Paul Davidson
Those who
propagate the belief that stock prices reflect future dividend (or even
income) flows is a reflection that these "economists" have not yet been
sable to slough the skins of the irrelevant efficient market hypothesis of
mainstream economics.
[Clifford Poirot]
To argue that people buy financial assets on the basis of expected future returns (be
it in the form of anticipated
dividends, earnings or capital appreciation) is not the
same as accepting the efficient market hypothesis-by a long shot. The EMH says
all current prices reflect all known information, and only new information
moves prices. The EMH assumes the information is correct, and that in the
aggregate, any mistakes in anticipation cancel each other out. I would argue
that people buy on the basis of expected future returns, but that for many
reasons (including, but not limited to uncertainty) often wind up being wrong
in their expectations, and that prices do not reflect all known information.
So this is far from the EMH.
When students present this
argument I confront them with the following real world example.
While I was at Rutgers a colleague of mine collected stamps as a
professional occupation. His collection was so valuable that he had to
keep it in a safe deposit box at a bank. (Therefore he could not get any
utility from looking at these beautiful pieces of paper as some mainstream
colleagues argue when I present them with this example. Nor could many of
these bits of paper even move a letter through the mails --since they were
often cancelled -- and even if they could move a letter they could not be
worth more than their face value.) Yet he continued to buy and
sell parts of his collection. Why?
These pieces of paper certainly did
not represent a share of the future profits of the post office (That's a laugh
since most postal systems lose money.)
Did these bits of paper represent
the Marginal product of the post offices which issued them? Or was it
(as I have argued is the same for any liquid assets in a nonergodic system)
the "buy to sell to the bigger fool theory"?
[Clifford
Poirot]
Paul, I must protest this example as bordering on the invidious. Did
your students really let this go unchallenged? Do you characterize stamps as a "financial
asset"? Stamps are a rare commodity, and their
rareness or uniqueness makes them valuable. Your colleague may have been unable to derive pleasure from looking at stamps, but most
collectors of anything rare value things due to
their rareness. Nonetheless, they
buy on the basis of anticipated future
values-or-to obtain an opportunity to buy another item.
When I collected baseball cards as a teenager,
I placed on a disproportionate value on the
Yankees. Yet I would trade Yankee cards if I thought it
might bring me something equally as
good-like say -Pete Rose. What made the value of Pete Rose (or Thurmond Munson, or
Bobby Mercer...)
high? It was anticipation of their current and future performance. The same with rookie
cards.
Nonetheless, I was never able
to parlay my minimal baseball
card collection into tradeable liquidity (though others I knew were to a very limited
degree).
Such items are not the same as
the purchase of financial
assets.
Another example: In the 1970s the US
postal system offered a stamp for Dag Hammersjold (spelling may be
wrong) a former UN official that had died.. After the end of the
production run, a person in Peoria told the media that he had obrtained a
sheet of these stamps where the picture was reversed --and the owner explained
how since this was so rare he expected to sell this for millions at a
stamp collectors auction. The U.S. post office found out about this as
the TV media picked up the story , and they decided to print sheets of
the stamp with the picture reversed. As soon as that was announced guess
what happened to the value of the original sheet of misprinted
stamps?
[Clifford Poirot]
And this is a perfect example of unanticipated information changing the value. Why did its price fall? Because now its
anticipated future value had
changed.
One final fact, several years ago
(before the Clinton Administration started retiring the 30 year Treasury
Bonds, statisitcs indicated that the duration that people held a 30 year
Treasury was on average less than 180 days. In that case who cares about
future stream of interest payments?
[Clifford
Poirot]
Anyone who is buying and selling Treasury
Bonds-because the decision to buy, hold or sell will be based
on anticipated changes in
bond prices and yields.
Nonetheless, I would like to see these
statistics. I'll
make a guess that professional bond traders and bond funds held the bonds for short
term purposes to trade in response to short term market movements, in an attempt to
push fund yields up a few basis points (and also generate management fees). I would hazard to guess that the "average" investor who bought Treasury
bonds for long term income and safety, held them for much longer. But let's
extend this further-what period are we talking about? Sometimes the FED
changes policies every 180 days.
Regardless, why
would I buy or sell a bond if it was not in anticipation or in response
to, actual or anticipated changes in
yields.
The important thing to recognize is
that if an orderly, well organized market for a durable (with low carrying
costs) exists, people will hold it for speculative purposes primarily --
[Clifford Poirot]
To speculate: I thought that meant in anticipation of future yields or
values?
And as I have argued in my
just published book FINANCIAL MARKETS, MONEY AND THE REAL WORLD a liquid
market is not an efficient market -- and, in a nonergodic uncertain
world, an efficient market cannot be a liquid
market.
Paul
Paul Davidson
Editor, Journal of Post Keynesian Economics
503 SMC
University of Tennessee
Knoxville, Tn 379996-0550
phone Number: (865) 974-4221
fax number: (865) 974-1686