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Wednesday, 13 January 2010

Asset bubbles: Not just valuations, but what and how we value

Where is the next Asset bubble likely to emerge? And what class of assets will drive and become the next bubble?

This is a question that is addressed in The Economist of 9th-15th January 2010, p.65 "The danger of the bounce". Link: [The danger of the bounce]

The arguments are clear and concise enough; however a further factor to consider as part of the general historical trend and valuations analysis expounded in the article is the accounting distortions recently caused and driven by IAS 39 – Financial Instruments: Recognition  & Measurement.  The problems with IAS 39 are being addressed by the IASB, however, in a nutshell the challenges we face at the moment is thus:

Having changed the historical cost accounting valuations of corporate balance sheets to ‘the dumping ground of the "mark to market" tyranny’ on the Profit & Loss (Income Statement), we are not currently comparing apples with historical apples.  Having switched to "mark to market" accounting and utilised the Profit & Loss account as the dumping ground and not the Balance Sheet, we are currently looking at corporate balance sheet asset and liability valuations that are not what they were or have been over the last 100+ years of the historical comparison cycle referred to in the article.

Now I hope and trust that this issue is so blatantly obvious and has already been corrected and factored into the analysts calculations, that I am wrong about this; however, my experience of the analysis in the past, does not fill me with enough confidence to ensure that this is not the case.

Further to this, the fact that the debate is already starting about Asset bubbles, is good and an encouraging sign, however, there is also the little matter of risk (outside of pure compliance risk) and the pricing and factoring of this into the asset valuation equation, which needs to be highlighted and debated further.

Part of the debate this column attempts to stimulate is a ‘true and fair’ economic factor cost model and approach to understanding economic discourse in general.

So, let’s continue adding value and centring our arguments around this important issue.

theMarketSoul ©2010

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