden riddle that will keep you scratching your head for years. Not only do all of the most powerful central banks in the world hold gold reserves, they hold tons of it, and most are slowly but surly adding to their pile, not selling it off. Now why in the world would governments -- master central planners of their own respective economies -- feel the need to own a physical commodity that only has value because it's rare, shiny, divisible, fungible, and universally accepted as money going on thousands of years? What could possibly be gained from this irrational behavior? Is it merely a runaway instance of group think, or do you suppose that something deeper could be going on? Why is there never any serious debate on whether to sell the gold to pay for more useful things, like infrastructure, or paying off debt?

That, my friend, is the golden riddle, and I personally invite you to solve it.

Re:A golden riddle

[WaterDamage]

There is no riddle to solve. The central banks refuse to believe in a total collapse of their created fiat currency but they use Gold to hedge currency fluctuations. Let me put it to you this way, if shit hits the fan most people go into survival mode just like when a hurricane is about to strike. The last thing anyone gives a flying fuck about is gold. The first thing they think about is getting safe shelter, food and water and boarding up their belongings hoping to minimize the losses.

Re:A golden riddle

[WaterDamage]

Another point I forgot to mention was the same central banks/quants never saw the housing bubble either causing many banks to completely collapse. As a matter of fact Bank of America is a zombie bank with ungodly liabilities. If the shit hits the fan one day, like a nuclear bomb in Manhattan, no amount of gold or money could stop BofA or any bank from going completely under. The Fed printed tons of Dollars and took rates down to zero to artificially buy the banks lots of time before the reaper comes in to take their souls away. If you think some banker is smarter than some survivalist out in the woods, my friend you have been drinking the spiked CoolAid from the same punch bowl the bankers drink from.

Trading one kind of risk for another.

[sjbe]

If you're worry about your money being inflated away, convert your fiat currency into precious metals like silver and gold.

So you are trading inflation risk for exchange rate risk since (almost) nobody takes bullion as payment and bullion fluctuates in value just like any other asset. Go ahead and try to pay for a hamburger at McDonalds with your gold coins. Let me know how that works out for you.

Re:Trading one kind of risk for another.

[__aaclcg7560]

Go ahead and try to pay for a hamburger at McDonalds with your gold coins.

A one-ounce American Gold Eagle coin has a $50 face value (melt value is ~$1,227). I could go to McDonald and buy a hamburger with a Gold Eagle, and get a pair of twenties and then some back.

Re:Trading one kind of risk for another.

[kaatochacha]

I've used odd unknown money to buy things in stores, such as US Half Dollars
Staff generally accept whatever you say, as long as you look like you're not lying.
In fact, they often say "Hmm, I think I'll buy that and take it home."
so, if I tried trading a $50 gold piece at Mcd's, I'm willing to bet the cashier would take it, give me my change, and buy it from the drawer.

Bullets become currency when things go to hell

[sjbe]

If things really go to hell, it'll be whomever has water/shelter/food, so don't bother hoarding precious metals as they won't be so precious if you can't get clean water.

If things really go to hell it will be whomever has bullets and a gun to use them in.

Re:Bullets become currency when things go to hell

[Enry]

That too.

Re:Bullets become currency when things go to hell

[Tyrannosaur]

If things really go to hell, it'll be whomever has water/shelter/food, so don't bother hoarding precious metals as they won't be so precious if you can't get clean water.

If things really go to hell it will be whomever has bullets and a gun to use them in.

I am going to get myself shot when I point out the guy with the guns' grammar...

Re: Bullets become currency when things go to hell

[BlueTrin]

He plans to use silver bullets this is why he is getting 30oz of silver.

Re: Bullets become currency when things go to hell

[Hognoxious]

He's expecting a vampire-zombie coalition?

Or is it werewolves, I can never remember. Fat lot of use I'd be...

Get into manufacturing

[sjbe]

I never believed in "making money from money"... I guess that's called "financial engineering" nowadays?

Doesn't matter if you believe in it or not. It works and it's a vital part of the economy. Financing in and of itself is not a bad thing. Making money in the stock market is not inherently bad either. Like anything it can be abused but that's not a viable argument against it.

That kinda insults me as an engineer, since we generally abide by physical laws.

I'm an engineer too. I'm also an accountant. You should get a thicker skin if that is all it takes to insult you. Economics doesn't care if you can't wrap your head around its concepts.

I'd love to invest in actual production... you know, things that add value and subtract costs instead of just "multiply" monopoly money. What options are there for that kind of thing?

Start, buy or work for a manufacturing company. That's what I do for a living.

Re:Get into manufacturing

[rwa2]

Sounds cool!

Maybe "insults" was poor word choice. It's just kinda strange to see people with strong math skills get sucked into doing stuff for Wall Street when the system is clearly rigged not in your favor. Rather than something, you know, useful to everyone. And then the rest of us are just stuck with 401k savings plans (if we're even that lucky) that we can't really do anything else with, other than play the market and hope someone doesn't screw it all up for us (even though that's exactly what everyone else on the market is there to do).

Yeah, I did have a good "accounting for engineers" class for my MS degree, it was easily more interesting than the other systems classes. Was taught by a brilliant Arthur Anderson guy who was laid off after the Enron scandal, ironically enough. Didn't cover much of the stock market, of course.

Anyways, just hold onto your butts for the next crash, I guess.

Meet Warren Buffet

[tomhath]

Most successful stock analyst of all time.

THIS TIME SHALL BE DIFFERENT!

[Anonymous Coward]

It's not different at all, is it Steve!?

Go ahead and try

[sjbe]

A one-ounce American Gold Eagle coin has a $50 face value (melt value is ~$1,227). I could go to McDonald and buy a hamburger with a Gold Eagle, and get a pair of twenties and then some back.

Go ahead and try that. I guarantee that they will look at you like you are trying to pass a $3 bill. Not a single person behind the counter will have ever seen one of those coins and they almost certainly will not accept it as payment.

Re:Go ahead and try

[__aaclcg7560]

I'm just pointing that I could buy a hamburger with a gold coin. I recenlty picked up a 1976 bicentennial $2 bill with the San Francisco mint mark in crisp uncirculated condition. Still legal tender. But I wouldn't try to buy anything with it. A store clerk is more likely to call the cops because it doesn't have any modern security features like the newer bank notes.

Gold has some utility - albeit not much

[sjbe]

But gold only has value because it's rare and shiny, but there are many things in the world that are rare and shiny.

That's not the only reason it has value. It has some amount of utility value. We can make useful things with it - electronics, coatings, etc. However it's utility is hugely exceeded by its perceived (real or not) value as a "safe" store of value. This perception is generally not backed up by evidence but it persists nevertheless.

Re:Gold has some utility - albeit not much

[Hognoxious]

I don't have the figures to hand and ICBATLIU, but IIRC the fraction of gold going into (non-decorative) industrial uses is about a tenth, the rest is a roughly even split between hoarding & jewelry.

Diversify

[sjbe]

When the dollar collapses and your paper assets (i.e., stocks, 401k and IRA) are worthless, you will sell your real estate to me for 30 ounces of silver to buy a loaf of bread.

Why would I do that? I have a gun and I know how to use it. If things are really that desperate I'll just take the bread if I need to. Furthermore my cash, stock and other assets are not the only things I own. I have real estate, useful goods like cars and tools and jewelery. I have assets in foreign currencies. I even have some amount of bullion. See when they say diversify your assets they don't just mean buying stocks and bonds. You have to REALLY diversify because it is highly unlikely that everything will lose value all at the same time. I might lose a lot but the odds of me losing everything are quite small.

Re:Diversify

[__aaclcg7560]

See when they say diversify your assets they don't just mean buying stocks and bonds.

Most financial advisors recommend stocks, bonds and mutual funds. But most people don't realize that these are all paper assets. If the dollar goes belly up, so does the dollar-denominated paper assets.

Re: Diversify

[Anonymous Coward]

So you diversify out of the dollar.

You don't hold assets in multiple markets?

What book value means

[sjbe]

Book value is the amount the company could expect to sell its assets for, assuming odd things like "goodwill" being something you can auction off.

Book value in accounting terms is the value PAID for the assets. It may or may not accurately reflect current market value. Many assets like brands can be very difficult to value though it is clear that they do have some value because they have never been bought or sold. For instance Coca-Cola is clearly a valuable brand but how much is it really worth? Nobody knows for certain because it has never been put up for sale. We can make an educated guess but it's just a guess. If the asset is never sold it may not have a book value even if it is clear it would bring a substantial price in a sale.

Re:What book value means

[Anne Thwacks]

How much it is worth is easily established:

The company is worth the same amount as, if deposited in the bank, would earn interest equal to the dividend that the company pays, with small adjustments for the risk that no one wll buy Coca Cola next year for some arbitrary reason, or that the raw materials will cost significantly more, or the regulatory authorities will ban it, etc.

The value of the Coca Cola brand is the difference beween the above value, and the value of a company measured in the same way, but selling "no name" brand cola (probably close to zero).

If the value of a company was only equal to the value of the assets, the company is obviously a pointless waste of space. For the average so called Q to be less than 6, it looks like the economy is in serious trouble.

Re:What book value means

[bingoUV]

The value of the Coca Cola brand is the difference beween the above value, and the value of a company measured in the same way, but selling "no name" brand cola (probably close to zero).

So to measure the worth of Coca Cola, you need to spend lots of money in establishing another cola company and make it sell no name brand cola. This is not practical. If the company is imaginary, it doesn't come under "easily established", it comes under "educated guess" that the GP was mentioning.

If the value of this imaginary company is assumed to be zero, you are essentially saying the value of Coca Cola company is same as the value of the Coca Cola brand. This is clearly wrong.

Dividends

[sjbe]

These days it is often far dumber than that. Unless a company is paying a dividend, the only value you have is what someone else is willing to pay for it.

Why is that dumb? That's true of ANY asset. In fact even if they are paying a dividend all the company is doing is transferring money to you that you already own as a shareholder.

In the age of worshiping the Almighty Growth, dividend payouts are more scarce than they once were and you can't expect a fledgling company will ever pay out.

A dividend pay out implies that the company does not believe that it has investment opportunities available to it that would outperform those available to the shareholder. A dividend is essentially an admission by management that the company has cash flow coming in but has no idea or no ability to put that cash to productive use. So it is a fair question to ask why you would ever invest in a company that in spite of the resources available to it cannot generate a reasonable return on the money it earns. Dividends are not a stupid idea but it's reasonable to question why they are being paid.

Re: Dividends

[DrLang21]

Why is that dumb? That's true of ANY asset.

Not true. My car has tangible value. My house has tangible value. My furniture has tangible value. My stocks do not have tangible value except for the dividends they pay me. Cash is the only value I receive from a stock, and if its not coming from the company, the company is not actually creating value for me. The value becomes more like a collectable.

In fact even if they are paying a dividend all the company is doing is transferring money to you that you already own as a shareholder.

Cash can buy me tangible value. I have to trade stocks for cash before they can be used to buy tangible value.

A dividend pay out implies that the company does not believe that it has investment opportunities available to it that would outperform those available to the shareholder.

That implies that stock value is directly related to the real value of a company. It is not. As a former 3D FX shareholder, I can guarantee you it is not.

Re: Dividends

[BlueTrin]

There seems to be evidence that over the long term stocks oscillate around or above the company value they represent, so it is not totally stupid although a bit baffling that people buy a company which will not lay dividends and without the ability to influence any voting decisions.

Re: Dividends

[DrLang21]

I mean, the reason I buy such a company is because it works and because keeping up with our economic system essentially depends upon participating in the system. It's lower risk gambling. The few companies I have invested in that pay good dividends always give me bigger headaches come tax time than its worth.

Re: Dividends

[BlueTrin]

Tax system with tax bands are always a headaches and encourage people to "optimise" their taxes.

Book value of assets

[sjbe]

Coca-Cola famously sold off all it's bottling plants, etc.

The bottling plants are not the brand. Coca-Cola is selling flavored sugar water. There is some value in the product but the VAST majority of the value is in the brand. After all you could buy Pepsi, RC, Faygo or any number of other drinks and you could probably pay less for them. So why did you buy a Coke? Furthermore since the Coca-Cola brand has never been sold any valuation of that brand is at best an educated guess.

But secondly, book value includes intangibles, such as goodwill, brand name, distribution chain, etc.

Book value generally includes only items that have been bought or sold. A company may have a valuable brand but unless it has been bought or sold at some point, its book value will be $0.00. Furthermore book value may have little to do with the current market value of assets owned. McDonalds has vast real estate holdings but these have been purchased over many decades, often for less money than they would fetch if bought/sold today. Their current book value is widely considered to be far less than their current market value but they are not marked to market under normal circumstances.

Re:Book value of assets

[Actually, I do RTFA]

Ah, thanks. You are correct. But, it's silly to say that Coca-Cola paid nothing for their brand... in fact, some (foreign?) advertising budgets get accounted for as assets and depreciation over time.

Re:Book value of assets

[sjbe]

But, it's silly to say that Coca-Cola paid nothing for their brand... in fact, some (foreign?) advertising budgets get accounted for as assets and depreciation over time.

It's not that they paid nothing for it, it's that you cannot get an accurate market value for it. They have never put their brand up for sale so what is it worth? It's like asking what a Picasso painting is worth. It's a unique asset worth what someone will pay for it but you'll never get that information unless you actually sell it. Any accountant will tell you (and I am one) that there is no book value for assets like that unless they get sold. Otherwise you could claim it is worth whatever you wanted for the value of the brand which isn't accurate or meaningful. It's an accounting convention for practical reasons.

There is some effort to move more towards mark to market accounting, particularly in IFRS accounting but that is hard to do with unique assets like a brand that have never been sold.

Re:Book value of assets

[Actually, I do RTFA]

Any accountant will tell you (and I am one) that there is no book value for assets like that unless they get sold

I'm confused. Coca-Cola bought it over time. And I thought you just told me book value was that paid for an asset. I know a giant loophole (at least in the 90's) was companies accounting for all their advertising (or international advertising maybe) as purchasing a depreciating asset (goodwill? brand? noteriety??) and then taking advantage of tax rebates that encouraged investment in assets. Then, writing off the cost over years.

Mod parent down!

[Anonymous Coward]

We're talking about durable currencies, not commodities.

Re:Mod parent down!

[Bob the Super Hamste]

Is there a difference when the shit hits the fan?

How to value assets

[sjbe]

I wonder how they value assets?

Depends on the asset. There is no single simple answer to this question.

While it does list intellectual property, how do you accurately value something that isn't sold/bought on a market?

In general the practice is to look for something similar that was sold and to use that as a proxy for its current market value. Sometimes this is not an easy thing to do. If the asset is very unique it may be impossible as a practical matter.

If a company holds a patent that they never try to sell, how can it be valued accurately?

It cannot be accurately valued. At best you can take an educated guess regarding what it might be worth but it will at the end of the day just be a guess. Think of it as an appraisal for an item. It might not actually sell for that much or it might bring much more but it's an educated guess by someone with a reasonable knowledge of the market for such assets.

Value of employees

[sjbe]

Employees don't really seem to be assets as far as the stock market is concerned.

That's not true. Most employee's portion of the value in the share price is basically a rounding error but it's not uncommon for executives to account for a substantial portion of the share price. Warren Buffet undoubtedly accounts for a very significant percentage of the share price of Berkshire Hathaway and when he dies/retires I would expect the share price of that company to drop. Interestingly the value of an employee can be negative. When Carly Fiorina left HP the stock ROSE 7% the day she left.

Re: Value of employees

[Anonymous Coward]

And don't forget, sometimes companies will acquire other companies just so they can get the employees, otherwise known as an aqui-hire.

No single number

[sjbe]

What's the best value for inflation?

There is no single number and even if there were it would be impossible to hit it with any sort of reliability. There are simply too many moving and difficult to measure parts of the economy to realistically get to a specific number. Central banks can often keep it within a few percentage point range but that's the best they can usually do.

The best answer is probably in the low single digits, somewhere between 1%-4%. Why? Higher inflation than that tends to exceed the ability of other assets (notably company earnings) to grow and thus people's assets shrink in value at a rate they cannot overcome. So how about deflation? That's bad too because then people are incentivized to NOT invest because they know their assets will be worth more tomorrow than today without them doing anything productive with them. So how about 0% inflation? See my earlier comment about how it is basically impossible to hit a specific number. You'll miss high or low and if you target 0% you'll get into deflation sometimes which is bad. So the answer is a low single digit percentage of inflation. That is enough to push people to invest and do useful things with their capital without causing them to lose value in their assets or sit on them without investing at all.

Re:No single number

[trout007]

Deflation is not bad in general. Just for those in debt. It's great for savers.

Re: No single number

[BlueTrin]

It is bad because it encourages saving and slow down your economy.

Re: No single number

[trout007]

Saving is required for sustainable growth.

Re: No single number

[BlueTrin]

And I think you are not talking about the same thing than I do ?

Gold has value because it doesn't corrode, it last

[raymorris]

> But gold only has value because it's rare and shiny,

Gold has value because it's virtually the only useful metal that doesn't corrode. There are objects made 10,000 years ago that still look pretty much new because they are gold. Steel lasts maybe 1-30 years, depending on the environment. Copper even less. Aluminum corrodes almost instantly, but it's a very thin layer of corrosion at first, so it's okay for many uses.

Tungsten carbide can't be bent, molded, or cut, so it's not particularly useful, though it doesn't corrode.

Re:Gold has value because it doesn't corrode, it l

[AthanasiusKircher]

Gold has value because it's virtually the only useful metal that doesn't corrode.

Yeah, yeah -- I wasn't going into too much detail here. Of course gold has some utility value, particularly in a technologically advanced society. But its current market price is a huge number of factors higher than that basic utility value -- and that "extra value" could vanish at any time. And the basic utility value can even vanish too -- in sufficiently dire circumstances.

A more accurate Q-value ..

[nickweller]

If you include the offbook debt then the ration is more like 700 percent. The only solution being to lay off such debt onto whole countries in the guise of structual loans.

Re:Gold has value because it doesn't corrode, it l

[WaterDamage]

So enlighten us why not hold diamonds? They are shiney and last forever too. Why not plutonium? It too is a extremely rare element and will boil water for you for the next 10+ million years without the need for fossil fuels? Tungsten , can't be bent? You must be one of those armchair full of shit engineers. Have you ever shaken an incandescent light bulb and seen that black filament wiggle? That is Tungsten in case you didn't know what Tungston was even used for.

easy answer

[Wolvey]

The answer, as usual, is money. The hard part is showing your work.

Financial "Engineering"

[rwa2]

ABET does not consider "Financial Engineering" to be an engineering field... it's just a bunch of quants setting up a house of cards so they can stretch the value of whatever assets they have available to be worth 15 - 30x more on paper once all of the banks finished loaning everything to each other. Packaging all of the portfolios of sub-prime loans to dilute the risks, and then setting up the rules and insurance so their initial investors get the guaranteed payout and the rest of the public investors that they've convinced to buy into their portfolio gets stuck holding onto the defaulted mortgages. And whatever it is that HFET people do to take a bit off the top of "normal" trades everyone else is trying to conduct, or by feeding wacky headlines to various news feeds to make some of these HFET algorithms flash crash parts of the market so they can buy in low. It stinks, and I resent having not many other viable options for what to do with my 401k savings, but what else can we do with them?

An iPhone is objectively more valuable and useful than the equivalent pile of raw materials. And if one iPhone is 100x as valuable as the raw materials, then 10 iPhones are 1000x as valuable as their raw materials.

From what I've heard of the stock market, it's not really that simple... Sure an iPhone is worth more than the sum of its parts, but Apple is special and has managed to market their brand so people will pay more than what their products are worth. That makes it sound overvalued to me. And Apple is also good at squeezing their suppliers while cornering the market with 1-2 year exclusivity agreements, so if they sell 10x more iPhones, that doesn't necessarily mean a 10x increase in the revenue of all of their suppliers. Not to mention that if the market analysts project that they could grow their sales by 10x, but they run into some supply chain snags and "only" grow their sales by 9x, they've failed the market and all of their stock prices tumble.

Buy stock in a company that makes stuff. It's not a good investment because "stuff" isn't all that valuable anymore to people in the era of 3D printers and rapid manufacturing, but hey, if it makes you happy...

Heh, yeah, investing in companies that make 3D printers and do rapid manufacturing would make me happy :-D . On one hand, it seems to be a good idea to turn stock market investments into useful "stuff" just before it crashes. On the other hand, even useful stuff that no one can afford to buy from you because their savings and investments were wiped out by a stock market crash isn't going to help you make ends meet :-/

Re:Financial "Engineering"

[NostalgiaForInfinity]

ABET does not consider "Financial Engineering" to be an engineering field

Of course it's not. It's also irrelevant to your investments. What I'm saying is that the basics of markets and economics should be pretty easy for an engineer to understand.

And whatever it is that HFET people do

Again, it's irrelevant to you our your investments.

It stinks, and I resent having not many other viable options for what to do with my 401k savings, but what else can we do with them?

You have tons of viable options for your 401k.

Sure an iPhone is worth more than the sum of its parts, but Apple is special

There is nothing special about that; any company that wants to stay in business needs to add value to its inputs.

That makes it sound overvalued to me.

Well, that's nice for you, but it simply means you're not a customer. What counts is that enough people are willing to pay for it; their reasons and whether you approve of them really don't matter.

On one hand, it seems to be a good idea to turn stock market investments into useful "stuff" just before it crashes. On the other hand, even useful stuff that no one can afford to buy from you because their savings and investments were wiped out by a stock market crash isn't going to help you make ends meet :-/

Stock market crashes simply average out in the long term. That's why you invest slowly and withdraw slowly. Trying to time the market is pointless for most people.

If you need money in the short term, gradually move some of your stocks into assets with guaranteed (if lower) returns.

Re:Gold has value because it doesn't corrode, it l

[bingoUV]

last forever too

Diamonds break easily along some lines. Once they break along those lines, the value of large diamonds is greatly reduced.

Yes deflation IS bad in general

[sjbe]

Deflation is not bad in general. Just for those in debt. It's great for savers.

Yes deflation is bad in general. Even a little bit of it is bad. If you need evidence of this you merely have to look at Japan since 1990. They've had mild deflation for quite a while and their economy has suffered greatly for it.

Deflation encourages people to save money beyond what is actually optimal for the economy in general. Hoarding basically. It hurts those with debts or with illiquid assets like a house. It results in less investment, less growth and reduced employment. It increases the real value of debt - effectively the same as increasing the interest rate. For an economy to be healthy there needs to be an incentive to take a reasonable amount of risk and deflation decreases that incentive. With deflation you can get a deflationary spiral where deflation leads to lower prices which leads to lower production which leads to lower wags and employment which leads to lower prices and the cycle repeats. Basically no economist I'm aware of thinks that deflation is a desirable thing.

Re:Yes deflation IS bad in general

[trout007]

You are only looking at who is hurt by deflation not the benefits. This is why Central Banking is so dangerous. It picks winners and losers for every action it takes.

Deflation hurts those:
in debt just like inflation hurts savers.
with houses but helps those looking to buy a house.

An economy needs savings to grow. Going into debt when there isn't actual savings (producing more than is consumed) cannot lead to sustainable growth but only malinvestment bubbles and crashes.

There is no such thing as a deflationary spiral. The economy always adjusts to whatever the money supply is. It just depends which industries were overvalued. Japan is suffering from stagflation where the Central Bank refuses to let deflation happen.

I agree that few economists think deflation is desirable which is why we are in such a mess right now.

CapEx Trending to Historical Lows Too!

[Anonymous Coward]

Subject says it all. Q ration over 1 and CapEx in the doldrums.

Diamonds have subjective cut, color, clarity. Divi

[raymorris]

> So enlighten us why not hold diamonds? They are shiney and last forever too.

May people do hold diamonds as investments / stores of value, but diamonds have several subjective properties which effect their value. See color, cut, and clarity. An ounce of gold is an ounce of gold, it's completely fungible. Not so with diamonds.

Also, if you have an ounce of gold and you sell half, you still have half the value left. If you have a one carat diamond and you cut it in half, you just destroyed much of the value. They aren't as readily divisible. Primarily, though, it's the subjective value factors - one 1 carat diamond might be worth ten times as much as another.

Re tungsten oxide filaments, look up William D. Coolidge. He developed a complicated multi-step process to pound tungsten oxide (tungsten rust) powder into bits of wire. It's not useful for much else, though - notice how easily it breaks. The difference between tungsten metal and tungsten oxide is the same as the difference between iron metal and iron oxide (iron rust). You can make engines, cars, and wrenches from iron. Try making these things from rust.

Re:Diamonds have subjective cut, color, clarity. D

[WaterDamage]

Gold comes in 10k, 14k, 18k, 24k, rose gold, white gold, etc. So What's your point about diamond's subjective qualities again? Would you know the difference between 14k and 18k gold without test equipment/chemicals? What about gold bars that are fake? You know, the ones where just recently, the Chinese coated tungsten bars with 10 thin layers of Gold on the outside and someone discovered that the gold bars were 90% Tungsten after they drilled with a drill bit past the first few layers? Now all the gold bugs are scared shitless that most of the Chinese gold bars might be 90% fake! No one had the balls to dare to drill all the other gold bars circulating the world since the gold bugs now realize it would destroy their entire gold supply if in fact most of the gold bars are fakes. Back to the Tungsten point. It never ceases to amaze me all the stupid shit people post, especially with those that have never worked on something claiming to be subject matter experts. Tungsten is ground into a powder, like flour, then it is melted in casts to make parts. And yes, Tungsten powder is used to make rockets, airplane parts and nuclear missiles used by the US military. So you are spewing complete BS none-sense with your claims of Tungsten. If you really want to see first hand how powerful tungsten powder forms into a solid metal go to your nearest wedding store and check out Wedding bands made of Tungsten and try to break or scratch one and you'll realize only Diamonds can cut Tungsten.

Feds are temporarily propping up doomed stocks

[Shalhav]

They're keeping interest low and printing money to prop up stocks. It may make things look OK for a while, but it will be followed by a big crash.

a dictionary might help you

[raymorris]

You might find a dictionary helpful for understanding the difference between subjective and objective and the difference between melting and pressure sintering.

The percentage of gold in an alloy is an OBJECTIVE measurement. The beauty of a diamond's color is SUBJECTIVE. Beauty is in the eye of the beholder.

You might also look up MELTING vs PRESSING. Tungsten powder is NOT melted to make jewelry or other objects. Rather, it's mixed 50/50 with carbon powder, then subjected to extreme pressure in the mold. It holds together the same way a snowball holds together. You don't melt snow to make a snowball, you press it. Tungsten carbide is formed the same way. As you correctly noted, tungsten carbide (which is only half tungsten) can't be scratched, or bent, or cut. (Except diamonds can scratch it.) It's pretty difficult to make things out of a metal that you can't cut, drill, bend, or file. It's used occasionally when extreme hardness is required, but 99.99% of metal objects aren't made from tungsten because most things CAN'T be. Most metal manufacturing requires drilling, or milling, or threading, or bending or ... . You can't do any of that stuff with tungsten.

Book Value Per Share

[mundlapati]

Market Capitalization should not be more than 10 x Book Value Per Share