Re: Fine work by our new Nobelist

From: sinister (sinister_at_nospam.invalid)
Date: 10/15/04 

Date: Fri, 15 Oct 2004 12:01:22 GMT

<royls@telus.net> wrote in message news:416ef8c9.23756206@news.telus.net...
> On Wed, 13 Oct 2004 22:44:10 GMT, "sinister" <sinister@nospam.invalid>
> wrote:
>
>>"Ron Peterson" <ron@shell.core.com> wrote in message
>>news:10mr4v3pj2r69eb@corp.supernews.com...
>>> Igor <jjweatherby@houston.rr.com> wrote:
>>>
>>>> In short a big fall in prices does not mean stocks were overvalued.
>>>
>>> It's a hint. If I build an apartment building and can't get any renters,
>>> that apartment building has minimal value. The corporations eventually
>>> had the same problem with demand drying up because the US economy was
>>> sick.
>>
>>Right; that's another obvious problem. Prescott et al. can rant all they
>>want about corporate assets, but capital assets are often worthless if
>>demand dries up, or if the assets become obsolete, etc.
>>
>>The fact that they placed so much emphasis on "intangible assets" has to
>>raise eyebrows.
>
> That's the clincher. "Intangible assets" often just means non-land
> rent collection privileges.

I assume you mean like intellectual "property rights".

I'm not sure what Prescott and his coauthor were referring to. Maybe they
estimated the value of such assets by some indirect method.

> Same thing the dot.coms were selling. If

Certainly the dot.coms were marketing themselves based on some sort of
intangible assets. But it's not clear that those "assets" were truly
connected to rent collection. It's true in the case of Microsoft, and a
wise investor might say "due to networking effects, MS has a medium-run
monopoly on operating system software, hence might be a good investment
candidate because it can extract large rents." But for something like
pets.com, I think most (unwise) investors were thinking "the internet is
hot...," not "pets.com will maintain a monopoly on whatever and thus not
have its outsized profits competed away."

Not that I'm unaware of the argument/claim that outsized returns are almost
always indicative of some kind of rent collection---IIRC you argued the
issue of the relation of rents and the time pattern of outsized returns on
sci.econ. (That is, is something a rent if it's momentarily not competed
away.)

> they had stuck with actual capital (not even counting land), the
> research might have had some meaning. Certainly counting bubble
> assets like land, stocks, etc. to find the "underlying value" of
> corporate stock is just idiotic, if not outright dishonest. By that
> "logic," they could just as easily convince themselves that Japan's
> stocks were not overvalued in 1989, even though the Tokyo market's
> capitalization was based mainly on land holdings that a few years
> later had fallen in value by 70%-80%.

Right. Stock valuation should be based in part on the projected earnings of
the company. ("In part" because there's always the issue of investor
sentiment affecting P/E.) Assets are worthless in terms of return if they
don't earn anything. Which is why the paper sounds so silly. Of course, I
should read it before pontificating much more about it...

>
> -- Roy L

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