Mucho, I don't see a reason for an equity risk premium. While it's true that the Fed is not going to go bust [very unlikely anyway], a spread of companies is very secure. More secure than a fiat currency which has nothing to hold it up.
A fiat currency, in the world of encrypted cyberspace and Q currencies, is like Wile E Coyote suspended in air over a cliff edge. A share-backed cybercurrency has the value of productive enterprise as its value. That is real value and not going away while people and companies are around.
People now have a stock portfolio, with a credit account, credit cards, cheques, ATM access, on-line access in foreign countries. That's what I have at Prudential. I don't need money other than as a pricing mechanism. It's irrelevant as a store of value [other than in tiny quantities as a debit balance - I don't want to hold an asset with no backing].
It's only a small step from that position for PayPal or others such as QUALCOMM or Microsoft or gang of them to pool some shares, create a cyber currency, the Q, with 100q to the Q, which can be traded securely in cyberspace without the snooping eyes of tax authorities stealing some of it.
US$ were fine for the 20th and 19th century. Aztecs used gold. Some people used sea shells. It's time to move on. The P:E ratios recognize that and so there is no more risk premium for shares. My guess is that something like a P:E of 25, which is 4% return on money, with no inflation and no tax, is just fine. Especially when there is a P:E growth rate too. An equivalent US$ interest would need to be at about 6% to take account of tax and inflation risk [or outright collapse]. As Argentinians know, fiat money can go poof in the night.
We should expect an increase in US$ interest rates in 2002 as the markets stabilize and GNP recovers. At the current low rates, share prices should be much higher than they are.
Mqurice |
