Typography

Earlier this week Apple announced a 7:1 stock split. Each share of Apple, currently trading for around $570, will be worth about $80 after the split goes into effect. Stock split announcements like Apple's are becoming ever more rare, and for good reason. All things staying the same, a stock split could typically be trusted to rejuvenate the size of a share's liquidity premium, and therefore increase the real value of the firm's stock. Thanks to changes in market structure, this stock split liquidity effect no longer exists. The phenomena of a stock trading in the high triple digits, let alone quadruple digits (Priceline currently trades at $1,150) is a relatively new one for markets. During the decades before this one, a firm would typically announce a stock split once its shares had passed the $100 mark. Anyone reading the finance textbooks of the day—which for the most part taught that splits are irrelevant—would find this constant splitting and re-splitting to be puzzl...

The blogosphere has been slowly shifting from worrying about the tepid nature of the current recovery to biting its nails over the timing of the next downturn. Feeding its fears is Robert Shiller's cyclically-adjusted price earnings (CAPE) ratio, the elevated nature of which would seem to indicate that the fun can't go on (see chart below). I think the the CAPE is a crappy measure for measuring valuations and should be largely ignored. The general idea behind CAPE is that there exists a long-term average price earnings ratio to which stock markets will eventually revert. In the 1970s and early 80s, markets were undervalued on an earnings basis relative to their 16.5x average, so purchases made sense. Now they are overvalued relative to their historical average, so sales would be appropriate. I have two explanations for why CAPE is a crappy measure for determining the over or undervaluation of equity markets. These are both "money" reasons, meaning that they have a mo...

This is a follow up to my previous post on the monetary effects of credit cards. In this post I'll explore the idea that the use of credit cards in payments is driving a modern Gresham effect, the result of which is a displacement of cash and an inflationary race to the bottom of sorts. This downward spiral resembles the same dynamic set off by coin clippers in the medieval age, the era when Gresham's Law was first enunciated. First, we need to revisit the idea of Gresham's law , or the idea that the bad money drives out the good. Imagine that it's 1592 and you're a fish monger in a busy market in London. Like everyone else, the unit of account that you use to price your wares is the pound unit of account, further subdividable into twelve shillings and 240 pennies. The actual medium that you and most other merchants have chosen to represent that unit (ie. the medium of account) is the English penny, coined by the Royal Mint from twenty-four grains of silver. Howev...

This is a guest post by Mike Sproul. Many of you may know Mike from his comments on this blog and other economics blogs. I first encountered Mike at the Mises.com website back in 2007 where he would eagerly debate ten or twenty angry Austrians at the same time. Mike was the first to make me wonder why central banks had assets at all. Here is Mike's website.   On October 26, 2008, Porsche announced that it had raised its ownership stake in Volkswagen to 43%, at the same time that it had acquired options that could increase its stake by a further 31%, to a total ownership stake of 74%. The state of Lower Saxony already owned another 20% stake in VW, so Porsche's announcement meant that only 6% of VW's shares were in “free float”, that is, held by investors who might be interested in selling. Porsche's buying had inflated the price of VW stock, and investors had been selling VW short, expecting that once Porsche's buying spree ended, VW shares would fall back to reali...

It's the Roe v Wade of the blogosphere, a battle that never quite gets resolved. Nick Rowe and David Glasner have been having one of their bi-annual debates over the ability of private bankers to create excess deposits. See here , here , and here . The nub of their conflict seems to resolve revolve around the following points: if we assume that 1) bank deposits and cash are imperfect substitutes for each other, and that 2) bankers simultaneously raise the rate on deposits and increase the quantity of deposits, then 3) an excess supply of deposits and cash will emerge. Nick argues for the last point while David argues against it. At the risk of only adding noise to what is always an interesting debate, I'm going to chime in. I'm going to focus on the step-by-step process by which events play themselves out, the bricks & mortar if you will. Given the complexity of this process there will no doubt be errors in this post, hopefully readers will flag them. The thought expe...