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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Ilaine who wrote (34463)	10/24/1998 12:02:00 PM
From: Joseph G.	Read Replies (1) \| Respond to of 132070

<<Do you measure in nominal dollars, or adjusted dollars?>> If corporations do business in mongolian tugriks, you measure in mongolian tugriks, if they do in nominal $, then in nominal $. The measure is internal to the business, not what a deranged economist dreams up.

To: Ilaine who wrote (34463)	10/24/1998 3:39:00 PM
From: Knighty Tin	Read Replies (2) \| Respond to of 132070

Cobalt, I don't know Paul Krugman. But responding to some of the arguments you quoted bit by bit: 1. Actually, the idea that gold will increase more in value than other commodities makes me like gold bugs. But I know what he is saying. Pegging a currency to gold may not be healthy. However, I would counter that holding a national store of gold, and adding to it when the price declines, may be very healthy. National treasuries, of course, have done just the opposite. They are selling their gold in price declines and will add to their reserves when it rises in price again. Sounds like the way brokers do asset allocation. <G> I will take the other side of both those trades. 2. The question of whether the Dow or some other index is overpriced relative to gold depends upon where you start and end your counting period. If you say the Dow 30 was 41.52 in 1932 when FDR raised the price of gold from $20 to $32, you see that gold is up about 15 times since then and the Dow is up 207 times. His argument from 1971 is bad on the logic front. He adjusts the Dow for inflation, but not the gold price. Uh, gold pricing is a measure of, among other things, real or peceived inflation. I consider that argument non-sensical and possibly dishonest. 3. The price of stocks is related to the real earnings power, current and future, of the corporations behind the stocks adjusted for the risk-free rate of return today and in the future. So, the price of stocks, IMHO, must reflect some reality about the true value of the businesses. If that is true (and it is the only real choice), then we are at a level rarely before seen in the value of stocks relative to their eps, or, price earnings ratios. So, to deserve that type of valuation, earnings growth has to be among the best we have ever seen and interest rates among the lowest we have ever seen. Thanks to Alan "The Bubble Enabler" Greenspan, interest rates are fairly low. However, the current cut in the discount rate only gets that rate down to a level that is still above what it has been on average since 1918. Yes, there is a promise of further cuts to come. Heck, in the Depression, the rate got down to 1/2 of 1%. But these rates do not support this valuation. As for earnings, current eps are poor and though analysts are estimating too high right now, even their pollyanna estimates do not bring earnings power up to any level that supports these prices. So, if I am right on eps not growing the way the analysts predict, then we are way overvalued. If they grow the way analysts predict, we are less overvalued. If they grow at 20% or so, we are fairly valued. Notice I did not mention inflation in my valuation model. The reason is two-fold. First, both earnings (or dividends, if there were such things any more) and stock prices are quoted in the same currency, so inflation doesn't figure in those ratios. And, the risk-free rate by which I discount epe contains an estimate of inflation. Hope this helps. MB

To: Ilaine who wrote (34463)	10/26/1998 11:30:00 AM
From: HB	Read Replies (1) \| Respond to of 132070

"nominal dollars, or adjusted dollars"? Do you mean adjusted for inflation, by some CPI-like measure? If so, then prices in those units shouldn't show inflation. You look at prices of a basket of goods in nominal dollars. The hard thing is dealing with the fact that what people consume today is not the same as what they did 70 years ago, so there's no single accurate index of inflation in terms of goods. Using one commodity, gold, doesn't seem like the greatest idea: Wanniski is saying, even though your equity in US companies may buy more bananas, more megahertz of processing power, more square footage of better-insulated housing, whatever, it's worth less because it won't buy as much of a particular yellowish, ductile metal. Thanks for reminding me of the Krugman site, there's some great new stuff there. I don't know if Krugman counts as a lefty in Massachusetts, though -G-. Cheers, HB