Re: Closed - End Fund Puzzle

[dhenwood@xxxxxxxxx (Doug Henwood)]

At 1:21 PM 9/26/95, Paul Davidson wrote:

>Barkley invokes a strange argument
>
>-- namely that the "true fundamental" underlying the speculative nominal
>market value of closed end fund shares is the speculative nominal
>market value of the shares of stock the fund holds (
>(and he forgets -- (1) the expectations of the fund shareholders as to
>how clever the fund manager will be in getting into and
> out of stocks to reap unexpected capital
>gains in the future and (2) fund shareholders expectations about how present
>and prospective shareholders  expect the managers to reap unexpected
>capital gains.)
>
>It is hard to believe that speculation about speculation
>about speculation, etc. represents a "true fundamental".

I fail to see what's so strange about the idea that the contents of a
closed-end fund's portfolio should be thought of as the fund's "intrinsic
value." Chicago boys (which I recently learned is a great pun in Spanish:
si cago, voy!) may overdo the ease of arbitrage, but doesn't the
possibility of arbitrage at least exert *some* anchor?

Options are pretty insubstantial assets, but they too have something like
an intrinsic value, based on time, interest rates, and volatility.

But stocks and bonds do have more tangible underlying values than options,
if less so than closed-end funds - assets, profits, and/or dividends in the
case of stocks, and real interest rates in the case of bonds. (And
arbitrage pricing models can value the whole national stock market on the
basis of some simple economic indicators.) Of course wild oscillations
around these intrinsic values can and do occur - what would all those
youngsters do with their screens & phones if they didn't? - but over the
course of decades, centuries even, certain values have proved to have a
substantial graviational pull.

>        My best illustration that liquid securities traded on exchanges
>have no "true fundamental" such as the "real marginal product of capital"
>involves postage stamps. A former colleague of mine had a VERY valuable
>postage stamp collection and he traded stamps on a reasonably organized
>market. (It was so valuable that he had to keep it in a bank vault and
>hence it was very in convenient to see -- as a pastime -on rainy Sunday
>afternoons. Consequently its utility for visual pleasure was very small
>relative to its carrying costs. )

Postage stamps are a silly example to use for general principles of asset
pricing. There's nothing behind them besides perceptions. Gold may be a
sterile asset, giving it some of the characteristics of postage stamps, but
over the very long term its price has tended to gravitate towards a
constant purchasing power over time. (OK, I know there are plenty of
problems in measuring long-term purchasing power, but we're trying to
capture centers of gravity, not price the damn stuff down to the mill.) I
haven't done the arithmetic in a while, but last I checked the present real
gold price (in US$) deflated by the US CPI was about the same as it was
when Roosevelt seized private holdings in the 1930s. Since the frenzied
peak in 1979-80 was around twice this "intrinsic" value, one could fairly
say it was a bubble.

>Next thing Barkley will tell us, that Purchasing Power Parity (PPP) is the
>true fundamental for the US dollar exchange rate -- although I think you
>will find it hard to indicate any period between 1973 and 1995 when the
>Dollar was close to PPP. Why is the dollar have a long period when it iss
>undervalued (recent years) and a long period when it was overvalued (Early
>Reagan years)?

"Undervalued" and "overvalued" implies some intrinsic "value" from which
market prices are departures. Even PD can't shake the habit.

Why PPP - from the sphere of consumption - by the way? Why can't you also
model currency values as a function of differentials in national
productivity growth?

Doug

--

Doug Henwood
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