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Wall Street Revalued: Imperfect Markets and Inept Central Bankers

ISBN: 978-0-470-75005-6
256 pages
August 2009
Wall Street Revalued: Imperfect Markets and Inept Central Bankers (0470750057) cover image
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.

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Foreword.

Chapter 1 Introduction.

Chapter 2 Synopsis.

Chapter 3 Interest Rate Levels and the Stock Market.

Chapter 4 Interest Rate Changes and Share Price Changes.

Chapter 5 Household Savings and the Stock Market.

Chapter 6 A Moderately rather than a Perfectly Efficient Market.

Chapter 7 The Efficient Market Hypothesis.

Chapter 8 Testing the Imperfectly Efficient Market Hypothesis.

Chapter 9 Other Claims for Valuing Equities.

Chapter 10 Forecasting Returns without Using Value.

Chapter 11 Valuing Stock Markets by Hindsight Combined with Subsequent Returns.

Chapter 12 House Prices.

Chapter 13 The Price of Liquidity – The Return for Holding Illiquid Assets.

Chapter 14 The Return on Equities and the Return on Equity Portfolios.

Chapter 15 The General Undesirability of Leveraging Equity Portfolios.

Chapter 16 A Rare Exception to the Rule against Leverage.

Chapter 17 Profits are Overstated.

Chapter 18 Intangibles.

Chapter 19 Accounting Issues.

Chapter 20 The Impact on q.

Chapter 21 Problems with Valuing the Markets of Developing Economies.

Chapter 22 Central Banks’ Response to Asset Prices.

Chapter 23 The Response to Asset Prices from Investors, Fund Managers and Pension Consultants.

Chapter 24 International Imbalances.

Chapter 25 Summing Up.

Appendix 1 Sources and Obligations.

Appendix 2 Glossary of Terms.

Appendix 3 Interest Rates, Profits and Share Prices by James Mitchell.

Appendix 4 Examples of the Current (Trailing) and Next Year’s (Prospective) PEs Giving Misleading Guides to Value.

Appendix 5 Real Returns from Equity Markets Comparing 1899–1954 with 1954–2008.

Appendix 6 Errors in Inflation Expectations and the Impact on Bond Returns by Stephen Wright and Andrew Smithers.

Appendix 7 An Algebraic Demonstration that Negative Serial Correlation can make the Leverage of an Equity Portfolio Unattractive.

Appendix 8 Correlations between International Stock Markets.

Bibliography.

Index.

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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.
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Wall Street Revalued: Imperfect Markets and Inept Central Bankers (US $27.95)

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