Andrew Smithers, one of the world's foremost economists, showed that at its peak in 2000 the US stock market was wildly over-priced and argued that central bankers should adjust their policies to prevent asset bubbles. But the Federal Reserve claimed that assets could not be valued and that they should ignore asset prices. In "Wall Street Revalued", Andrew Smithers argues that the Federal Reserve was wrong on both counts and that these errors were the major cause of the current recession and financial crisis. He shows how investors and central banks can value assets, so that incipient bubbles can be identified and a repetition of today's problems avoided. Indifference to overvalued asset prices by investors, central banks and much of the financial press is the root cause of the current crisis. Bubbles in stock markets, house prices and financial assets cause huge damage when they fall, not only to their owners, but also to the world economy. An understanding of how to value assets is therefore vital for managing the economy as well as for investors. "Wall Street Revalued" explains how assets can be valued and shows how much incorrect and inaccurate information is published on the subject and how to spot this. Among investment bankers and financial journalists the two most common claims to value are, as Andrew shows, unadulterated nonsense. One of these is that 'Shares are cheap given the level of current (or forecast) PE multiples' and the other is that 'Shares are cheap relative to interest rates'. Andrew also explains how asset prices affect the economy and how central banks lose their ability to stabilise it when bubbles collapse. The denial that markets can be valued has caused great damage. Markets are not perfectly efficient, nor are they are irrational casinos. This book sets out a new model for understanding the limited efficiency of financial markets, which is the key condition for improving investment and economic management today. About the author: Andrew Smithers is the founder of Smithers & Co., which provides economics-based asset allocation advice to over 100 fund management companies worldwide. Andrew is a regular contributor in Japan to the Nikkei Veritas. He was a regular contributor to the "London Evening Standard" and "Japan's Sentaku" magazine, and has written for many other newspapers and magazines, including the "Financial Times", "Forbes" (US), "Sunday Telegraph" (UK), "Independent on Sunday" (UK) and "Genron" (Japan). Andrew is an invited contributor to the prestigious Economist's Forum on the FT website. Andrew is a member of the Advisory Board for the Centre for International Macroeconomics and Finance (CIMF) at Cambridge and has also been a member of the Investment Committee at Clare College, Cambridge since 1998. Prior to starting his own firm, Andrew was at S.G.Warburg & Co. Ltd. from 1962 to 1989 where he ran the investment management business for some years and which, by the end of his tenure, was the acknowledged market leader. This was subsequently floated off as a separate company, Mercury Asset Management, which was acquired by Merrill Lynch in 1998.
Ch. 1 Introduction 1
Ch. 2 Synopsis 15
Ch. 3 Interest Rate Levels and the Stock Market 25
Ch. 4 Interest Rate Changes and Share Price Changes 37
Ch. 5 Household Savings and the Stock Market 41
Ch. 6 A Moderately rather than a Perfectly Efficient Market 49
Ch. 7 The Efficient Market Hypothesis 57
Ch. 8 Testing the Imperfectly Efficient Market Hypothesis 67
Ch. 9 Other Claims for Valuing Equities 81
Ch. 10 Forecasting Returns without Using Value 91
Ch. 11 Valuing Stock Markets by Hindsight Combined with Subsequent Returns 97
Ch. 12 House Prices 105
Ch. 13 The Price of Liquidity - The Return for Holding Illiquid Assets 109
Ch. 14 The Return on Equities and the Return on Equity Portfolios 115
Ch. 15 The General Undesirability of Leveraging Equity Portfolios 121
Ch. 16 A Rare Exception to the Rule against Leverage 131
Ch. 17 Profits are Overstated 137
Ch. 18 Intangibles 145
Ch. 19 Accounting Issues 159
Ch. 20 The Impact on q 171
Ch. 21 Problems with Valuing the Markets of Developing Economies 175
Ch. 22 Central Banks' Response to Asset Prices 181
Ch. 23 The Response to Asset Prices from Investors, Fund Managers and Pension Consultants 191
Ch. 24 International Imbalances 195
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