VN:F [1.9.16_1159]
Rating: 0.0/5 (0 votes cast)

The Central Value Theory ™

Over time, nothing goes up in value and everything goes up in price.

Rationale

Over time, intrinsic values increase and decrease always returning to its mean (relative value).  Prices on the other hand, keep increasing until it collapses and begins anew repeating the birth-growth-death cycle.  For as long as there are a group of humans, this process will continue.

Results of the Central Value Theory

Value cycles from over valued to under valued over a period of time (20, 60 years).  Value establishes a true long term investment theme for wealth accumulation.

True Value

True Value is the intrinsic value of an object or asset. This intrinsic value can be estimated using various other asset classes that are inelastic like Gold.  For example, the Dow Jones Industrial Index can be measured in oil barrels, tonnage of sugar but is best measure in Gold.

Value is determined when a bidding condition occurs or a transaction is established or equivalent transactions of similar nature occurs.  Value shifts as people (public and the market) sentiment changes about the desirability of an item or asset class.  Value zigzags from undervalue to overvalue.

In the equity markets, value is traditionally measured by Price-Earnings ratios (P/E) in the public markets and Cashflows in private companies.

At an early stage of an undervalued asset, the public sentiment is one of neglect and disinterest.  As the public interest increases, the asset becomes of more value.  Toward the end of the cycle, there is euphoria that causes over bidding (typically by the masses) and values become extreme.  At the extreme, values become undervalued again.  This cycle repeats over and over.

Prices

Prices is what is paid for goods or an asset.  The medium of exchange (ie what is used to pay for the asset) becomes a standard of measurement of price.  For example, in the USA a house purchase and most purchases are in US Dollar which is a currency (in fact a fiat currency to be specific). However, you can barter the house with another house or with other assets beside the US Dollar.

Another example, China is purchasing much raw materials in the world.  If China buys Iron Ore from Chile, China can pay in different manner and depending in such, the price may be different however the value would be the same, ie China wants the Iron Ore.

Robert Prechter wrote:

Value Versus Price

Because in the 21st Century China’s economic expansion depends on raw materials and China is the ultimate buyer of raw commodities, the demand and thus value for commodity assets increases dramatically but the result in US Dollar (price) may be different because China can pay with methods other than US Dollar or its own fiat currency – the Yuan.  Another better example, is the value of most goods in the USA are increasing in price (food, water, services), however, the need for food and water and its human value has not changed that much.

Prices

Prices are affected by the medium of exchanged and in the modern world that medium of exchanged is dictated by International Central Banks using fiat currency.  All fiat currencies devalue over time.”

Value Investing

From World War II to 1966, the hot asset with high public demand were stocks and real estate.  In 1966 to 1981, the hot assets became commodities.  Then in 1980 to 2000, stocks and real estate were again in hot demand.  You can see this cycling from one theme to the other in the following chart.

At the end of one timeframe (say 1980), interest rates are extreme, stocks have been depressed for close to 20 years and overvalue conditions exist.  Investing at this overvalued condition into stocks in the early 1980’s was best.  Likewise, in 2000 when stocks became overvalued, commodities especially gold and silver were at depressed values for over 10-20 years.  Gold was at $250 to $300 and Silver was $1-2 per ounce.

Here is another chart showing stocks values, stock dividends and interest rates fluctuating in zigzags every about 15-20 years. (The reason prices zigzag in an upper trend is due to the natural devaluation of the fiat currency by which prices are measured – in this case is the Dow Jones Industrials measured in US Dollars went from 1,000 to 10,000 from 1980-2000 while the US Dollar devalued).  Interest during this period went from 18% down to 1%.

Finally if there is one chart I would teach to my grandchildren to teach to my greatgrandchildrens and to my greatgrandchildren greatgrandchildren is this one:

The only variable that changes the range is the conversion from a fixed gold standard to a paper fiat currency standard.  I would teach children that through the history of the world, currency and money has been alternating back and forth.  Hard based tangible curreny (gold) then switch to paper then back to gold.  Since governments are the main controlling force, government dictates which medium is the present currency standard.  The child will have to clever enough to see the untold because governments will not say anything. 

Then the only variable for the child to be aware is that there are long period where equities and gold alternate in price.  For example, in 1982, the choice would be to switch from gold to equities but then in 2000, to switch from equities to gold.  One day in the next 5 to 8 years, it will be time to switch from gold to equities.  In the meantime, gold is the place to be in.

And the other important point, all paper currencies are designed to depreciate in value (and the more fiat they are the faster).