I still feel you need a hug. Intrinsic, belonging to a thing by its very nature. If housing by its very nature has an future expected cash flow, then why is housing in Detroit, or portions of it, basically free? My answer is, demand for housing is not intrinsic and therefor neither is its price. Its based on all sorts of factors that change over time, sometimes drastically.
You’ve now made a straw man argument against me. You’ve changed what intrinsic means, but I’m ok with that. What I’m not ok with is your supposition that I must believe in efficient market theory because I don’t believe in intrinsic value.
Let me state up front what I believe and then you can attack it or let it stand as you please. I believe that at an given time any investment(s) value is the sum of all information available to the buyer about that investment, coupled to the alternatives that buyer has either at the moment or in the expected future. That doesn’t mean that there aren’t huge asymmetries in information. It also assumes that there is no past and of course no future to model. That is as close to intrinsic value as I come. The reason I say that its not intrinsic is that past performance is itself based on a series of factors which are constantly changing.
Now to an example of MBS “data.” As you can see this is a 2007 vintage MBS and as of Mish’s last post on it was already 12% delinquent. Why would anyone take a risk on an investment so toxic? Sure there may be real underlying value that can be realized by buying and holding till the market recovers, but the trick is, you have to be understand whats in the pool. Part of the panic out of these instruments is that they were designed to be opaque and facilitate fraud. So far as I know, nobody really understands most of them. If they do, they stand to make a lot of money buying them on the cheap. All accounting systems have their flaws, mark to model as well as mark to market. Defending mark to model though is irresponsible, seeing as how the banks have used it to try and hide not only their losses, but their culpability in creating these monstrous securities. You argue bring data, but thats been impossible. Trust has been destroyed exactly because of the opacity of many of these instruments and the fraud they enabled.
When we can bring data, then the market can clear!
