1/6
Charlie Munger says that markets are wildly overvalued, and its a little hard to disagree with him. In my "bezzle" piece I noted that 20 years ago Munger explained that overvalued markets are a form of bezzle, or fictitious wealth.
bloomberg.com/news/articles/… via @technology
Charlie Munger says that markets are wildly overvalued, and its a little hard to disagree with him. In my "bezzle" piece I noted that 20 years ago Munger explained that overvalued markets are a form of bezzle, or fictitious wealth.
bloomberg.com/news/articles/… via @technology
2/6
It is fictitious because it leaves us collectively, albeit temporarily, feeling wealthier than is justified by the future production of goods and services. As Munger suggests, and as I explain in my piece, both the creation of bezzle and its amortization are pro-cyclical.
It is fictitious because it leaves us collectively, albeit temporarily, feeling wealthier than is justified by the future production of goods and services. As Munger suggests, and as I explain in my piece, both the creation of bezzle and its amortization are pro-cyclical.
3/6
But their impacts aren't symmetrical. While bezzle-creation can artificially boost economic activity through the wealth effect, bezzle-destruction is likely to undermine economic activity much more aggressively through a negative wealth effect.
carnegieendowment.org/chinafinancial…
But their impacts aren't symmetrical. While bezzle-creation can artificially boost economic activity through the wealth effect, bezzle-destruction is likely to undermine economic activity much more aggressively through a negative wealth effect.
carnegieendowment.org/chinafinancial…
4/6
There are probably two reasons for the asymmetry. First, falling markets create more uncertainty than rising markets. Second the wealth effect probably also asymmetrical: a one-unit increase in wealth is likely to affect our consumption by less than a one-unit decrease.
There are probably two reasons for the asymmetry. First, falling markets create more uncertainty than rising markets. Second the wealth effect probably also asymmetrical: a one-unit increase in wealth is likely to affect our consumption by less than a one-unit decrease.
5/6
The problem is that if rising markets are encouraged by a too-accommodative Fed, and if the Fed will always respond to the increasingly painful economic consequences of an adjustment in market prices by easing liquidity, then either we believe...
The problem is that if rising markets are encouraged by a too-accommodative Fed, and if the Fed will always respond to the increasingly painful economic consequences of an adjustment in market prices by easing liquidity, then either we believe...
6/6
that prices can remain forever untethered to economic reality, or we accept that ultimately there will be some other adjustment mechanism that the Fed cannot control which realigns prices with fundamentals. This other mechanism is likely to be pretty painful.
that prices can remain forever untethered to economic reality, or we accept that ultimately there will be some other adjustment mechanism that the Fed cannot control which realigns prices with fundamentals. This other mechanism is likely to be pretty painful.
"Overall, property prices rose 9.2 per cent across 55 countries in the 12 months to the end of June,...a result of the gush of cheap money that central banks released into the markets."
ft.com/content/282e38…
ft.com/content/282e38…
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