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One counterpoint is that this assumes the economic growth rate is and will continue to be constant over the long term. Of course, if you think that AI and tech
by crazygringo 2y ago
One counterpoint is that this assumes the economic growth rate is and will continue to be constant over the long term.
Of course, if you think that AI and tech more broadly is going to increase our rate of economic growth over the next few decades, you would expect the "correct" value of that ratio to increase significantly.
And that's, of course, ignoring the other factors like interest rates, inflation, etc. that need to be taken into account as well.
- remexre 2y agoShouldn't those things increase GDP as well?
- crazygringo 2y agoNo, that's the whole point. They don't increase current GDP. Valuation of stocks is based on future expected profitability, while GDP is today's GDP.
- remexre 2y agoThat's still based on optimism (i.e., needs to be adjusted for risk), though; if the technology will massively increase productivity, the ratio should correct once those benefits start to be realized. It seems like "many market participants are mis-estimating risk" is exactly the sort of thing that this metric is intended to measure.
- dgb23 2y agoBut you don’t invest in tech. You invest in companies. See: dotcom bubble, where most companies were bad bets. Even very established ones. If you think the crash will happen, then it might be cheaper to buy after the crash.
- crazygringo 2y agoI'm explaining the perspective if you think a crash won't happen. Of course it's always cheaper to buy after a crash if there is one.