"Good stuff, but I thought its most important insight was that stock prices are not always forward looking. Unfortunately, I am not capable of saying whether this is true."
He does not state that stocks are always forward looking; he demonstrates when they're not. What he states is that forward-looking positive growth is the fundamantal dynamic, absolutely essential to capitalization.
The most important insight was that these periods when forward valuation ceased coincided with widespread (public) perceptions of systemic uncertainty. Put another way, what they call "loss of confidence" in the system. Or stated differently, that future valuations may not justify the investment.
ROI is fundamental to capitalization; not just to individual stocks and entities, but to markets, credit and economies in general. The ROI does not have to be increased valuation; it can be flight to safety (USD bounces in uncertainty), preservation of capital (gold): as long as it's not certain loss.
But there must be an ROI.
Once ROI ceases, capitalization ceases; the order of the system itself is threatened. Demographics, debt, EROIE [ en.wikipedia.org ], environmental concerns and many other factors contribute to global perception of reduced ROI. Since the crisis it's a constant observation on SI threads that trading is thin: beyond algos, institutional players such as banksters, hedge funds, sovereign wealth funds and pension plans the public is staying away from markets in droves.
There's growing fear that debt and markets will no longer reward capital inputs; that no matter what they players do they face loss, not gain. If that's true status quo is threatened. The whole system dynamic collapses and probably, civil unrest begins.
In fact for a few years now, discussions about exactly that possibility have pervaded SI, on many different threads.
Jim |
