Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Will You Make Money in the New Silver Bull Market ? - 13th Aug 20
Hyper-Deflation Capital Destruction And Gold & Silver - 13th Aug 20
Stock Market Correction Approaching - 13th Aug 20
Silver Took the Stairs to $21 in 2008, Took Escalator to $29 2010. Is Silver on Elevator to 120th floor today? - 13th Aug 20
President Trump Signs Additional COVID Relief – What To Expect from the Markets - 13th Aug 20
Has Gold's Upward Drive Come to an End? - 13th Aug 20
YouTuber Ads Revenue & How to Start a Career on YouTube - 13th Aug 20
Silver Notches Best Month Since 1979 - 12th Aug 20
Silver Shorts Get Squeezed Hard… What’s Next? - 12th Aug 20
A Tale of Two Precious Metal Bulls - 12th Aug 20
Stock Market Melt-Up Continues While Precious Metals Warn of Risks - 12th Aug 20
How Does the Gold Fit the Corona World? - 12th Aug 20
3 (free) ways to ride next big wave in EURUSD, USDJPY, gold, silver and more - 12th Aug 20
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Proving The Effectiveness Of The Only Known Antidote For Economic Suicide

Stock-Markets / Credit Crisis 2009 Aug 25, 2009 - 07:15 PM GMT

By: Andrew_Butter

Stock-Markets

Best Financial Markets Analysis ArticlePutting aside colorful sensationalism (tales of greed, fraud, and incompetence), the instrument of the recent suicide attempt was banks lending money against collateral and not taking reasonable or responsible steps to make sure that the value of collateral was more than the loans that were outstanding, at the point in time loans defaulted.


A common argument by bankers is that they did not know that this would happen. This is (probably) true in most cases (i.e. they say it was incompetence not fraud), but the reason they did not know was that they did not do, or commission, proper valuations. That is self-evident, but then they say, "Oh but it is impossible to do a valuation of an asset for some date in the future, so we used some jerry-built concoction of "the market" to do the valuation".

First: The "market" did not deliver satisfactory valuations, it could not, and it can never do that. That's like doing a valuation based on a popularity contest, there may be a weird logic there, but (a) that is not how you do a valuation under any coherent valuation standards, particularly not International Valuation Standards and (b) evidently it does not work, if it did work there would be no crisis.

Second: It is not impossible to make a reliable estimate of what an asset can sell for in the future, that happens all the time. People who make auto loans understand this, they understand for example that a new car will be worth less in ten years time that it is worth today, and they account for that. So why should a building or a security be any different?

The problem was not that no one could do such a valuation; it was that no one asked the question. This is the question that should have been asked and answered: "What is the minimum price that I can reasonably expect to be able to sell this asset for over the next five, ten or twenty years".

Is that difficult to do? Not really, it obviously takes more skill than simply finding out how much the asset could sell for today, but it's not hard. The problem then was no one asked, the problem now is that still no one is asking that question, and the problem there, is that the global financial system will have to rely on the morphine drip of state handouts until (a) that question is routinely asked and (b) market participants believe the answer.

How can you do that?

This article is not about how to do valuation; if someone needs to have that explained to them, then they would be well advised to hire someone who knows, valuations are tricky, they are not things that amateurs should attempt without adult supervision. This article is simply to demonstrate that it can be done, with deadly accuracy.

Proof:

The current problem was started with housing, so perhaps that's a place to start?

I have done valuations of real estate for a big part of my life, I can demonstrate that a properly conceived valuation of housing in USA in 2004 would have flagged the fact that housing was at that time on average 23% over-priced, and thus after allowing for they dynamics of corrections after mispricing (which are not a mystery (http://www.marketoracle.co.uk/Article12114.html)), the maximum value that should be attributed to housing when used as collateral at that time was 60% of the current (then) mark-to-market value (http://www.marketoracle.co.uk/Article6250.html). But that's in the past, and anyone can be smart after the fact, so that's hardly proof.

How about all those toxic assets sitting on bank balance sheets, what will they be worth in five years time?

The problem with that is as explained (http://www.marketoracle.co.uk/Article12770.html), it always was and it still is impossible to value those assets, because sufficient market-derived data is not available in the public domain. And until sufficient data is made available to market participants those assets will sit in the stomach of the banks un-digested, and the government will have to play "make-believe" until they eventually "mature" and can be passed through the digestive system.

So what's left?

How to demonstrate that it is possible for anyone who is "skilled-in-the art" to do a reliable valuation of a complex asset; in the future.

Here is an example:

In January I decided to do a valuation of the US stock market using well-known valuation techniques. I was not making a prediction; I was doing a valuation.

 

On 26th February 2009 (http://www.marketoracle.co.uk/Article9131.html, I reported:

US Stock markets values will decline to a point when DJIA hits 6,600 and S&P 500 hits 675.  Thereafter values will increase markedly.

 

A follow up confirmation was made in 17th April 2009 (http://www.marketoracle.co.uk/Article10101.html):

US Stock Markets values will increase 13% to 30% before the end of 2009.

Is that accurate enough?

That's 99.77% accurate, you don't need that level of accuracy; 10% is easily good enough. In any case that valuation model was only accurate 8% at the 95% confidence level, the fact it was spot-on was just luck.

But that was not alchemy, nor was it a "prediction" made thanks to some inside track or special knowledge that I have of the markets (I have none). That was simply a valuation done strictly in accordance with International Valuation Standards, it could have been for a car, second hand bottling plant, or a herd of pedigree cows; the methodology is identical.

Proper valuation as an antidote to Economic Suicide:

Lending money against collateral that can be expected (by reasonable and rational valuation techniques), to be worth less than the outstanding amount of the loan, is financial suicide.

Governments that implicitly or explicitly support financial institutions that engage in such practices, are committing economic suicide,

Free markets depend on government providing sufficient regulation to prevent market participants from poisoning the market. A good example is the sale of melanin tainted milk in China, a few criminals caused huge damage to the FMCG industry over there.

There is no reason why in a free market, anyone should not be allowed to commit financial suicide, but when they decide, metaphorically, to do that by hijacking a plane and flying it into a building, it is the duty of government, to prevent such actions.

The antidote is that governments must absolutely require any financial institution that relies on their support, either explicitly (via the discount window) or implicitly (via the prospect of bail-outs), to do their valuations properly.

Notes:

(1): By "proper valuations" I explicitly exclude the Voodoo Valuation Standards employed by FASB and IFRS (http://www.marketoracle.co.uk/Article8177.html).

(2):  The valuation of the US stock market made on 26th February was valid for six months, from today no opinion is expressed about the future price of the US stock market, the valuation was done simply as a demonstration of capability.

By Andrew Butter

Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2009 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Andre Taiakin
26 Aug 09, 04:27
Stock Market Valuation

I am sure I am not the only one sincerely impressed by the accuracy of your 6600 and 675 numbers. I am also sure that I am not the only one wondering how you got those numbers. As someone who had never even heard of International Valuation Standards before reading your articles on this website, I would certainly appreciate a little more insight into this subject. Obviously it would be particularly interesting to find out how to derive the other-than-market-value for a market index, such as the one used in your chart in www.marketoracle.co.uk/Article9131.html

Thanks!


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules