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A not insignificant fracion of all capital is not in the stock market, but in (generally) far less risky investments like bank accounts, corporate and sovereign bonds, or real estate. As they (usually and in the long run) have a lower return, a higher return on stocks might very well be sustainable even in the long run, as long as economic growth runs at a reasonable clip.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Mar 13th, 2012 at 10:55:12 AM EST
[ Parent ]
A not insignificant fraction of all capital assets is not in the stock market, but in (generally) far less risky investments like bank accounts, corporate and sovereign bonds, or real estate. As they (usually and in the long run) have a lower return, a higher return on stocks might very well be sustainable even in the long run, as long as economic growth runs at a reasonable clip.

Only assuming that you do not reinject your gains from the stock market into the stock market. If you do, then the stock market's fraction of all assets in the economy will increase.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 11:07:56 AM EST
[ Parent ]
But why build a factory when you can simply invest in one with less risk and better return?  Of course sooner or later you run out of bricks and mortar and are left with paper and electrons, but isn't it loverly while it lasts?
by rifek on Tue Mar 13th, 2012 at 02:52:13 PM EST
[ Parent ]
Because it might be cheaper to build a new one compared to buying an already existing one, depending on market valuations.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Mar 13th, 2012 at 04:37:02 PM EST
[ Parent ]
But that involves lags and risks that buying an existing asset doesn't have.

Also, if you buy the existing asset on credit, the existing asset acts as collateral. If you borrow to build, there's no collateral until the thing is built.

Therefore, the banking sector has a bias against lending for capital formation and for lending towards asset bubbles.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Mar 13th, 2012 at 04:42:56 PM EST
[ Parent ]
But that involves lags and risks that buying an existing asset doesn't have.

True. Which is why people talk about risk-adjusted returns, and why choosing the highest risk-adjusted return is what you should, given that the absolute level of risk is something you can stomach.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Mar 13th, 2012 at 06:06:54 PM EST
[ Parent ]
is what project finance is about.
And - again, it works, it's quite safe, but it's also quite a bit of work. Which may be the problem...

(Also - project finance bankers do not get million-dollar bonuses)

Wind power

by Jerome a Paris (etg@eurotrib.com) on Wed Mar 14th, 2012 at 08:48:21 AM EST
[ Parent ]
I have been wondering, how much of banks lending is project financing and how much is based on existing assets?

Ball-park figures is what I am looking for really.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Mar 14th, 2012 at 09:07:23 AM EST
[ Parent ]
most bank lending is still to corporations, and it is impossible to tell if that money is used for investment (and if so, in what) or for other purposes.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Wed Mar 14th, 2012 at 01:08:52 PM EST
[ Parent ]
Still, a a lot of non project-finance new construction projects are done by established actors, not startups, which actually have collateral available to pledge.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Mar 14th, 2012 at 10:44:01 AM EST
[ Parent ]
A not insignificant fracion of all capital is not in the stock market, but in (generally) far less risky investments like bank accounts, corporate and sovereign bonds, or real estate.

The extent to which it's less risky is basically a function of credit seniority and recovery/collateral values.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Mar 13th, 2012 at 12:32:45 PM EST
[ Parent ]
Creditors always have greater seniority than shareholders, that's why shareholders demand higher returns.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Mar 13th, 2012 at 12:38:25 PM EST
[ Parent ]
There are more tiers of seniority than "creditors" and "shareholders" or "debt" and "equity".

Interestingly, in English there's "equity" and "debt" = "fixed income", but in Spanish there's no word for "equity". Rather there's "fixed income" (renta fija) and "variable income" (renta variable).

What makes equity more risky than debt is not the seniority but the discretionality of dividend payments.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Mar 13th, 2012 at 01:12:55 PM EST
[ Parent ]
Well, that too.

But of course, there are differnt kinds of seniority when it comes to bonds as well, and the more junior bonds pay higher interest. That's completely reasonable and not mysterious at all.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Mar 13th, 2012 at 01:27:50 PM EST
[ Parent ]

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