Registered: Jan 2009
01-24-12 10:39 PM
Quote from Ed Breen:
Mghoul, I don't think anyone was suggesting that uncertainty about asset value should or does cause markets or individual economic actors to 'freeze.' Myself, with apology to Alan Watts, I see 'The wisdom of insecurity.' I think a condition of uncertainty within certain standard deviations is the normal context in which we live and invest.
Having said that, I still think we need to look at the basis of present value in our collateral assets. I think I have written here before, that current value is entirely dependent upon future expectations....of course these expectations take place in a context of uncertainty, but it is the level of uncertainty about the future that we use to discount our expectations. In a route financial sense collateral assets are valued by their expected future income discounted to present based up a cap rate assumption that accounts for the risk that future income will in fact be realized. That discount of future uncertainty in the realization of profit has a tremendous impace on the present value of assets. We see this impact on equities every earning season...the current value of Apple shares will change tomorrow as we update our view of Apple's future prospects based on what they report tonight.
In a different asset class we appraise the purchase of house now based on its after tax cost today, the likelihood of mortgage rate increase in the future, property tax increase in the future and whether we think housing values will appreciate or continue to depreciate.
Right now we deeply discount future appreciation prospects in retail housing in most locations....so the collateral is not worth what it once was. In sovereign debt its the same thing...do you think Greek will pay even its written down debt in the future? Do you think the U.S. will pay its sovereign debt in the future? What assets and attributes that accrue to Greece go into your discount of whethere they will pay thier debts....what assets and attributes contrast in the U.S. or Germany make you discount their future differently?
I do like your answer about why we think U.S. treasuries have value. I just look at it at more in terms of the present is a result of what we think about the future.
Sure, I 100% agree with everything you have said above... In general, my view is that the markets (of all sorts) represent, currently and as of now, the best methodology we humans have to discover and establish value in a world of uncertainty. Sure, this methodology has a whole variety of flaws, but I would suggest that, over a medium- to long-term horizon, on balance, it's pretty good. IMHO, that is one of the main reasons why markets are useful.
As to your questions. Will the Greeks pay their debts, restructured or otherwise? I have no idea. I consciously choose not to participate in this particular mkt. Off the top of my head, I don't think it's a foregone conclusion that they don't. Will the US pay its sov debt in the future? I'd say it will, with a very high probability (which is what the mkt is pricing). The factors that matter in the comparison are many. One of the more important ones is the ability to print your own ccy and the current deficit/debt to GDP, as well as the overall resilience and competitiveness of the economy.