My email to Tony Jackson at Financial Times:
2010/1/18
Dear Mr. Jackson,
That was a fantastic read. I have forwarded it to everyone I know in investment banking, although probably their frequent reference Prof. Damodaran would make an ideal recipient.
I have two arguments to challenge your thoughts.
1) Philosophical argument: Are we concluding here that while prices change, value remains the same? How does it matter, since human decisions are driven by current prices more than by the value. For example, a man dying of thirst on 18th January 2010 may not reach the life saving (value driven) decision if he has the choice of spending his last 500 dollars on (a) buying a bottle of water or (b) buying one kilo of gold sold for 500 dollars. Probably that's the reason why Avatar (gold i.e. $1.3 billion) is more exciting than Gone With The Wind ($26 billion i.e. life…much more valuable than gold!).
2) Statistical argument: While I fully agree with your rationale, please consider this. If you apply the 'double discounting' of inflation and available resources, I wonder how the pre-crash 2007 US house prices appear. Probably you would end up concluding that the house prices in a previous boom were higher than those in 2007. Same for gold and oil? We all know available oil reserves are lesser today than in an earlier oil boom. Sorry for my laziness in not using the actual data and showing the conclusions. Also, I may not replicate your exact number crunching so results may not be comparable. However, you might want to do (or may have done) this and share with me how this theory fits with US house prices, gold and oil.
Regards,
Chetan
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From: Tony Jackson [mailto:tonyjackson09@googlemail.com]
Sent: Monday, January 25, 2010 7:39 PM
To: Chetan Shah
Subject: Price and value
Chetan - my apologies for this belated reply. On the philosophical point, I think the distinction between price and value is fair enough. But my own point was rather more basic - the distinction between price and affordability. If the price of a thing has doubled but wages have quadrupled, we can all afford twice as much of it as before. Whether it is rational to buy twice as much of the thing - cigarettes, say - is of course a different question.
As to historic prices, I bought my first house (in Edinburgh) for £12,000 in 1978. Adjusted for UK average earnings, that makes £83,000 today. Since that's half the UK average house price today, I infer that house prices are now more expensive. And the gold price, as I recall, was nearly $800 at its peak in 1980 - around $3,000 today on average GDP per head. Still some way to go there ....
Regards,
Tony
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My response email to Tony Jackson on 26/1/2010:
Tony,
I hate to drag this into a further argument, but can't resist.
Would you say that gold is unlikely to reach $,3000 any time soon? Would you also say that your friends/wife/doctor from Edinburgh i.e. the market does not expect house prices in Edinburgh to fall by 50%? I am tempted to believe so, because I guess most of us do not live by statistics but by real physical experiences and the current - nominal - numbers appeal to us more than the real - discounted - numbers. Probably our priorities change, too and that reflects in our spending patterns breaking out of old expense/earning ratios.
I am certainly not sharing your thoughts on gold with my wife and give her a reason to buy more.
Thanks for your response and hope to read more of your brain stimulants!
Cheers!
Chetan
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