Product Description

Andrew Smithers, one of the world’s foremost economists, showed that at its peak in 2000 the US stock market was wildly over-priced and argued that central bankers should adjust their policies to prevent asset bubbles. But the Federal Reserve claimed that assets could not be valued and that they should ignore asset prices.

In Wall Street Revalued, Andrew Smithers argues that the Federal Reserve was wrong on both counts and that these errors were the major cause of the current recession and financial crisis. He shows how investors and central banks can value assets, so that incipient bubbles can be identified and a repetition of today’s problems avoided.   

Indifference to overvalued asset prices by investors, central banks and much of the financial press is the root cause of the current crisis.  Bubbles in stock markets, house prices and financial assets cause huge damage when they fall, not only to their owners, but also to the world economy.  An understanding of how to value assets is therefore vital for managing the economy as well as for investors.

Wall Street Revalued explains how assets can be valued and shows how much incorrect and inaccurate information is published on the subject and how to spot this.  Among investment bankers and financial journalists the two most common claims to value are, as Andrew shows, unadulterated nonsense.   One of these is that "Shares are cheap given the level of current (or forecast) PE multiples" and the other is that "Shares are cheap relative to interest rates".

Andrew also explains how asset prices affect the economy and how central banks lose their ability to stabilise it when bubbles collapse.   The denial that markets can be valued has caused great damage.   Markets are not perfectly efficient, nor are they are irrational casinos. This book sets out a new model for understanding the limited efficiency of financial markets, which is the key condition for improving investment and economic management today.

Product Details

• Amazon Sales Rank: #25158 in Books
• Published on: 2009-09-22
• Original language: English
• Number of items: 1
• Binding: Hardcover
• 256 pages

Review
"...an economist with a good record in identifying bubbles...provides evidence" (Financial Times, August 5th 2009) "Mr Smithers makes his case convincingly, dismissing alternative indicators of valuation, such as the dividend yield, along the way" (The Economist, August 14th 2009)

From the Inside Flap
In 2000 one of the world’s foremost economists, Andrew Smithers, showed that the US stock market was widely over-priced at its peak and correctly advised investors to sell. He also argued that central bankers should adjust their policies not only in light of expected inflation but also if stock prices reach excessive levels. At the time, few economists agreed with him, today it is hard to find those who would disagree.

In the past central bankers have denied that markets can be valued and that it did not matter if they fell. These two intellectual mistakes are the fundamentals cause of the current financial market crisis. In addition, a lack of understanding by investors as to how to value the market has also resulted in widespread losses.

It is clearly of great importance to everyone that neither these losses nor the current financial chaos should be repeated and thus that the principle of asset valuation should be widely understood.

In this timely and thought-provoking sequel to the hugely successful Valuing Wall Street Andrew Smithers puts forward a coherent and testable economic theory in order to influence investors, pension consultants and central bankers policy decisions so that thy may prevent history repeating itself. Backed by theory and substantial evidence Andrew shows that assets can be valued, as financial markets are neither perfectly efficient nor absurd casinos.

About the Author
Andrew Smithers is the founder of Smithers & Co., which provides economics-based asset allocation advice to over 100 fund management companies worldwide.  Andrew is a regular contributor in Japan to the Nikkei Veritas. He was a regular contributor to the London Evening Standard and Japan's Sentaku magazine, and has written for many other newspapers and magazines, including the Financial Times, Forbes (US), Sunday Telegraph (UK), Independent on Sunday (UK) and Genron (Japan).  Andrew is an invited contributor to the prestigious Economist's Forum on the FT website.
Andrew is a member of the Advisory Board for the Centre for International Macroeconomics and Finance (CIMF) at Cambridge and has also been a member of the Investment Committee at Clare College, Cambridge since 1998.
Prior to starting his own firm, Andrew was at S.G.Warburg & Co. Ltd. from 1962 to 1989 where he ran the investment management business for some years and which, by the end of his tenure, was the acknowledged market leader. This was subsequently floated off as a separate company, Mercury Asset Management, which was acquired by Merrill Lynch in 1998.

Customer Reviews

Imperfect, but a must read
Andrew Smithers (no, not the Simpsons' Smithers) might be considered part of the economic cognoscenti -- James Grant and Jeremy Grantham think very highly of him, but none of them seem to show up on CNBC all that often. But I believe these economists and money managers are all cast in the same mold -- true value investing. It's a shame more investors don't listen to this breed; they'd save themselves a lot of time, money, and grief.

This book wasn't really written with the individual investor in mind and has the loftier goal of pushing central bankers to realize that it is indeed possible to value markets, whether they be stocks, bonds, or housing. Smithers doesn't really go into commodity pricing, which is unfortunate; commodities are the hottest asset class right now. It could be there is no simple way to price oil or gold.

Regardless, he takes the reader through Tobin's q and Ben Graham's CAPE, which he considers decent approximations to where markets should be priced (as of today, that's about 900 in the SPX -- 20% lower). But he points out shortfalls with this method -- mainly that it requires a lot of historical data, and that often doesn't exist for any nation other than the US.

So he develops another method based on historical returns that comes up with roughly the same answer. But he doesn't give the reader the price data (which come from other academic papers and books) to verify it. So we're left with nothing but trust and no way to reproduce an analysis for future usage. This to me is a major flaw. Robert Schiller provides data on his website to reproduce CAPE that he introduced in his book, I believe Smithers could do the same with his "hindsight" model from this book.

Smithers's analysis of the housing markets is quite short and unsatisfactory. He shows that percentage of income going towards housing has steadily increased over the last 100 years and right now it's way above the trend line. That's hardly evidence that the housing market is overvalued, even though other (better) indicators suggest overvaluation. I also have a serious bone to pick about how he presents the Efficient Market Hypothesis and subsequently demolishes it, but that gets too deep into academia. Suffice it to say that freshwater economists might blow a gasket after reading it.

Casual readers that haven't taken many finance classes will probably find some of this material to be too dense -- if you've never heard of "Equity Risk Premium", a good chunk of this book will probably go over your head. But then again, you probably won't be reading this review because you had never heard of Andrew Smithers and passed on this book already.

Investors and economists will want to read this book to get a very macro, long-term view of the markets. It's a little dry, but very informative. You won't finish the book thinking all is well with the world, but turn on CNBC if you need that perkiness.

If you want a rigorous and practical treatment of how to properly value the long-term prospects of equity markets, this is an absolute must read. I think most readers will find big philosophical disagreements with Smithers on some topics, but a good chunk of the analysis here is worth orders of magnitude more than the cost of the book.

must read
I think it's a valuable book. In depth analysis and ready to use advise. A must read.