![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
Asset valuation, 20% ROE
Nov. 18th, 2009 01:26 pmA new unwritten law of economics has occurred to me. If the chairman of the Federal Reserve says "it is inherently extraordinarily difficult to know whether an asset's price is in line with its fundamental value", then you can be fairly sure that assets are, in the main, overvalued.
Well, Ben Bernanke said that this week, so I think we can safely conclude that assets are overvalued and are heading for a fall.
This reminded me of the insane valuations in the dotcom era (remember? "New parameters", all that gumph) when, and this is no lie, I remember one investment manager saying that he preferred investing in stocks that were at all-time highs because that meant that there were no resistance points on the upside. Marvellous.
As the FT observed, "if Mr Bernanke has no idea what a bubble looks like, China reckons it does, suggesting this week that US policy is causing a speculative rise in asset prices".
Even the FT seems to me to make the mistake of assuming that we are now in a correction period, that the bubbles that were constructed over several decades and particularly in the early period of the Bush presidency are now in the process of slowly being unravelled over time.
An alternative view is that the final aspect of the bubble is now in place -- printing money. And an addition to this view is that one imbalance is still roaring ahead with the co-operation of both sides -- the huge trade balance deficit between the US and China. Neither of these can last forever and both must, eventually, end somehow -- either with tears for the creditors (i.e., savers and China) or for the debtors (i.e., past borrowers and the US/UK).
That there has been nothing learnt from the past decade's madness was evinced this morning by Oswald Gruebel, head of UBS, who said that the bank was aiming for 20% return on equity. Now, you can (and he will) dress this up in all kinds of smoke and mirrors about how it will and can be done. But the question remains, where does this monty come from? What wealth is actually created?
And that's where it gets a bit difficult. Because (and I assume that even Gruebel would admit this), the world economy is not going to grow at 20% a year. So, if you are going to generate 20% RoE there are only a few options open to you:
1) You manage it at the expense of other financial institutions.
Well, UBS has hardly been covered in glory in the past here. There's no reason to see why UBS should succeed instead of the other banks that didn't fuck it up last time round
2) You manage it at the expense of the general economy.
In other words, a small business grows 25%, and UBS takes 20% of it. This is the classic "sucking money out of the system" that will, eventually, lead to alternative, cheaper options.
3) You manage it by inventing profits
The usual answer and the technique used by banks in the past decade. Lend out money to people you shouldn't lend it to. Insure the default with a financial institution you shouldn't insure it with, and book the profit this year, worrying about the disappearance of your capital, your borrower and your insurer when it happens.
In other words, to promise 20% RoE is irresonsible in the extreme -- verging, I would posit, on the criminal -- because it cannot be genuinely achieved by a run-of-the-mill bank in an economy that is hardly growing at all and which over the next decade is unlikely to average more than 2% a year.
______________
Well, Ben Bernanke said that this week, so I think we can safely conclude that assets are overvalued and are heading for a fall.
This reminded me of the insane valuations in the dotcom era (remember? "New parameters", all that gumph) when, and this is no lie, I remember one investment manager saying that he preferred investing in stocks that were at all-time highs because that meant that there were no resistance points on the upside. Marvellous.
As the FT observed, "if Mr Bernanke has no idea what a bubble looks like, China reckons it does, suggesting this week that US policy is causing a speculative rise in asset prices".
Even the FT seems to me to make the mistake of assuming that we are now in a correction period, that the bubbles that were constructed over several decades and particularly in the early period of the Bush presidency are now in the process of slowly being unravelled over time.
An alternative view is that the final aspect of the bubble is now in place -- printing money. And an addition to this view is that one imbalance is still roaring ahead with the co-operation of both sides -- the huge trade balance deficit between the US and China. Neither of these can last forever and both must, eventually, end somehow -- either with tears for the creditors (i.e., savers and China) or for the debtors (i.e., past borrowers and the US/UK).
That there has been nothing learnt from the past decade's madness was evinced this morning by Oswald Gruebel, head of UBS, who said that the bank was aiming for 20% return on equity. Now, you can (and he will) dress this up in all kinds of smoke and mirrors about how it will and can be done. But the question remains, where does this monty come from? What wealth is actually created?
And that's where it gets a bit difficult. Because (and I assume that even Gruebel would admit this), the world economy is not going to grow at 20% a year. So, if you are going to generate 20% RoE there are only a few options open to you:
1) You manage it at the expense of other financial institutions.
Well, UBS has hardly been covered in glory in the past here. There's no reason to see why UBS should succeed instead of the other banks that didn't fuck it up last time round
2) You manage it at the expense of the general economy.
In other words, a small business grows 25%, and UBS takes 20% of it. This is the classic "sucking money out of the system" that will, eventually, lead to alternative, cheaper options.
3) You manage it by inventing profits
The usual answer and the technique used by banks in the past decade. Lend out money to people you shouldn't lend it to. Insure the default with a financial institution you shouldn't insure it with, and book the profit this year, worrying about the disappearance of your capital, your borrower and your insurer when it happens.
In other words, to promise 20% RoE is irresonsible in the extreme -- verging, I would posit, on the criminal -- because it cannot be genuinely achieved by a run-of-the-mill bank in an economy that is hardly growing at all and which over the next decade is unlikely to average more than 2% a year.
______________
