Suppose at some point there is an announcement that in ten years Free Hardware Foundation will release a magical nanofactory that turns dirt into most things currently in the basket of goods used to calculate inflation. There is no doubt about truth of the announcement. No company directly profits from the machine, as it’s free (libre) hardware.
There’s some upheaval in the market, that eventually settles down. Yet real value of stock is predictably going to sharply go up after ten years, not (just) immediately, as that’s when the basket of goods actually becomes cheaper.
You may have to hold my hand on this one: I can agree the value of the stock (in the time-discounted future dividends sense) will go up after 10 years due to time-discounting—the technology would enable value production that “comes into scope” as it gets closer in time.
But is there any reason other than time-discounting that the PRICE won’t go up immediately? For instance, if I expect the time-discounted dividend value of the stock is $50 today and will be $5,000 ten years from now, and the rest of the market prices it at $50 today, then I could earn insane expected returns by investing at $50 today. Thus, I don’t think the market would price it at $50 today.
value of the stock is $50 today and will be $5,000 ten years from now, and the rest of the market prices it at $50 today, then I could earn insane expected returns by investing at $50 today. Thus, I don’t think the market would price it at $50 today.
Everyone gets the insane nominal returns after ten years are up (assuming central banks target inflation), but after the initial upheaval at the time of the announcement there is no stock that gives more insane returns than other stocks, there are no arbitrage trades to drive the price up immediately. For nominal prices of stocks, what happens in ten years is going to look like significant devaluation of currency.
If a $5,000 free design car (that’s the only thing in our consumer busket) can suddenly be printed out of dirt for $50, and central banks target inflation, they are going to essentially redefine the old $50 to read “$5,000”, so that the car continues to cost $5,000 despite the nanofactory. At the same time, $5,000 in a stock becomes $500,000.
(Of course this is a hopeless caricature intended to highlight the argument, not even predict what happens in the ridiculous thought experiment. Things closer to reality involve much smaller gradual changes.)
Do you know anything about the state of evidence re: to what extent this is happening and/or driving stock returns? I’m not sure how you’d pick this apart from other causes of currency devaluation.
I’m not talking about time-discounting at all. The point is that real value of stock (and money) is defined with respect to a busket of consumer goods, and that’s the only thing that isn’t being priced-in in advance, it’s always recalculated at present time. As it becomes objectively easier to make the things people consume, real value of everything else (including total return indices of stocks) increases, by definition of real value. It doesn’t increase in advance, as valuation of the goods is not performed in advance to define consumer price index.
Suppose at some point there is an announcement that in ten years Free Hardware Foundation will release a magical nanofactory that turns dirt into most things currently in the basket of goods used to calculate inflation. There is no doubt about truth of the announcement. No company directly profits from the machine, as it’s free (libre) hardware.
There’s some upheaval in the market, that eventually settles down. Yet real value of stock is predictably going to sharply go up after ten years, not (just) immediately, as that’s when the basket of goods actually becomes cheaper.
You may have to hold my hand on this one: I can agree the value of the stock (in the time-discounted future dividends sense) will go up after 10 years due to time-discounting—the technology would enable value production that “comes into scope” as it gets closer in time.
But is there any reason other than time-discounting that the PRICE won’t go up immediately? For instance, if I expect the time-discounted dividend value of the stock is $50 today and will be $5,000 ten years from now, and the rest of the market prices it at $50 today, then I could earn insane expected returns by investing at $50 today. Thus, I don’t think the market would price it at $50 today.
Everyone gets the insane nominal returns after ten years are up (assuming central banks target inflation), but after the initial upheaval at the time of the announcement there is no stock that gives more insane returns than other stocks, there are no arbitrage trades to drive the price up immediately. For nominal prices of stocks, what happens in ten years is going to look like significant devaluation of currency.
If a $5,000 free design car (that’s the only thing in our consumer busket) can suddenly be printed out of dirt for $50, and central banks target inflation, they are going to essentially redefine the old $50 to read “$5,000”, so that the car continues to cost $5,000 despite the nanofactory. At the same time, $5,000 in a stock becomes $500,000.
(Of course this is a hopeless caricature intended to highlight the argument, not even predict what happens in the ridiculous thought experiment. Things closer to reality involve much smaller gradual changes.)
Hmm, but what if everything gets easier to produce at a similar rate as the consumer basket? Won’t the prices remain unaffected then?
This makes sense!
Do you know anything about the state of evidence re: to what extent this is happening and/or driving stock returns? I’m not sure how you’d pick this apart from other causes of currency devaluation.
I’m not talking about time-discounting at all. The point is that real value of stock (and money) is defined with respect to a busket of consumer goods, and that’s the only thing that isn’t being priced-in in advance, it’s always recalculated at present time. As it becomes objectively easier to make the things people consume, real value of everything else (including total return indices of stocks) increases, by definition of real value. It doesn’t increase in advance, as valuation of the goods is not performed in advance to define consumer price index.