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A Few Thoughts On The Dollar
Amid the Fed's insistence on the "higher for longer" narrative, it's all too easy to cite the greenback's resilience in the course of lampooning the various de-dollarization narratives which stormed the financial front pages last year after the West seized Russia's reserves.
We should avoid that. And not because those narratives don't deserve to be lampooned ("Eastern Powers"!), but rather because the dollar's near- and even medium-term performance (i.e., relative strength and weakness) is in m
I probably shouldn’t do this, but your weekly on R* was excellent and raised an old flag for me. You argued R* is nearly impossible to know. I agree. In 1967, I wrote my Master’s Thesis on a similar, somewhat related issue, related to this current post. Deeply into my studies in theoretical and practical corporate finance I kept encountering rules for calculating the cost of capital for firms who used the number to analyze investment decisions. The more I looked at that calculation, the more I realized it could only be characterized in the same way you described R*. WACC is essentially indefinable. The prices of equities, bonds and preferred stock used as sources of external funds by corporations literally change every minute when markets are open. Nor are these numbers actually calculable based on unknown future cash flows. To say the XYZ compamy’s WACC is 8.25%, for example, is ridiculous. The number simply can’t be calculated that precisely. To show the variability/instability of the COC I looked at data from hundreds of publicly traded electric utilities over time (used because PUCs are among the most stable types of firms financially, with most using many forms of financing) I found sufficient variability in the WACC numbers to make any attempt to specify this key variable precisely to be fruitless. R* and a firm’s WACC are both, in a sense, imaginary numbers, as your excellent post once again reminded me.