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Pastimes : Ask Mohan about the Market
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To: studdog who wrote (6946)11/4/1997 1:50:00 PM
From: Cynic 2005  Read Replies (2) of 18056
 
Karl, I do not appreciate that link at all. That put too much stress on my brain cell since I had to think! -g- I think earlier Bonnie gave a link to an actual paper by the Feds.
Seriously, I suppose the paper is intended for Fed policy review than for an academic publication. I review a number of research papers every year. If that paper came to me for review, I will rip-it apart since it has a lot of lose ends. Otherwise a good source of worry for the Feds. -g-
1.What the Feds are essentially saying is that markets are not efficient and when they go out of whack on the up side, they (Feds) have a duty to see it correct to fair value. A very true but touchy argument. Let us assume a noise level of 5%. i.e. if the market is within 5% of the fair value, we will consider that market to be fairly valued. Look at the graph in #3. With my definition, the market was fairly valued in 1981 (just prior to this 15 year bull), 84-85, 90-92 (recession). partly in 94 and in 1996. The rest of the times it is either undervalued or over valued. I too, hardly call it "efficient."
2. They mentioned 3 factors to correct over-valuation a) drop in stock prices b) a drop in bond-yield and c) an increase in expected earnings. I guess the analysts are taking care of (c) -g- But all these things are in no single person hands. How are the Feds going to do bring-in consensus and sense to the market? To rise interest rates before considering other alternatives such as increasing the margin loan rates is not something they want to do. But AG suggested that it was an alternative they were considering.
Just my thoughts. Not very organized, but good enough for an unfinished works. -g-
-Mohan
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