One of the first things I learned about when learning the stock market was the discounted cash flow method. For those too lazy to look it up, I’m not going to explain what this is. For the purposes of this article, the only thing that interests me is the relationship between the discount rate and net present value.
I have the dubious advantage of having built various spreadsheet calculators to help me calculate NPV. I’ve applied these spreadsheets to everything from individual stocks to specific properties to solar panels to get a picture on the net present value of different assets within different asset classes. Yes, I do this for a hobby.
It’s only once you’ve built and fooled around with these sorts of calculators that you can see the dangers of certain types of macroeconomic policy.
The interesting thing is that the discount rate is never really consistently defined. Certain people will use a risk-adjusted rate, whereas Warren Buffett will simply use the long term government bond rate.
In other words, being the words of Admiral Akbar, ‘It’s a Trap!’ If it stands to reason that a drop in the discount rate leads to assets with a fairly minimal cashflow adding half a million dollars to their valuations, then it also stands to reason that even a slight, slight increase in the discount rate will lead to the price collapse of many of those assets.
Having said that, I’ve always been a cynic on the housing market, being a Hayekian, and this is perhaps the continuation of a long-held and fairly-wrongheaded (according to recent data anyway) set of postulations.
