Wednesday, March 8, 2017

Market Fluctuations

In order to understand the process that takes place when market prices fluctuate, we must reconsider the existence of the various price spreads of the factors of the production process.

As Rothbard so deftly pointed out, Keynes had no idea what the rate of interest was. He believed it derived from the producer's loan market, and that a central authority needed to guide this supposed abstract concept. Rothbard laid to rest Keynes, as he incited the Austrians to the very fact of the mark up, the difference between buying and selling prices.

Keynes was so oblivious to this fact that his broad conjecture wound up contributing a convoluted method of mathematics which subscribed to the common present value formula. This formula is exponential, a fraction of a whole number (a percentage), multiplied by itself.

PV= Present Value (current market price)
FV= Future Value (or price at maturity-$1000)
R or i = Risk Free Rate (10 year Treasury)
N= Time or Number of Periods

Indeed these is your standard calculation when attempting to attribute value or a price to an obvious subjective factor. Evidently the most influential variable is the interest rate. The majority of financial theory requires the inclusion of the rate of interest, especially within the formulas concocted.

In the descriptions above, R or i is qualified as the commonly used instrument in all of finance, which is the instrument universally adopted by all financial theoreticians, that being the 10-year Treasury.

Applying the general moniker of "Risk-Free" to this instrument is solely due to the cajolery of governments, which resulted from that moment by which the US Dollar became the reserve currency for all central banks in the world. The Bretton Woods Conference led to the virulent Keynesian victory, which was to the world's detriment.

The elastic currency was able to thrive, all the while every other country in the world adopted the US dollar as it's reserve currency. A Gold-peg would be the aim of the US government in an attempt to make others believe they manage their expenses, or as some economists wangle, to stabilize the currency with the assistance of the central bank.

Time preference is so important to conceptualize because it tabulates the legerdemain of valuation theory. The theory of mathematics to the innumerate can seem daunting, and thus results in credulity. To those who believe they have mastered it, their persuasion is a result of embracing their theory as an absolute. One does not have perfect information.

Thus, Keynes' neophyte conclusions on the rate of interest, most specifically the Marginal Efficiency of Capital (MEC), led him to include a mark up within a mark up. Both mark ups, as aforementioned, are the subjective time preference us Austrians refer to as the rate of return or agio, time preference thereof. As Rothbard highlighted in an important footnote in his treatise on economics, the MEC is the rate of return itself.

To calculate the market, investors need to become numerates. What I refer to is that investors must understand that the lack of clear foresight (we are not God and cannot predict the future), leaves us with purview or experiences. Data is historical, they are numbers associated with occurrences that have already occurred in the past.

The more experience or information one gathers, perchance the enhanced the success of the wager.

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