Recoupement Horizons
A snapshot glimpse of ceptual economics

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One of the interesting "fundamentals" of established free-market economics has really been shown to be a "flexible" parameter instead of a narrow one, during these past few recent years of the new Internet woven economic system.

That is the Price/Earnings ratio .. the general cost of a stock compared to the annual profit a company produces.

Stock P/E's soared from a generally accepted region of 15-35 to 1, to 100:1, 200:1, and even an extraordinary 600:1 in one case.    The Pundits said the 'overvaluing' was caused by day-traders too anxious to see movement - any movement - of stock prices and try to come out on top with positive price changes on a day to day basis.   And, the untested profit potential of new start up companies which simply had a web-presence and a promise to 'try' and make money.

In a way, this new trading philosophy had something going for it:  the ability to produce wealth based simply upon the good faith and trust in the potential of an organization to do someting, anything, and the large enough body of traders willing to stay in and play the stock-trading game.

The trust played havoc with the P/E fundamental.  So it makes sense to look at the ratio and realize what it means.

In a way, P/E is a 'faith' valuation, mixed in with what an overall economy is capable of.  It is a measure of the confidence that any wealth holder has in his or her fellow wealth holders and producers.  It is the giving over of personal wealth to other people, in the anticipation of generating profits.   Now, I'm sure there are other historical values to set a picture for this in, but I'll draw from my own experiences of investing.

There used to be a 'guideline' in place some 20 to 30 years ago regarding the pricing of commercial real estate.  The rule-of-thumb was, the price of a commercial property was 7 times its annual income.  In other words, all things being equal, an investor would expect to get back the initial cash investment in 7 years, after which all income would be free and clear profit.  Absent inflation, absent repairs and upgrades, absent increases intaxes and costs of doing buisness.  With those factors added in, return on investment could comfortably vary between 4-10 years.  Comfortably.   That was in the era of double-digit inflation.

And essentially, that is what the P/E ratio sets also.  Its the comfort zone for replacing or recouping an initial investment commitment and funds outlay.  25:1 give or take 10 corresponds to an interest rate of  3-8%.  Yet seen in another way, its placing a longer term trust in the loan or investment relationship.  The Recoupement Horizon is pushed out to 15-35 years, with residual or parallel benefits happening in the interim.  It's confidence in the company to endure for that long, and somehow move into windfall or upscale profitability in the future.

The time horizon - the trust and confidence zone - moves further out into the future.   And if enough people buy into that - literally and figuratively - then the economic system becomes that more stably integrated.  As long as the trust stay in effect.    Plus, higher investment prices feedback to all investors and the health of the system to support those pricing levels.  But that takes a permanent commitment.   It takes a certain level of free un-committed cash to bolster any temporary loss of value esteem in the face if any dissillusionment events.

It is mutual trust and confidence which produces wealth.  Not all at once, but distributed like a bucket brigade, where each sequential transaction ... added up at the end of a year .. concludes that $100 worth of wealth exists, when in fact it may have been the same $10 bill which engaged in 10 different transactions and cummulatively accomplished $100 worth of economic activity across the board.

Sure a Recoupement Horizon of 600 years (a P/E of 600:1) sounds foolish.  But it's not really.  It means two things that there is an exceptionally long term trust and confidence in the total global market economy, and that many people feel the same way.   And they are willing to barter that faith - which nicely and concurrently matches cash profits from stock trades and strong valuation changes - with other believers.    They may be trading in units of currency, but they are really debating the health, potential and reliability of business operators like themselves, in terms of how many months, how many years out into the future those companies will stay viable.

That's a pretty wild and optimistically strong stand to take in some cases - 100, 200, 600 years.  But is that ir-responsibility?  To some it may seem so.   

I tend to think its a good sign.   The day-traders are a breed who seem like they live for today and the moment, but are they really?  It seems to me their underlying message is:  believe in tomorrow.  really tomorrow. way out there.  beyond our children's children. 

Not such a bad message, is it!?   Especially when we all trust it together.

Even under the very interesting situation of Entangled Recoupement Horizons.   That long-term high-valued far reaching mutual confidence is inseparably bound with the markets' rules of accountability .. balancing the transactions books at the close of every single trading day and the settling of accounts.  Now tied to that other part .. day-trader myopia (short sightedness) .. recouping investments every 24 hours.  (!)

Only an extensive and integrated and diverse - ecologically sound in the financial sense - commerce organism can exist with these dynamics and tensegrity protocols of integrated integrities loops and flows.  Where single events have simultaneous meanings - for the severally different yet interwoven tiers of organization.

 

                                                                             April 18, 2000

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