Weekend Reading: Robert Solow: Why Wages Aren't Keeping Up
Notes on the Global Economy as of Early April 2016

Must-Read: Matthew Klein: Private Equity’s Mark-to-Make-Believe Problem: "No asset is inherently worth anything...

...just some multiple of the income you think it will produce over time. Both the earnings forecast and the multiple can change at a moment’s notice--sometimes because the outlook for the future has genuinely changed, but often for other reasons.... One sensible response is nihilism: the great appeal of buy-and-hold passive investing is you don’t need to have any opinions.... Others... still try to earn a living betting some of today’s market prices will change, often but not always because they think the average opinion is improperly interpreting the available information. Then there are those, such as private equity firms, who invest in illiquid assets. ‘Illiquid’ in this case means ‘thing that’s almost never traded’, which in practice means ‘we won’t pretend to know what it’s ‘worth’ in the absence of a market, but here’s a number if it makes you feel better’. (This is distinct from the other meaning of ‘illiquid’... which is ‘oh of course we’re good for the money, we just don’t have it on us right now’, usually in response to questions such as ‘I’m not getting back what I lent you because you blew it retaining junior tranches in subprime mortgage bonds, am I?’)...

http://ftalphaville.ft.com/2016/04/06/2158293/private-equitys-mark-to-make-believe-problem/

Comments