Liquidity Theory of Asset Prices

About the authorsGORDON PEPPER has the unusual combination of an economics degree from Cambridge and actuarial training. Immediately after he finished taking examinations, he became a dealer on the Floor of the London Stock Exchange. His ‘postgraduate university’ was the market place, where he underwent the harshest of disciplines. Forecasts based on conventional theories were often wrong. The inescapable conclusion was that these theories were either incorrect or incomplete. Pepper was the joint founder of W. Greenwell & Co’s gilt-edged business (that is, the UK government bond business), which arguably became one of the leading bond-advisory businesses in the world, the advice being about both the best investments and the optimum way to execute business. For more than ten years he was the premier analyst in the gilt-edged market and was often described as the guru of that market. He was the principal author of Greenwell’s Monetary Bulletin, which, in the 1970s, became one of the most widely read monetary publications produced in the United Kingdom Pepper is the author of three books and the co-author of a fourth: Money, Credit and Inflation (1990), Money, Credit and Asset Prices (1994), Inside Thatcher’s Monetarist Revolution (1998), and (with Michael Oliver) Monetarism under Thatcher – Lessons for the Future (2001). He is also chairman of Lombard Street Research Ltd, which is one of the UK’s leading independent firms carrying out investment research and specialising in analysis of money, credit and flows of funds. Summarising, Pepper’s particular strength is the combination of practitioner and academic. Above all, he writes with great authority from his knowledge of what actually happens in the marketplace. MICHAEL J. OLIVER is currently Professor of Economics at École Supérieure de Commerce de Rennes and a director of Lombard Street Associates, UK. He graduated in economic history at the University of Leicester and was awarded his PhD in economics and economic history from Manchester Metropolitan University. He has held posts at the universities of the West of England, Leeds, Sunderland and has been a Visiting Professor at Gettysburg College, Pennsylvania and Colby College, Maine. He is the author of several books, including Whatever Happened To Monetarism? Economic Policy-making and Social Learning in the United Kingdom Since 1979 (1997); Exchange Rate Regimes in the Twentieth Century (with Derek Aldcroft, 1998) and Monetarism under Thatcher – Lessons for the Future (with Gordon Pepper, 2001). He has just finished co-editing a book (with Derek Aldcroft) entitled Economic Disaster of the Twentieth Century, which is being published by Edward Elgar in 2006. He has contributed articles to Economic History Review, Twentieth Century British History, Economic Affairs, Contemporary British History, Economic Review and Essays in Economic and Business History.

• Foreword by Russell Napier xiiiAcknowledgements xviiAbout the Authors xixList of Tables, Figures and Charts xxiiiIntroduction 1Appetiser 1Structure of the book 2Language and jargon 2Academic theories 3Modern Portfolio Theory 3The Efficient Markets Hypothesis 4Forms of investment analysis 4Fundamental analysis 4Monetary analysis 5Technical analysis 5The intuitive approach 6What the book is going to say 6PART I THE LIQUIDITY THEORY 91 Types of Trades in Securities 112 Persistent Liquidity Trades 153 Extrapolative Expectations 214 Discounting Liquidity Transactions 255 Cyclical Changes Associated with Business Cycles 376 Shifts in the Savings Demand for Money 43PART II FINANCIAL BUBBLES AND DEBT DEFLATION 497 Financial Bubbles 518 Debt Deflation 55PART III ELABORATION 599 Creation of Printing-press Money 6110 Control of Fountain-pen Money and the Counterparts of Broad Money 6511 Modern Portfolio Theory and the Nature of Risk 7112 Technical Analysis and Crowds 8113 The Intuitive Approach to Asset Prices 8714 Forms of Analysis 93PART IV EVIDENCE AND PRACTICAL EXAMPLES 10115 The UK Markets Prior to 1972 10316 The US Equity Market 1960–2002 10917 Two Forecasts 11318 Debt Deflation, Practical Experience 119PART V MONITORING DATA 12119 Monitoring Current Data for the Monetary Aggregates 12320 Monitoring Data for the Supply of Money 13921 The Different Sectors of the Economy 145Glossary 149References 157Index 159