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« Trendline Deception | Main | Musings for June 11, 2007 »

June 07, 2007

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Bill a.k.a. NO DooDahs

First, we shouldn't confuse money and wealth. Voluntarily exchanging money for goods and services increases wealth, because all parties to the transaction see the situation to their betterment. A purely monetary transaction analysis misses this point.

Second, look at the role of central banks and the fractional reserve system.

RB

What I have not understood is this -- how can wealth of one person translate into liquid money for another if there isn't the corresponding liquid money available under conventional savings measures. It appears that can only be the case if said money comes from abroad.

Bill a.k.a. NO DooDahs

Reality never trumps sentiment. Never. It may eventually CHANGE sentiment, but sentiment backed by money is the only thing that moves markets.

It can work both ways, ya know. A positive reality may have to wait years before sentiment shifts ...

Cal

These numbers quoted by Malpass are interesting, but ultimately not helpful if the context is not known.

The $587B increase in Q1 is a 2% growth on net assets, not bad assuming these figures are related, however, the question is how this growth is spread amongst the populace.

As Galbraith noted, a nation of middle income earners vs. a nation with the same wealth divided amongst only a few will show significant differences in spending patterns.

If the rich are just getting richer but the typical consumer is feeling both poorer AND spending less, I would posit that the American economy is going to be in big trouble.

Wall of worry is a good talkback term, but the real question is how the long term falling dollar trend will affect inflation. Rising bond yields would be only one effect.

All punditry aside, ultimately I suspect we are in a market stage where fiscal realities will trump sentiment.

oldprof

Very interesting, Will. There was discussion as long as thirty years ago about trying to make taxation a better reflection of permanent income.

Readers should go to your site (click on Will's name) to check out the charts.

Thanks,

Jeff

will rahal

Some economists believe that consumption is based on "permanent" income.
The spending that has taken place during the last 20 years, convinces me that, wealth(from real estate or stock market) is also a major factor.
I took consumption and divided it by income and got some intersting results. For the first time in four decades the non-durable/wage index climbed to a new level indicating a drop in discretionary spending.

oldprof

Good question, Shrek.

As a regular reader, you know that we use the interest rate comparison as a good starting point. Those just joining the discussion now might want to go back and look at the series on the Fed Model (just enter it in the site search window).

We check out the valuation gap on a regular basis. The most recent S&P forward earnings yield is about 6.4%, slightly lower than our last report. The S&P has gone up, but so have earnings forecasts. Even with the ten-year note trading at 5.12%, the gap is still 26%.

The 6.4% earnings yield has gotten quite a bit of mention from those following the behavior of private equity funds.

Thanks again for bringing this up.

Jeff

Shrek

At what level do interest rates make you readjust the valuation disparity in stocks?

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