By Dan Denning – Southbank Investment Daily (Great Britain)
“You’re way off.”
“Pardon?” I said.
“You’re asking questions nobody cares about. Take today. You asked whether there was a cyclicality to earnings trends that makes them predictable.”
“Do you think anyone cares about that? Maybe a few academics. But I mean people who are retired or who want to retire. They’re not thinking about the ‘cyclicality of earnings’. They’re trying to figure out if they’ve saved enough to retire. Or if they can quit working. Or when they’d have to sell their house if their savings run out. None of that has anything to do with what you wrote about.”
At that point I took a sip of my cask ale. I was catching up with a friend who works in the City. One of his guilty pleasures is reading alternative e-letters like this, which go against the grain of the financial orthodoxy. But the great thing about real friends is they’re the only people who care about you enough to tell you the things you don’t want to hear.
Is he right? Well, even the academics might agree. If you were building your own theory of asset prices at home in your garage, you’d have to look at liquidity. I spent a lot of time last week showing you how valuations play into other theories of asset prices. But liquidity makes the most intuitive sense to people. Why?
It’s supply and demand. If you’re a baby boomer. I’m talking about you. And I’ll come back to you in just a second. But first, a quick look at markets.