03 June 2010
Moody’s, Appraisers and Markets
Warren Buffett’s defense of Moody’s reminds me of the business plan of antiques appraisers—they charge the owners/sellers of the old pieces for their service because they are providing an expert opinion of value. That value, however, is only relative to other antiques, the monetary worth of which can go up and down. It depends, of course, on the relative value of money, i.e. inflation or consumer expectations.
Moody’s and antiques appraisers are expert in assessing fundamental value relative to other assets. However, they are not expert in predicting market valuations which can vary wildly with psychological factors that affect the willingness of investors and consumers to take risks and to disregard history.
AAA is not an absolute rating. It only places an asset on a sliding scale that is subject to universal movements relative to measures of monetary value. It also is vulnerable to changes in investor and consumer judgments of the relation of each asset class to liquid monetary value, and of the importance of liquidity itself.
Warren Buffett’s defense of Moody’s reminds me of the business plan of antiques appraisers—they charge the owners/sellers of the old pieces for their service because they are providing an expert opinion of value. That value, however, is only relative to other antiques, the monetary worth of which can go up and down. It depends, of course, on the relative value of money, i.e. inflation or consumer expectations.
Moody’s and antiques appraisers are expert in assessing fundamental value relative to other assets. However, they are not expert in predicting market valuations which can vary wildly with psychological factors that affect the willingness of investors and consumers to take risks and to disregard history.
AAA is not an absolute rating. It only places an asset on a sliding scale that is subject to universal movements relative to measures of monetary value. It also is vulnerable to changes in investor and consumer judgments of the relation of each asset class to liquid monetary value, and of the importance of liquidity itself.
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