Re: Sustainable Stock Prices

["Harry Veeder" <veed0001@xxxxxxxxxxxxxxxx>]

----------
>From: paul davidson <pdavidson@xxxxxxx>
>To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
>Subject: Re: Sustainable Stock Prices
>Date: Mon, Apr 10, 2000, 2:14 pm
>

>At 11:50 AM 4/8/00 , Harry wrote:
>
>
>>John, raises an interesting point. It is interesting because
>>I think it involves an incorrect assumption about nature of bubbles.
>>I believe the nature of bubbles reflects "subjective" inflated
>>estimates of PRESENT VALUE rather than future earnings.
>
>
>But Harry , unless you are using a different language than most economists,
>the present value is the discounted (expected) future earnings.
>


This is true, but that does mean the nature of present value is identical
with the expectation of future earnings. The act of discounting transforms
expected future earnings into something else known as present value.

In the case of bubbles, expected future earnings would remain relatively
stable but the discounting operation that traders use in their own minds
would be unreasonable as to give an inflated estimate of present value.
If traders always used textbook discount calculations like accountants and
economists bubbles would never arise.

Bill Gates "feel good smile", does not alter expected
future earnings but it does cause present value to go up.
A smart trader in bubble stocks makes money by exploiting the
giddy teenage mentality of other traders.

Harry Veeder