GDP, M&A, EBITDA, P/E, NASDAQ, Econo-thread Part 11

[Roland]

That's not Sava's thread you're talking about ?

[DrSpike]

Hehe I get this a lot.

Y (GDP say) = F(K,L)=AK^bL^c.

Now at times marginal products, which are the first order partial derivatives of this function are useful. Take for instance determining the wage of labour in the aggregate sense by using the marginal product of labour holding capital constant.

However, although people talk about labour and capital productivity, most of them do not understand what they mean.

Now growth comes from increases in the inputs capital and labour. But how should you measure the effect of productivity? Well you can try and attach the notion directly to an input (usually labour).......simple versions of the Solow model do this. Of course now all the return to productivity goes to labour, and the only reason for the capital stock to grow is depreciation. Alternatively you can use the shift parameter A as a measure of TFP. Now labour and capital can share the return, with the general equilibrium conditions ensuring that the capital stock expands to bring the return back to its original level.

Solow was and is a genius, which is why I linked to his interview above. Dynamic considerations are a nightmare to analyse, and with a few innocuous simplifications he changed how we think about these issues forever. Sure growth theory has come a long way since the Solow model, but IMO you can develop all your intuition from it.........the niceties can come later.

[Roland]

Well it's the old problem that if you take capital or labour in isolation, output would be pretty much zero.

Anyway do you think TFP has a big impact over time ? Real interest rates, capital coefficients and the income distribution between labour and capital look very stable.

[DrSpike]

Originally posted by Roland

Anyway do you think TFP has a big impact over time ? Real interest rates, capital coefficients and the income distribution between labour and capital look very stable.

TFP is of paramount importance, but for GDP growth. What is genius is formulating how the general equilibirum considerations lead to TFP being able to increase without violating the stylised facts you mention.

Anyways enough economics for me today.

[Sten Sture]

good god, I have forgotten what TFP and MFP are...



I would be willing to bet all of DanS's money that if the real GDP was a constant growth number, then every firm this side of the international date line would buy in their equity capital to replace it with debt. EPS would go parabolic! Ah, the beauty of leverage and the equity risk premium!


I suppose I should be more concerned with the States Utd's reliance on external capital flows, but I think that the flows have more to do with 'good' demand for our investments from external sources, freeing domestics to do other things with their capital, rather than a true scarcity of available domestic capital.

To capital market participants, the method of measuring the savings rate is considered to be quite archaic and the meaningless result is substantially ignored - perhaps to our peril. "Japan's savings rate is c20% and their economy is in the ****ter" is a common way to address nay-sayers.

[DanS]

"I would be willing to bet all of DanS's money"

I would be willing to bet all of your money that your booky wouldn't return your phone call because of the low stakes.

"Encouraging home ownership is a hands down public policy winner."

And nobody's going to be voted out of office for doing it either.

[Roland]

Dr:

"TFP is of paramount importance, but for GDP growth."

Uhm... yes... but what's the impact on the macro "EPS" in your opinion....

"What is genius is formulating how the general equilibirum considerations lead to TFP being able to increase without violating the stylised facts you mention."

Are you talking about Solow again ?

Sten:

"the method of measuring the savings rate is considered to be quite archaic and the meaningless result is substantially ignored"

You could say the same about the method of measuring earnings. Until Enron & Co.

And the "good demand" is the same line Lawson used to explain the UK current account deficit during Britain's bubble economy of the late 80s.

[Sten Sture]

The Enronesque earnings would have actually been the exact reverse - big numbers using new methods that investors fawned over.

I prefer debt based statistics like interest coverage, collateral coverage and cash flow.

I am just mad because the govy debt is too small for the investment market and the technical cart is driving the fundamental horse.

Now that the charts have turned negative, we may see a more balanced market - and higher mortgage rates. That should help reduce the American real (or imagined) estate "bubble."

[DrSpike]

Originally posted by Sten Sture

I prefer debt based statistics like interest coverage, collateral coverage and cash flow.

And I. But then you deal in fixed income securities IIRC - there is less possibility for you to invent silly stories justifying silly valuations.

[Sten Sture]

Of course, though that raises the question whether "less" is statistically significant.

[DrSpike]

Hehe. I actually wrote the post as "no possibility", but I changed it to less because I know there is some scope. But the scientist in me wishes to test.

H0: Sten is a crook, responsible for the failings of corporate America

H1: Sten is an angel, who has never had anything other than 100% happy customers.

Since I have no data on the relevant distributions or parameters, and am unwilling in this case to impose such unknowns, I fall back on the methods of casual empiricism. 1 vote each.

I vote that there is insufficient evidence for H0 to be rejected.

[Roland]

"The Enronesque earnings would have actually been the exact reverse - big numbers using new methods that investors fawned over."

And it's the same with most of the new savings measurements that are being proposed. They're all about creative (national) accounting.

"I am just mad because the govy debt is too small for the investment market and the technical cart is driving the fundamental horse."

Well not to worry. If I'm right you'll see a budget swing like the UK in the late 80s or Japan, so a deficit of 5-7 % of GDP. Happy ?

"Now that the charts have turned negative, we may see a more balanced market - and higher mortgage rates."

I'm not sure this is the end of the bond meltup. The real recession is yet to come....

[Adam Smith]

Originally posted by Roland
The real recession is yet to come....

Proposed inscription for Roland's tombstone.

[DrSpike]

Nah, we wouldn't want him to sound more optimistic than he really is.

[Roland]

Originally posted by Adam Smith
Proposed inscription for Roland's tombstone.

Famous last words.

But I intend to live beyond 2005.