Value and Stock Market Declines
The stock-market free fall has financial pundits and politicians wailing about the trillions of dollars lost in the US markets, writes Mark Pribonic. All this hand wringing over value is a relic of an accepted neo-Keynesian misnomer. Unfortunately, the modern-day idea of value has produced a hallucinogen that causes people to take leave of financial common sense. It is known in economic circles as the "wealth effect." FULL ARTICLE
Comments (4)
Rubén Rivero
Your statement that the value hasn't been destroyed, just shifted toward other assets such as a huge hypothetical mattress is crucial for understanding the current situation. Perhaps this shift in priorities will take place over the next few years.
Published: October 22, 2008 12:56 PM
prettyskin
There are really no financial crisis for the federal government to step in and bailout banks. What a sham! Stocks, and they likes, are risk prone investments- some loose and some win.
What I can't understand is the move to socialize banking and the incoming government agenda. I am more leaning on both major parties are two of the same- cut from the same cloth.
Published: October 23, 2008 1:54 PM
Mark Humphrey
Mr. Pribonic has a unique, if curious, explanation for the troubles that ail us. The market price of US equities declines roughly 43%, and he avers that the loss is ultimately ephemeral, because Austrian economics ranks values ordinally, rather than cardinally.
In truth, I have no clear idea of what he is driving at. But one thing I do understand clearly: the methodological tool of subjective preference and ordinal ranking of values properly utilized by the Austrian School, for the purpose of grasping cause and effect in economics, has precisely zero relevance to the challenge of making smart investment choices.
Smart investment choices are good choices. But good choices are not a matter of subjective preference; they are a matter of life and death. Good choices uphold and enhance one's ability to lead a happy and fullfilling life. Similarly, good investment choices enable one to make money or preserve capital in pursuit of a good life. This is why Mr. Pribonic indirectly defends the objective (moral) value of prudence in his article.
What people most need is rationality in investing, as in all other walks of life. Rationality in econmics upholds the methodology of subjective value and ordinal ranking. Rationality in investing requires the virtues of prudence, inrtelligence, and courage.
The fact that some unfortunate or incompetant investor ranked Google or Goldman Sachs or AIG really really high on his ordinal hierarchy is not relevant. All that matters--or ought to matter--to any individual investor is the money she earns or loses. Care in upholding the eternal verities of investing tends to yield good results; neglect brings financial ruin.
This is why investment choices revolve around the cardinal principle of "fundamental value", which is the application of normative standards to market prices.
Published: October 24, 2008 9:41 PM
farouk
i think we are near the market bottom, most stocks are undervalued where else could they go?
Published: October 29, 2008 4:43 PM