Wall Street Revalued

In 2000 one of the world s foremost economists, Andrew Smithers, showed that the US stock market was widely over-priced at its peak and correctly advised investors to sell. He also argued that central bankers should adjust their policies not only in light of expected inflation but also if stock prices reach excessive levels. At the time, few economists agreed with him, today it is hard to find those who would disagree. In the past central bankers have denied that markets can be valued and that it did not matter if they fell. These two intellectual mistakes are the fundamentals cause of the current financial market crisis. In addition, a lack of understanding by investors as to how to value the market has also resulted in widespread losses. It is clearly of great importance to everyone that neither these losses nor the current financial chaos should be repeated and thus that the principle of asset valuation should be widely understood. In this timely and thought-provoking sequel to the hugely successful Valuing Wall Street Andrew Smithers puts forward a coherent and testable economic theory in order to influence investors, pension consultants and central bankers policy decisions so that thy may prevent history repeating itself. Backed by theory and substantial evidence Andrew shows that assets can be valued, as financial markets are neither perfectly efficient nor absurd casinos.

In 2000 one of the world's foremost economists, AndrewSmithers, showed that the US stock market was widely over-priced atits peak and correctly advised investors to sell. He also arguedthat central bankers should adjust their policies not only in lightof expected inflation but also if stock prices reach excessivelevels. At the time, few economists agreed with him, today it ishard to find those who would disagree.In the past central bankers have denied that markets can bevalued and that it did not matter if they fell. These twointellectual mistakes are the fundamentals cause of the currentfinancial market crisis. In addition, a lack of understanding byinvestors as to how to value the market has also resulted inwidespread losses.It is clearly of great importance to everyone that neither theselosses nor the current financial chaos should be repeated and thusthat the principle of asset valuation should be widelyunderstood.In this timely and thought-provoking sequel to the hugelysuccessful Valuing Wall Street Andrew Smithers puts forward acoherent and testable economic theory in order to influenceinvestors, pension consultants and central bankers policy decisionsso that thy may prevent history repeating itself. Backed by theoryand substantial evidence Andrew shows that assets can be valued, asfinancial markets are neither perfectly efficient nor absurdcasinos.

Foreword vChapter 1 Introduction 1Chapter 2 Synopsis 15Chapter 3 Interest Rate Levels and the Stock Market 25Chapter 4 Interest Rate Changes and Share Price Changes 37Chapter 5 Household Savings and the Stock Market 41Chapter 6 A Moderately rather than a Perfectly Efficient Market 49Chapter 7 The Efficient Market Hypothesis 57Chapter 8 Testing the Imperfectly Efficient Market Hypothesis 67Chapter 9 Other Claims for Valuing Equities 81Chapter 10 Forecasting Returns without Using Value 91Chapter 11 Valuing Stock Markets by Hindsight Combined with Subsequent Returns 97Chapter 12 House Prices 105Chapter 13 The Price of Liquidity - The Return for Holding Illiquid Assets 109Chapter 14 The Return on Equities and the Return on Equity Portfolios 115Chapter 15 The General Undesirability of Leveraging Equity Portfolios 121Chapter 16 A Rare Exception to the Rule against Leverage 131Chapter 17 Profits are Overstated 137Chapter 18 Intangibles 145Chapter 19 Accounting Issues 159Chapter 20 The Impact on q 171Chapter 21 Problems with Valuing the Markets of Developing Economies 175Chapter 22 Central Banks' Response to Asset Prices 181Chapter 23 The Response to Asset Prices from Investors, Fund Managers and Pension Consultants 191Chapter 24 International Imbalances 195Chapter 25 Summing Up 197Appendix 1 Sources and Obligations 199Appendix 2 Glossary of Terms 203Appendix 3 Interest Rates, Profits and Share Prices by James Mitchell 209Appendix 4 Examples of the Current (Trailing) and Next Year's (Prospective) PEs Giving Misleading Guides to Value 217Appendix 5 Real Returns from Equity Markets Comparing 1899-1954 with 1954-2008 219Appendix 6 Errors in Inflation Expectations and the Impact on Bond Returns by Stephen Wright and Andrew Smithers 221Appendix 7 An Algebraic Demonstration that Negative Serial Correlation can make the Leverage of an Equity Portfolio Unattractive 233Appendix 8 Correlations between International Stock Markets 235Bibliography 237Index 239