Summers ‘ block

Larry Summers has a blog post analysing the new McKinsey study on companies focusing on the long-term delivering better returns for shareholders than companies that manage for the short-term. Mr. Summers has his reservations on the study. I have just downloaded it and I do not have a view on the Mckinsey study yet. This blog post is not about that Mckinsey study.

But, these lines paragraph from Mr. Summers’ blog post are intriguing:

The observation that many “unicorn” companies with no profits, and sometimes no revenues or even fully developed products, get valued so highly makes me skeptical of the idea that the capital market is systematically myopic. It is also the case that the companies generating the highest immediate cash flows — which should be overvalued on the myopia theory — historically have had the highest stock market returns, implying undervaluation rather than overvaluation.

Most of us who know how financial markets and investors behave, in reality, would conclude the opposite. High valuation of unicorn companies is not a sign of the long-term horizon of capital markets. Quite the opposite. Similarly, companies generating high immediate cash flow and hence delivering high stock market returns is a sign of markes ignoring long-term fundamentals and systematically focusing on fad and fashions. The high valuations that unicorn companies get can be easily explained by that.

That Mr. Summers comes to the opposite conclusion is fascinating. He is unable to shake off in his head the model of an optimising, homogenous, rational economic agent. That explains lot of his conclusions and support for short-term (superficially) effective and long-term disastrous monetary policies pursued in the last seven to eight years.

One should recall his debate with Michael Spence and Kevin Warsh and then this rebuttal of his arguments by Stanley Druckenmiller. These are late 2015 vintage.

After all those arguments and rebuttals, Mr. Summers’ economic model remains upside down.

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