Fair Value and Intrinsic Value

I did a post on fair value during April and have received much email traffic expressing confusion between intrinsic and fair value. This post seeks to clarify the difference. 

What is intrinsic value? 

Intrinsic value is the value of a security embedded in the security itself. It is calculated by summing the future income generated by the asset, and discounting it to the present value.

The real value of commodities have fallen for decades – this trend has changed - how long will the change last?

Over the centuries, the prices of commodities in real terms trended down. This occurred despite continually rising demand. 

Why?

1. Better technologies led to more efficient and cheaper extraction.
2. Demand rose, but at a slower rate than real growth because the commodity required per item reduced due to less wastage and improved production technologies for industrial goods and consumer durables.
3. There was plenty of resource from low marginal cost sources; more than was needed at the time and in the foreseeable future.

What has changed?

Item 1 and 2 above have certainly not changed. In fact there is no doubt in my mind that human ingenuity will continue to lower cost of extraction as well as reduce per item commodity required.

Inflation, Interest Rates (Real & Nominal), Sensex Levels & Real GDP

Interest rates rose today.  Inflation is now at near 9% which is well above the 5.24% median levels since July 2000. The market interest rate (Reverse Repo) is now at 6.25%, which is above the 5.5% median rate since July 2000.  But do note that real interest rates remain negative 2.36% [Caluclated as (1+ money rate)/(1+ Inflation Rate)-1] even today; this compares with 0.17% positive at median levels since July 2000. 

Inflation peaked in January 2010 and has trended down since; real interest rates bottomed in January 2010 and have risen steadily since.  As it happens, inflation has fallen below its decade trend line (trend between July 2000 to Current).  Real interest rates are over the decade trend line (trend between July 2000 to Current).  Both inflation below trend and real interest rates over trend are likely a result of significant anomalies caused by the financial crisis, which are now normalizing - for example real interest rates fell to negative 11.16% by January 2010 which is well out of  normal range of positive 2.5% to negative 2.5%.  And inflation rose to 16.22% in January 2010 which is also well outside the typical 2.5% to 8% range.