brief interpolation of Greenspan's speech:
First, the rapid shift in the composition of gross domestic product toward idea-based value added is muddying our measures of current earnings and, hence, our projections of future earnings.
i.e., Thinking about the damn rise in internet stocks (idea-based value) is ruining my time for morning coffee!
Software that is embedded in capital equipment, and some that is stand-alone, is currently being capitalized and consequently amortized against current and future earnings.
i.e., Microsoft, the company, should, at most be valued at the company's depreciation value, which, last time i checked, was around $5 a share, which includes Bill Gates' hairpiece and the toilets in their building
Indeed, there is even an argument for capitalizing new ideas, such as different ways of organizing production, that enhance the value of a firm without any associated outlays. Some analysts judge the size of undercapitalized outlays as quite large.
i.e., if I had my way, capitalizing a "new idea" would be worth absolutely $0 until that new idea produced revenue and/or at least was able to produce a nice tangible massage in some red light district
Even our most sophisticated analytic techniques have difficulty dealing with the interactions among time preference, risk aversion, and uncertainty and with the implications of these interactions for the risk premiums that are embedded in asset prices. It is our failure to anticipate changes in this discounting process that much of our inability to accurately forecast economic events lies.
i.e., We don't know what in the heck going on or where we're going
For example, the dramatic changes in information technology that have enabled businesses to embrace the techniques of just-in-time inventory management appear to have reduced that part of the business cycle that is attributable to inventory fluctuations and, accordingly, may well have been a factor in the apparent decline in equity premiums that has characterized the latter part of the 1990s.
i.e., Dell's "just in time" model was partially responsible for the stock dolldrums this summer and it's killing Compaq and screwing up our way of looking at inventory, dang it!
An individual's degree of risk aversion may vary through time and possibly be subject to herd instincts. Nonetheless, certain stable magnitudes are inferable from the process of discounting of future claims and values.
i.e, It's those dang internet Indians again. The herd instict. We need another Wounded Knee; this time we really masacre em'
Enough investors usually adopt strategies that take account of longer-run tendencies to foster the propensity for convergence toward equilibrium. But from time to time, this process has broken down as investors suffer an abrupt collapse of comprehension of, and confidence in, future economic events. It is almost as though, like a dam under mounting water pressure, confidence appears normal until the moment it is breached
i.e., especially if you wet the bed at night. It's a really, really wet breach then. And it's a real confidence killer.
Probability distributions that are estimated largely, or exclusively, over cycles excluding periods of panic will underestimate the probability of extreme price movements because they fail to capture a secondary peak at the extreme negative tail that reflects the probability of occurrence of a panic.
i.e., DANG I wish my wife had sold Dell at $49 this last time around
Moreover, it is evident that borrowings against capital gains on homes influence consumer outlays beyond the effects of gains from financial assets. Preliminary work at the Federal Reserve suggests that the extraction of equity from housing has played an important role in recent years. However, stock market values and capital gains on homes are correlated and, hence, their separate effects are difficult to identify. This is an area that clearly warrants further examination.
i.e., whose the dumb a.. that borrowed money from their home equity to invest in the stock market? stop that you idiot or I'll have to examine you further
Accordingly, we have little choice but to confront the challenges posed by these questions if we are to understand better the effect of changes in balance sheets on the economy and, hence, indirectly, on monetary policy.
i.e., And after all that I said, I STILL don't know what the frick is going on, although I'd like to indirectly better understand what you're serving for lunch here in Jackson Hole. Bottom Line: don't buy internet stocks, read balance sheets, and figure out where monetary policy is going after we figure it out ourselves. |
