Pricing

[peterbirks]

To the Central Saint Martin's Fine Art show at Charing Cross Road, AND to the Ceramics, Jewellery, Textiles, Industrial Design and Product Design shows at the Southampton Row site.

A smaller show this year at Charing Cross Road, with far fewer artists having rather more space to strut their stuff. On average, the standard seemed higher. Photos to follow.

The most interesting part of the Southampton Row exhibition was the MA in Industrial Design. This was top pro stuff that you could easily imagine being put into (commercial) profitable use. The Product Design show had a few "client-funded" projects, with Ariel (the washing powder), clearly looking for ideas to extend its "clean" brand image. Brightly coloured Ariel socks with in-built frangrandizer, anyone?

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The Goldman Sachs restructuring of collapsed hedge fund Cheyne Capital has one all-important aspect — the auctioning of Cheyne assets by the receivers. This will give transparency to pricing, which in turn will give eeryone a much clearer idea of what these things are "worth" today.

This will not necessarily be good news, and I expect that there are a few operations out there dreading it, because the price established will blow a hole in their own fantasy island self-valuation. That in turn could triger downgrades and further defaults. However, all of this stuff had to be done eventually. When the prices are established, I think that we could justifiably call it "the end of the beginning".

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Comments

Auctions

[geoffchall.livejournal.com]

Don't think it will give that much of a guide - it'll just give a price rather than a value. The value of a £100 debt with a 10% chance of default is £90 but that's not going to the price now is it?

Re: Auctions

[peterbirks.livejournal.com]

But some transparency is far better than none, surely.

I think that the price of debt does affect its perceived value, but you are right in that supply and fdemand also has an impact. However, it's no use a company saying "But this product is really worth £90 ... it's just that no-one is willing or able to pay that amount", because this allows for subjective valuation, which is what too many companies are doing at the moment, too optimistically. Sure, the auction might put a lower number on products than holders of similar products would like, but it does at least provide a real number, rather than an airy-fairy "this is our guess" number. That is why I termed it the end of the beginning. Even if the prices seem wrong, they are at least a benchmark of liquidity, and that is what you have to have to get the market moving.

PJ

Re: Auctions

[geoffchall.livejournal.com]

The trouble with putting a number on it is that it confuses price and value. My father-in-law is very fond of saying that something's only worth what someone's willing to pay for it - which is what you get for marrying into the family of bluff Northerners. A good solid long-term bet is to buy debt worth £90 (and yes it is subjective) for £60 and wait for a 50% return.

Because markets over-react and uncertainty will cloud even objective judgement. I'd like to think the markets will produce a price closer to value than this but we'll see.

Re: Auctions

[peterbirks.livejournal.com]

But surely you don't object to putting a number on share prices, which also confuses price and value? No-one would claim that a company's share price always accurately reflects its "value"; however, they would claim that it's as good a system as you can get in an imperfect world. Just because putting a number on it does not give an absolutely accurate answer is surely not an argument against putting a number on it at all, (presuming that you accept that there is some kind of positive correlation between the two).

The great thing about inefficient pricing is that it brings arbitrage into play ,which is what makes markets less inefficient. But you have to put a price on something in the first place before the arbitrage guys can get in on the act.

The major argument against this is that a shortage of cash will mitigate against accurate pricing (i.e., there will be arbitrageurs around saying "God, I could make a fortune here, if only I could gear up a bit"). That's a valid point, but it doesn't defeat the claim that some pricing is always better than none.

PJ

Re: Auctions

[real-aardvark.livejournal.com]

Surely if you auction an item you are realising its price; not its value?

Re: Auctions

[real-aardvark.livejournal.com]

Oops, sorry, that made little sense. Well, none, actually.

What I meant to say is that surely a transparent price</> is what you're after, anyway. A transparent value is no damn use to anybody in the current circumstances. It's also a logical impossibility for, say, a bond, since you'd have to know the payback at maturation and even then amortise it for opportunity cost, inflation, etc in the invervening period.

Re: Auctions

[peterbirks.livejournal.com]

Er, I think you are agreeing with me. But I'm often not sure...

PJ

Re: Auctions

[real-aardvark.livejournal.com]

Well, I was agreeing with you. I was disagreeing, I think, with Geoff -- although I'm not even sure of that. The sticky-i formatting didn't help much, did it?

My main point, if any, is that people (and I think this includes Geoff here, unusually) seem to love over-complicating financial analyses. Journalists (not you) are exceptionally prone to this. (CFOs just seem to lie, that being socially more acceptable in their milieu.)

Yes, transparency is a general good. Transparency is pricing is presently a necessary good - except for those for whom it is a necessary evil.

Muddying the water by bouncing talk of supply and demand around is largely beside the point, I would think.

Re: Auctions

[geoffchall.livejournal.com]

What I was banging on about is the tendency amongst the naive, the simple-minded and market operators to believe that price=value and that becomes a self-fulfilling prophesy. Thus if my hypothetical £100 debt has a 10% default likelihood, it's value is £90. If it is then given a price of £60, this will in itself reduce the value as it will increase the likelihood of default.

The whole system has been understating risk for ages and has just swung the other way. If people pay attention to that swing then they're just as likely to put a wrong value on a debt as the previous generation of idiots.

Re: Auctions

[real-aardvark.livejournal.com]

Soooooo,,,,

Why are you devoted to the demented and exciting world of accountancy, rather than the hypothetical world of inverse risk valuation?

Me, I never trusted accountants. I love you all. I just don't see the point of you.

Re: Auctions

[peterbirks.livejournal.com]

You are right that the whole system has been understating risk for a long time, but I think that your conclusion from this, that they are "just as likely to put a wrong value on a debt as the previous generation of idiots." is wrong.

There are many incentives to underestimate risk, and one could argue that there is a "risk cycle", whereby people gradually underestimate risk more and more, until a crisis/catastrophe strikes, when there is a sudden shift to risk aversion. However, the slow slide towards underestimating risk then begins again.

The only way to stop this is to have more accurate measurements of risk. This has actually happened in the catastrophe reinsurance market, where in some areas modelling is now sufficiently advanced to mean that there is plenty of capacity above a certain price, and very little below that price. It's as if the chance of a catastrophe striking Florida (and the concomitant cost) is as "known" as the chance of a five appearing when you throw a fair die.

However, in the financial markets, there is no such consensus.

What you seem to be arguing (and it's actually a fair point) that if risk is overestimated, this in itself increases the likelihood of default. This is actually a kind of argument against the powers of rating agencies and "conditional loan rates". There are many loans that are conditional on a triple A rating. If that rating is lost, then the interest rate goes up, which in turn increases the likelihood of default. Perception can influence reality.

I have considerable sympathy with your line here, but I don't think that it applies to the case that I mentioned. Sometimes we paint with too broad a brush.

PJ