22 Oct INTANGIBLE VS TANGIBLE VALUE
Bloomberg writes all the physical assets owned by all the companies in the S & P 500, all the cars and office building and factories and merchandise, if sold would generate less than 20% of the index’s value. The vast majority of the value in in intangible items such as algorithms, brands and lists.
The shift started with the advent of the computer age in the mid 1990s, picked up considerably during the financial panic of 2008 eclipsing the 50% level when asset values plunged and went on steroids in March. Is this realistic? Are intangibles worth this much more than tangibles?
Ultimately the value of a company is its expected cashflow discounted by some interest rate and most will agree valuations by this metric are greatly extended in the “intangible” sector, a sector that does not have any “residual value.”
Today’s massive record disparity between value and growth is widely documented. The above data further accentuates this point.
The pivotal question is whether there will be transition back to “hard assets” or aka value.
Our economy is an asset-based economy, defined as lending on an asset believing the value of the collateral will increase over time, with the loan being paid back with tomorrow’s dollar which will decline in value because of inflationary pressures.
Inflation and interest rates peaked in the early 1980s at around 14%, around the peak in the value of “tangible assets.” Simplistically speaking, today interest rates are around 1% and inflation is about 2%., a relationship in itself that should produce strong growth. Will there be a reversal in inflationary pressures, hence a change in the how the S & P 500 values intangible and tangible assets?
In about 15 months the national debt has surged from around $21 trillion to about $27 trillion. In 45 days, the national debt will increase to $29 or $30 trillion. Money supply is surging at a record 25% plus percent. Historically money supply growth is around the inflation rate. Excess banks reserves are over $4 trillion versus the long term average of $1 billion, reserves that money center banks are not earning interest.
Historically the above environment produces inflationary growth and in some regards is synonymous with the disastrous economic policies of the “Banana Republics.”
Fortunes will be made and lost if there is even a nominal shift back to tangible items, a shift which by definition will be partially the result of inflationary pressures.
Speaking of federal spending, markets yesterday were volatile based upon stimulus headlines. I rhetorically ask if government spending is the elixir for stellar economic growth, why have the socialist democratic European countries as well as Japan struggled between two and three decades?
Last night the foreign markets were mixed. London was up 0.08%, Paris up 0.20% and Frankfurt up 0.05%. China was down 0.38%, Japan down 0.70% and Hang Sang up 0.13%.
The Dow should open moderately lower on stimulus and election concerns. The 10-year is up 4/32 to yield 0.82%.