“Mark to Market” is No 1 in Bubble Making!
We all know that a business has no value without a projected positive cash flow. It makes no difference how much steel and concrete has been poured if the positive cash flow is not in the pipeline the business has no value.
The new buzz-word “Mark to Market” valuation of everything is an illusion of real value as markets can be easily manipulated by the pundits who control most of the news Media. Fortunately these pundits can not manipulate the cash flow for a business without spreading false rumors or creating a boycott! The first one is actually in constant used in a subtle ways.
The demand to use “Mark to Market” valuation for the loan collaterals was a huge mistake as everybody suddenly wanted to get rid of all securitized mortgages. All of them were not bad though more than a usual number of the underlying debts were not performing. As the books were not clear it was not obvious how to connect the actual properties with the mortgages. With this the whole packages became suspect and nobody wanted to buy them and “Mark to Market” made them all almost worthless – even if they have lost value but not that much. Anyhow, whoever had these unwanted hot potatoes in their hands would hear instantly that they needed more collateral to stay in business.
FED is now using the same method for analyzing the corporations claiming that in orderly market conditions the price that the investors are willing to pay for the shares of a company is a fair value for that company. This is a fast process as anybody with a PC and a brokerage account can download even the whole US stock market data much faster than they can make a local phone call. FED uses now just the current share value to evaluate the value of a company at the moment. This is a highly unreliable way to determine real value for any company. But it is fast. With this FED has abandoned the laborious calculations and fact finding missions to check the quarterly and annual reports for income and costs and their future projections. Each company must do this all just to survive and the tax authorities use these same numbers to determine the tax liability.
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