Re: The fundamentals of postage stamp value

[ROSSERJB@xxxxxxxxxxxxxxxx id <01HVRRY1KGZKHU2FKQ@xxxxxxxxxxxxxxxx> for pkt@xxxxxxxxxxxxxxxx; Wed, 27 Sep 1995 13:13:07 -0500 (EST)]

     I'll get "listed," but the topic is hot.  Tough.
4 points:
     1)  Some kinds of assets may have a fundamental which
cannot be known because the stream of "net returns" is utterly
unobservable.  This is the case of the rare postage stamp.
A collector may buy it because they enjoy having it, even if they
leave it in a vault all the time.  No speculation, no bubble,
just plain old consumption purchase to max personal utitlity.
     However, there are people who "invest" in postage stamps,
buying not because of personal pleasure of looking at or owning,
but out of an expectation that its price will rise and they can
make money.  I strongly disagree with Jamie G. that expectations
of future price rises are part of the fundamental.  They should
reflect expectated increases in future net benefits, which if
properly known today should be reflected in today's present
discounted value.
     But other than half-baked survey evidence we shall never be
able to determine whether or not a postage stamp's price movement
is a bubble or not.
     2)  Some assets may not have a clearly defined fundamental
because of multiple equilibria.  Foreign exchange rates are probably
the most likely case here, despite the vague evidence of long-run
reversion to PPP (relative to US, UK down and Japan and Germany up
since 1945).  But there are many different models of the "equilibrium
exchange rate" bringing in financial variables and all kinds of goop.
Some of these models have infinite equilibria.  There is no well-defined
fundamental for forex markets, although some currency movements have
certainly been "bubble-like" in that people were buying (or selling)
strictly on the expectation of continued momentum in the same direction
irrespective of any "real" economic behaviors (US $ in early 80s).
     3)  For financial assets such as stocks and bonds which have a
definite stream of net returns and thus in principle a discounted
present value fundamental there is another problem, already noted by
several on this thread and its relatives.  No one knows for sure what
that future stream will be.  Thus a rising P/E ratio for a stock may
represent a perfectly rational rising expectation of greater future
returns not yet observed today.  Or it may reflect speculative purchases
based on expecting the price to rise and hoping to sell tomorrow for more,
the key to a bubble.
     Although again surveys may get at this, for the econometrician this
is the inevitable problem of the _misspecified fundamental_.  No one
can observe what were the truly rationally expected set of future returns.
1929 might have reflected rational expectation of rising future growth
with the Great Depression being an off-the-wall highly unlikely event
that just happened to happen, etc.  After the fact the losers look like
idiots because things did not turn out as expected, but they were buying
on the basis of rationally expected components of the true fundamental.
No way out of this for such assets.
     4)  This is why closed-end funds are so interesting.  Any expectation
of future changes in the returns of the assets within the fund should
show up in the value of the fund itself.  It should always track the
net asset value of its constituents, accounting for agency costs, blah,
blah, which should vary only slightly over time.  This is the case where
indeed there is a definite fundamental and we know what it is.  Thus, if
we see a sudden emergence of premia in general on closed-end funds as
happened in the US in 1929 for domestic funds (which disappeared with the
crash) or as happened with a lot of closed-end country funds in late
1989-early 1990 and which crashed, this is almost certainly a bubble.
     BTW, the latter bubble was probably driven by the end of the
Japanese stock and land bubbles at the end of 1989, just to bring this
discussion full circle.  Money fleeing from those crashes drove the
closed-end country fund bubble, as I imagine Doug Henwood would agree.
     Now I really am over quota and better go into a "Cone of Silence."
Barkley Rosser
James Madison University