Value is not what it seems and the risks are huge.
From the Tulip bubble of Holland to the Bitcoin bubble of today, value has always been a subjective and dangerously alluring bedfellow, but what is it?
Every Marketer, MBA, everyone who ever read a business magazine or investing article, or studied economics even at the most basic level will have come across this favourite word of the economist, “value”.
Claiming to create value makes almost anything OK in our world, but what exactly is it? Can value exist without money? How much of value is really of any value and what is its essence? What then is price and what is the relationship between the two?
“The price of everything and the value of nothing”. Oscar Wilde coined this phrase to describe a man who was incapable of assuming there could be value in something unless it had a price.
What Is Value?
Value is the monetary, material, or assessed worth of an asset, good, or service. “Value” is attached to a myriad of concepts including shareholder value, the value of a firm, fair value, and market value. Some of the terms are well-known business jargon, and some are formal terms for accounting and auditing standards of reporting to the Securities and Exchange Commission (SEC).
An asset is anything of value or a resource of value that can be converted into cash. Individuals, companies, and governments own assets. For a company, an asset might generate revenue, or a company might benefit in some way from owning or using the asset. Investopaedia.
I’m sure you’ll agree that these are not the most enlightening definitions and the never-ending loop between (value to asset, asset to value), is disappointing not to mention the built-in contradiction, but this is an accurate demonstration of just how smart economics is in this century.
Is a dedicated and honest worker an asset? Is a stay- at-home wife taking care of a family an asset? Is a carer looking after elderly relatives an asset?
It seems that only if money is exchanged, does the modern definition recognise the existent of an asset regardless of how much value that asset may be providing to its beneficiary. Perhaps the difficulty is in assessing a worth for the asset. After all, economics is about money only. Is this the great flaw that drives our world into so many dead ends and dangerous creeks.
1: the monetary worth of something : MARKET PRICE.
2: a fair return or equivalent in goods, services, or money for something exchanged.
3: relative worth, utility, or importance a good value at the price the value of base stealing in baseball had nothing of value to say. Merriam-Webster
This is not an economics specific definition, but it’s equally vague and just as useful.
First and foremost, value can’t exist on its own, there must be a thing or possibly idea that has value and also there must an entity, person, company, or maybe government for which the thing has value.
The “thing” has “value” for “entity” or the “thing” provides “value” to “entity”
however it is more accurate to say: The “thing” has “value” for “entity” in “circumstances”
Change the entity and the value may disappear, or be greatly reduced, likewise the thing or circumstances.
Value is therefore dependent on the thing and the entity and often the circumstances and is not necessarily concrete in its own right.
Value also depends on an exchange, but in the world of economics that must be via a specific token that can be counted in a spreadsheet.
When someone says they are valuing a house, or a company, what they are really doing may be pricing it. Why do I say this?
Well we’ve already established with some clarity that value is subjective. For each subject there may be a different value. The price asked for a company or a house, is not tailored to the individual bidder, but to the intentions and opinions of the seller.
The seller believes it has a certain value (in this case, in money), and wants to exchange it for something that will provide him a similar amount of value. The value estimated by the seller is converted into a price and the sales process is one of finding the buyer whose estimate of value is higher than the sellers and hence he/she believes it to be a bargain.
A bargain is when the buyers value estimate is higher than the sellers value estimate.
Above lies one of the most fundamental principals of marketing and product management. A good product is seen as a bargain to a large number of potential buyers, yet the transfer is also beneficial to the seller.
Let’s have another shot at defining value and see if we can get a little closer.
Value is in the eye of the beholder and the two parties to any transaction may have different opinions of the value of the thing. Value is often money, but not necessarily so. It may also be a combination of money and other agreements or almost anything tangible or intangible as long as the recipient perceives value in it and proportionate to his token in the exchange.
I introduced the word token to describe the something, or consideration being offered for the thing. As we hinted at before, the token may be some money plus promise to help in certain ways, or free access to something or a myriad of other things. The oldest “thing” exchanged for “tokens” is of course sex. You can see why they take payment in advance, after all the circumstances change quickly after the exchange.
Is a love affair or marriage any different?
The tokens are different, but no less important, there are circumstances and the perceptions of value of both parties to the transaction are pivotal.
The latter is an important concept in defining value because we have now established beyond doubt that the token in the transaction need not have any monetary value, or even tangible manifestation.
In fact, although many including myself could attest otherwise, for now at least, it would seem that the token received in this transaction cannot necessarily be used to exchange for some other thing (depending on who gets the house, I digress). A divorce is a unusual, but possibly not unique situation, whereby all the value vanishes for one party to the transaction while the other party appears to do quite nicely.
That however is incorrect, because the relationship and assets they may hold together are separate transactions and subject to rules of engagement that were known from the outset.
The other aspect that is worth mentioning is that this exchange is an ongoing relationship rather than an exchange of assets. The same might apply to any number of business relationships.
There’s one further aspect of exchange of tokens that needs to be addressed as it plays an enormous part in economics especially and many other areas. This is the principal of price discovery as practiced more obviously in trading exchanges, but it also affects everyday commodities and services.
The underlying principle is that price (often substituted for value in the rhetoric of these scenarios) is a product of supply versus demand. That, of itself, is not overly controversial or interesting, because even without such centralised markets, price discovery would happen albeit more slowly. What is of utmost importance to the discussion is the existence of trading and market making by people with no intention of using the value received in the exchange, but simply to exchange it again for a higher price. Their perceptions on both sides of the transaction is based on their assessment of the opposite traders need or motivation. All notions of value would seem to evaporate at this point.
At a simple level, this behaviour creates a sense of demand that is not real and since price is driven by high demand, it causes increase of the price. Does that increase the value?
Even more pivotal to the discussion is the fact that the majority of traders never take delivery of shares, or other assets and indeed a huge portion of trading is done via contracts that don’t actually ever result in an exchange of the underlying assets such as stocks, potatoes, etc.
The first problem with this situation is that price discovery is now based on supply that far outweighs true supply because there is no intent of ever delivering. 20 potatoes on the exchange floor could result in 50,00 bids to buy against 60,000 bids to sell. The price of potatoes is now driven by these dynamics. Can this behaviour possibly have any relationship to the value of the potatoes?
The second problem is that based on the scenario above, traders wanting to buy low and sell high, have no connection to or respect for value, but simply predict the movements of demand or supply based on the gossip and rumours of the trading floor and have in recent years become adept at spreading fake news to move the markets and profit form the move. Just as our definition above, they trade on the difference between the buyer’s perception and the sellers. This no different in any way form a poker table or a roulette wheel and has nothing to do with markets, commodities, investment or anything remotely connected to value by any definition that is wholesome and useful.
They are manipulating the circumstance to manipulate price and steal value form those who create it. In-fact they often use huge sums to dominate demand and drive up the price of their own holdings.
The third problem is that what many of these traders are exchanging for money is not potatoes, but new assets or tokens in the form of a perceived higher value priced according to the difference between the price today and the price you will be able to buy at tomorrow and expressed as an opportunity. There are many complex pieces of paper sold as assets or “things” and exchanged for money.
Let’s attempt to explain the opportunity.
The thing they are selling provides value to the buyer because it promises him a high probability that tomorrow, or on set date, he can buy or sell this asset at a price that will give him a profit.
If this asset were a potato, then it would be wrong to say they were trading in potatoes, the thing they are trading is the pieces of paper, or options, so this has no affect on our definition of value.
In summary of our attempt to narrow it down.
So, we introduced a token to cover all kinds of payments including any or all of; money, love, potatoes, stocks, buildings, options, CFDs, or anything imaginable that might make up the offer from one party to the transaction because value comes in many forms.
We recognised that every transaction is not a one off exchange but longer term ongoing relationships can also qualify.
We identified that the perception of value in the mind of the buyer is often manipulated and sometimes heavily so by powerful buyers and a risk to exchange of value as well as a means of stealing value from value creators.
It seems clear to me, but I beg argument on this if you disagree, that price represents what traders are willing to sell at more than anything else, be that price discovery or manipulation and although this manipulated price influences heavily the perception of value of the buyer, it is not a safe or real perception and not a representation of the value the buyer expects to receive from the thing they are offering to buy.
Even when the buyer is trading in the hope of a further profit, I believe that the rules above still apply. It would seem that capital and money supply is the biggest driver of high price as witnessed by historic valuations during a global catastrophe of Covid19 fuelled by cheap or xero cost loans to big business
For this reason mainly, I maintain that the cost of something on the open market is the price and that value is what the seller is willing to pay be that in money or any other form of value.
But there’s another problem.
We also have things for sale and traded that make no pretence of providing any value whatsoever other than an electronic token of some kind with which to exchange for things In much the same way that currency is used.
Bitcoin has a value proposition for people with something to hide as they can still make exchanges with people in a way that is not as yet monitored by the authorities. That could be illegal business, tax evasion or many things. For these people there is value in bitcoin over and above currency or money.
For the sake of the discussion, currency is paper or metal money, whereas money is numbers in a computer account telling you how much you owe them usually since money is created form thin air by way of loans and apart from credit cards debt is generally secured against an asset of higher monetary value than the loan.
Exchanging currency is anonymous as most transactions were until the last decade or so when we began to make electronic transactions and numerous people began to spy on them.
There are many perfectly legitimate reasons why people want and are entitled to exchange value with others anonymously and a replacement or a digital buddy for currency is undoubtedly a need that bitcoin and its cousins are fulfilling, or is that their business?
Well actually no, that is not their business. While the crypto currencies do still serve that need more and more in a race with governments who are gradually getting around to regulating them in a similar way to money, their business is believed by a high number of economists to be little more than a bubble.
There are blogs and adverts everywhere along the lines of “Invest in” Ethereum, or Cordana, or whatever platform. This is a blatant lie. You can’t invest in any of these platforms because they are privately owned and no shares are currently available. An ICO creates coins before launch and sells these to raise capital. The only thing you get when you buy at an ICO is coin and your only potential for profit is if those coins get good circulations, generate demand and go up in price. You will never own the company or any part of it only the coin. The only value most of those coins will ever have is what someone else is prepared to pay you for it. You rely totally on a strong marketing campaign to create a perception in the marketplace that this coin is going to go up in price.
Some ICOs also offer utility tokens, i.e. a token that allows you to use some online service they provide such as cloud storage, but that is slightly off centre for cryptocurrency.
Fundamentally, when you buy a coin you buy a bubble, however there is as we have seen an element of bubble in every “thing” some more and some less. Money contains a large element of bubble, but its huge circulation and the habit that created confidence in it keep it safe, plus there is strict regulation that says it is backed by assets, though the value rather than price of those assets such as buildings, oil wells and so forth is highly subjective.
Housing is perhaps the biggest bubble of all. In UK today, the value of land is around 7k per acre and a developer will put at least 12 homes on that acre. Cost per house is 7/12 or approximately £600 and there’s no scarcity of it. A good family home costs 105k to build making the gross value including a profit for the developer around 117k.
The average price for such a home is almost £400k more than three times the true value. Its more than manipulation of perceptions in this case, its manipulation of supply. The ultimate scam and it sits upon a timebomb of interest rates. Governments now must find a different approach to inflation if it occurs because 1% rise would make vast swathes homeless, let alone 6 0r 7 % or even 17% as we saw a few decades ago.
This same supply manipulation technique is naturally enough cooked into the crypto currency algorithms so that there is a very limited number of coins possible with each algorithm. That also makes them ultimately useless as a token of exchange in place of money or currency other than to exchange tiny portions of coins, something that would negate the whole value proposition they are founded upon.
As mentioned previously, stocks also are heavily manipulated and “gassed up” mostly by the confidence that QE will continue along with share buy backs and M&A. A very large proportion of the price of most traded assets is hot air and always was. Traders know it will correct from time to time, but that with nothing else to do, they’ll start buying again at the first sig n of light and repeat the whole charade. The losers are those who create value.
We’ve got to make a commitment now, publish and be damned as my old mentor used to say.
There are a whole range of assets, or things that are heavily gassed up though supply manipulation, trading on options and other instruments and of course media manipulation.
The standout amongst these is Bitcoin that has risen something like 60,000% since inception and similar staggering price growth is happening around the crypto scene. Nobody would attempt to argue that this represents value.
Housing is at 300% of its reasonable price and this applies to a most of the assets you can examine.
On top of bubbles there is ongoing manipulation.
People are homeless because of this situation and it is no longer just an investment scenario.
Michel J Casey of coindesk says that speculative bubbles is a feature not a bug in Bitcoin, he says it is providing an avenue for speculation that will take the heat of housing and other critically important assets that have become unaffordable because of the climate of speculation and manipulation we just discussed.
The truth about Value and its relationship to price and utility, perceptions and all of these concepts would seem to be thus:
Value is mostly in the eye of the beholder, but that picture he’s seeing is often heavily touched up.
Money and currency are partly bubble, especially in the USA where valuation comes form trading and many countries still use dollars for export and import, but in most places it is a highly subjective price and carries a lot of gas. Fiat money is borrowed against inflated assets and hence money supply reflects the bubble in assets plus of course huge levels of QE.
· As much as half of the price of currency may be bubble.
· Bitcoin is all bubble, but it may survive.
· Housing is 65% or more bubble across UK and most of Europe and the US.
· Stocks could be as much as 50% bubble.
If we take on example of housing and break it down:
Housing. Shows a value running between 30 and 40% of price with at least 60% of the price being a bubble cause deliberately by supply manipulation.
So The thing has value for an entity in certain circumstances but that value is the sum of any utility or value excluding anything that results from market bubbles.