Ten Years Ago at Grasping Reality: May 21, 2008
Jared Diamond on Easter Island's Collapse: Needless to say, most societies—or at least most societies that we are aware of because they hang around for long enough to leave stone, pottery, or papyrus trails—do not behave this way. They evolve a social institution called private property to give individuals both control over scarce and exhaustible resources and an incentive to ensure wise and balanced extraction and careful and efficient use. It appears that the Easter Island people somehow failed to do so...
Warranted Stock Market Valuations and the Price-Earnings Equation Once Again: It can be shown http://delong.typepad.com/sdj/2007/05/a_teaching_note.html that the "right" way to value the stock market is with the price-earnings equation: P = E/[r - (1/θ - 1)ρ]. Here: (1) E are the earnings—the sustainable permanent cyclically-adjusted and correctly accounted for Haig-Simons earnings—paid on the index, (2) r is the appropriate real rate at which to discount cash flows of the riskiness of the stock market, (3) θ is the payout ratio of dividends to earnings, and (4) ρ is the wedge (which may be positive or negative) between the appropriate external real interest rate r and the internal rate of return the firm can earn on its reinvested earnings. If we are willing to assume that ρ is close to zero, than this equation is approximately: P/E = 1/r. The price-to-permanent earnings ratio is one divided by the market's expected discount rate. It's just worth pointing out that whenever the stock market is at valuation ratios that Gongloff and company consider "normal" then equities are an absolutely amazing deal relative to all kinds of bonds...
