Here's some more interesting little ditties.... I find them interesting due to my belief that economists are actually very astute and usually right... eventually:
soros.org
<<What I need to do is to demonstrate that there are instances where the participants’ bias is capable of affecting not only market prices but also the so-called fundamentals that market prices are supposed to reflect.
1.)
The common thread in the two instances I have mentioned is so-called equity leveraging; that is to say, companies can use inflated expectations to issue new stock at inflated prices, and the resulting increase in earnings per share can go a long way to validate the inflated expectations.
2.)
Consider, for instance, the boom in international lending
which occurred in the 1970s and led to the bust of 1982. In the boom, banks relied on so-called debt ratios, which they considered as objective measurements of the ability of the borrowing countries to service their debt, and it turned out that these debt ratios were themselves influenced
by the lending activity of the banks.
In all these cases, the participants’ bias involved an actual fallacy: in the case of the conglomerate and mortgage trust booms, the growth in earnings per share was treated as if it were independent of equity leveraging; and in the case of the international lending boom, the debt ratio was treated as if it were independent of the lending activities of the banks.
But there are other cases where no such fallacy is involved. For instance, in a freely-fluctuating currency market, a change in exchange rates has the capacity to affect the so-called fundamentals which are supposed to determine exchange rates, such as the rate of inflation in the countries concerned; so that any divergence from a theoretical equilibrium has the capacity to validate itself. >>
Wow, sounds an aweful lot like today to me.... the equity example is clear.... check out IBM's earnings per share since their buyback. Number 2 sounds like the same excuse used to look at debt load by families in the U.S. as being OK... no one is looking at this increased leverage as one of the reasons for the boom now subsiding, and what that might mean. And well, the icing on the cake is clearly the currency market implications... downright scary due to it's enormity and in no need of commentary other than it is clearly the mother of all potential disasters.
DAK |
