Monday, March 2, 2009

A secular change in asset valuation

What’s going on with the stock market? For one thing, the master of the spoken word, Mr. Obama’s refuse to say the words ‘wealth’ or ‘balanced budget’ alongside the words ‘investments’ and ‘change.’
However, I believe that there is something else going on: a secular change in asset valuation. What does it mean? It simply means that what we used to value at healthy multiples will not be like that going forward. After all, the entire financial system that supported the old valuation system has just collapsed. So who is there to credibly support that the old-type assets deserve the multiples of the past? Not very many players.
We are witnessing a major overhaul of the asset valuation system. It is happening right here right now. Will there be survivors? Yes. But the industries of the 20th century are about to fundamentally change.
If anything, there are new expense items that will show up on future balance sheets: carbon credits, market adjustments to financial assets, transportation costs, new taxes per a new tax code, and more.
More, the new administration looks to recognize that we are part of a global economy. What the direct financial implications of that recognition are we still have to see. But we can suspect that foreign vs/ local labor costs will change, foreign vs. local manufacturing will change, tax incentives for foreign vs. local operations will change and will be tariffs.
While the stock market overall will rebound (eventually), we should not expect that the winners of the past will be the winners of the future – no matter how low the stock prices seem to be today.
The Obama administration made it very clear that change would be coming. And change is coming as we speak. And it alters the asset value in ways that we have not seen in generations..

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