Friday, March 6, 2009

Market Cap- to-GDP Back At 1990 Levels

Caveat: The following is not meant as prediction, suggestion or inducement to any action. As always in matters of markets and personal finance, I offer no advice and strongly suggest you keep your own counsel.

US stock markets have taken it on the chin - and everywhere else, for that matter. Year to date the S&P 500 index is down a rather severe 26% - that's in just two months. And that's on top of a 38% drop during 2008, when measured from the high reached in May of that year. The total decline from the all time high reached in October 2007 now stands at -56%, bringing the index to levels last seen in 1996.

This has been repeated a million times already in the financial press and, quite importantly for popular mood followers, also in the regular media (you know, when the financial pages make it to the front page, etc. etc.). Nothing new there.

More interesting, however, is that total US stock market capitalization has plunged to 63% of GDP. That's a level not seen since 1990 (see chart below, click to enlarge).

  • You asked for it, so here is the Saturday Morning Addition: A longer-term version of the above chart (click to enlarge). Notice that it only goes to 2004. The current reading is intriguingly sitting right on top of the 85 year average - certainly much more in line with what one would term "reasonable". But markets are almost never characterized by sanity, so...

I am not going to interpret this - I'm keeping my own counsel, too. But feel free to provide comments as you see fit.

Oh, and here's the regular monthly update on the Monster Employment Index released yesterday. It managed to notch up a bit last month.

NOTE: Commenting is now "protected" by squiggly key word verification. Too much comment spam going on... I guess I must be happy to be so "honored".


  1. It is the ratio of the sum of ALL assets, at market value, to GDP that has to be considered,not only shares. Most of world wealth today is based on IOU, funded or unfunded (pun intended) . On this basis, we have waaaay to go.

  2. I have started buying a little again after a very long time of being out. I'm not any good at shorting. TIGHT STOPS is all I gotta say.

  3. Sue, In this central-piggy-bank controlled market you might be better off with just buying the options rather than the underlying stocks! You can always take delivery of the stock if the bet pans out.

    A 100% loss on the options to buy N stock certificates is much smaller than the 100% loss on the stock itself when it gets TARP'ed (or whatever the hell the letters are in three months time).

  4. the first chart shows it for the
    Ponzi scheme it is...or was this a
    trick graph ?

  5. I have looked at this data as well, and it is not too useful to only get it back to 1990. Using very conservative assumptions we can take it back to 1900. It shows what one would expect. We are on the cheaper side - but not at trough levels.

    Also take a step back and think about it - like Charles is saying, [Price/Sales] is a theoretically invalid notion. [Enterprise Value/Sales] is the theoretically valid ratio to be looking at, in which we add [Net Debt] to [Market Capitalization]. Using corporate debt data available from Flow of Funds shows that we are actually VERY EXPENSIVE. In fact, the layer of corporate debt is now so thick that it is structurally difficult for our market to be "cheap". This jives with intuition, and shows up in spades in the data.

  6. fajensen, I buy the stock and immediately sell a covered call for protection. However, this week its not working. Good thing I only did a tiny amount.

  7. I.M.O. Selling covered calls is just trading against yourself:

    If your stock does not go up you win and get to keep the call premium (but your are holding a sucky stock for the whole duration of the call).

    If your stock does go up, it will be called away thus robbing you of a profit,

    If your stock tanks you have to sell the stock and buy back the call to close your position.

    It's presently not worth holding stock for *any* length of time.

    Stocks are still *waay* overpriced the market can easily still drop another 80% on some hiccup on the news.

    On top of that, central bank action is what drives the market today so the price movements are essentially random and impossible to trade. I just throw a few bets in with a few calls and puts, nothing major, there is no point.

  8. Sue:

    Why not just sell naked puts? Probably a slightly better trade than your covered calls in this market. For your investment view, that is.

  9. US GDP has been vastly inflated due to so much leverage in the economy. When all this is said and done US GDP will be around 75% of what it is today i.e. it will be 25% less or around 7.5 trill. instead of the 10 trill. it was before the bubble burst.

  10. Hell, without getting into suggesting what "the right level is"

    1. Do you know what it was is 1974 when "The great pump up started?"

    2. Do you have a way of pointing me to charts like this that for longer time periods (100+ years) and/or for other developed countries?


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  12. yes, yes, I agree with all of you. right now i'm trying out the covered calls because i want to attempt to own stock again. i tried the naked puts and it eats up way too much margin. plus the second i wrote those naked puts i had to defend them. the dividends plus the premium is making covered calls very interesting. if my plan works out i might be able to own the stock for free in about a year. of course we can go to zero before then. trading is much fun now...

  13. Dear Thai,

    "You ring, we bring" was the motto of my college town pizzeria and it has kinda stuck with me when it comes to (pie?) charts. Look at the blog today..

    The World Federation of Exchanges (google it) has historical data on stock market capitalizations for almost every country - unfort. only back to 1990. GDPs are easy to find, usually through the World Bank site.


  14. Charles and Curt hit on the big hole in your analysis Hel, debt levels on corporate balance sheets are WAAAY higher than they were 30-40 years ago or even 20. MktCap of equity is a much smaller fraction of enterprise value. Camabron also makes a strong point about ephemeral GDP; how much of it was traders swapping inflated or fictitious paper back and forth?

    Add in debt levels and back out non-existent GDP and see what ratio you get.

  15. Thanks Hell. It is quite fascinating.

    I agree with Camabron/Yoyomo's point (which is really the same you have made on numerous occasions), that GDP needs to be readjusted for the debt that created said GDP.

    I wonder what it would look like if you did subtracted debt from GDP back to the turn of the century and reanalyzed market cap/GDP using such figures?

    Would you be willing to post your (excel?) file and the rest of us might try subtracting the relevant GDP debt per annum?

  16. Do you think it is fair to adjust GDP by THIS? Or do you think this commonly shared graph is way too simple for our purposes?

  17. A straight subtraction of debt from GDP would be wrong. It would be like subtracting your mortgage debt from your income - two completely different quantities.

    However, a better metric would be to subtract the annual INCREASE in debt (Δd) from GDP. Or to produce charts of (Δd/ΔGDP). Fortunately for my esteemed readership I have already done such calculations, way back when this blog started.

    They form the backbone of this blog, though I doubt anyone bothers to go this far back. Perhaps you could, however?

  18. Thanks for the redirection ;-)

    For everyone else, the relevant links:

    Link 1

    Link 2

    So does your old BOTTOM LINE still stand?

    DJIA: ~5,100-6,100
    S&P 500: ~580-700

    Not that Hell would makes predictions or anything else that might smell like investment advice ;-)

  19. Ok, last non-prediction stuff.

    I always loved this post of yours.

    The dividend yield on the S&P 500 today is 3.42% while the average dividend yield of 30 year treasuries is 3.5%.

    How would you fit these facts, your prediction and today's post together?

    And bond yields are creeping up a little???

    Oh, and I read productivity fell.

    You like to point to the end of Permagrowth... It is really not too hard to see the self similar (i.e fractal) nature of war as something has to give.

    Anyone else have thouhgts?

  20. Oh, I make predictions all the time. ALL THE TIME. It's just that I think that people should make their own decisions, not just rely on so-called experts, myself included.

    And yes, they still stand. I actually consider them pretty much fulfilled.

    As for the dividend yield/treasury situation, the 10 year reached 2.2% a week or so ago. DJIA yield right now is 4.8%... So pretty much there, too.


  21. To those who scoff at the notion of international banking cartels (via AutomaticEarth Feb22):

    That in turn leads me back to Professor Carroll Quigley, a teacher his one time student Bill Clinton should have listened to a lot more. Quigley's 1300 page tome Tragedy and Hope is available free online.

    If you have a problem with my analysis, hey, take it from a fellow US citizen (Quigley died in 1977). Here's an excerpt:

    "...[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations....

    "It must not be felt that these heads of the world's chief central banks were themselves substantive powers in world finance. They were not. Rather, they were the technicians and agents of the dominant investment bankers of their own countries, who had raised them up and were perfectly capable of throwing them down. The substantive financial powers of the world were in the hands of these investment bankers (also called 'international' or 'merchant' bankers) who remained largely behind the scenes in their own unincorporated private banks. These formed a system of international cooperation and national dominance which was more private, more powerful, and more secret than that of their agents in the central banks. This dominance of investment bankers was based on their control over the flows of credit and investment funds in their own countries and throughout the world.

    They could dominate the financial and industrial systems of their own countries by their influence over the flow of current funds though bank loans, the discount rate, and the re-discounting of commercial debts; they could dominate governments by their own control over current government loans and the play of the international exchanges. Almost all of this power was exercised by the personal influence and prestige of men who had demonstrated their ability in the past to bring off successful financial coupes, to keep their word, to remain cool in a crisis, and to share their winning opportunities with their associates."

  22. Thanks Thai for the links, thanks Hell for the redirects.

  23. "And yes, they still stand. I actually consider them pretty much fulfilled."

    As well you should- Kudos :-)

    I think all of us owe you a tremendous thanks. I certainly know my kids college fund does. Please don't ever hesitate to set up a tipping jar and I am sure many of us would very much like to send you a pizza or whatever thru it as appreciative "thanks" (I am not sure how it work anonymously but I am sure it is doable, anything is doable with $ and electronics).

    Yo, please take no offense as I really mean it more as an endearing compliment- I have come to "view" you as a kind of brilliant Mel Gibson in Conspiracy Theory over time. It is always a conspiracy ;-) And while to some degree a strict Darwinian view of the world might support your claim, I sometimes think you take things "past useful".

    "Yes", these cartels will form. My main response is "So what!" It is what the cartels do with their power that is critical, it is how they cooperate with everyone else that is all that matters in the end. Remember, from an evolutionary perspective, selection is working on the ant and the ant colony and the ant queen but it is jut as strongly selecting/working on the relationship, of each with each of these two each other. Change the term ant colony with the term private banking cartel or with the term government central bank cartel and the reality is you have changed nothing. The same rules, the same selection pressures still same rules still apply.

    Which is the real slave and which is the real master in your body: the mitochondria swallowed by the larger cell, or the larger cell surrounding the mitochondria?

    A private cartel is just as trapped in what it can do as any other form of cartel. My choices to treat patients are the same whether I work for myself, the government, a private medical practice. Changing these things changes nothing OTHER than my perception, of my relationship to the "boss" (and remember, selection is always working on that relationship no matter what my perception of it is).

    Ask your same series of "They could dominate..." questions again but this time against a system made of government central bank cartels without "richer masters" and I think your same "fears of ??...consequences" remain just as true.

    To quote Teddy Roosevelt, in the same 1910 speech at the Sorbonne France "The Man In The Arena", which Hell quoted in'06:

    ...keep ever in mind the fact that the cleavage between right and wrong, between good citizenship and bad citizenship, runs at right angles to, and not parallel with, the lines of cleavage between class and class, between occupation and occupation. Ruin looks us in the face if we judge a man by his position instead of judging him by his conduct in that position.

    We are all trapped in the system and shuffling the deck chairs changes nothing of the system fundamentally.

    Greenie- Can you support your claim with a little more data?

  24. Wasn't it Adam Smith who said that two merchants couldn't get together for tea without conspiring how to rig the market to their benefit. WRT TRex, before we can judge them on their conduct we have to rip down the walls of secrecy that they surround themselves with, have you gotten any invitations to attend lately? As for how the cartel members "cooperate" with the rest of us, all I can say is you're so cute I could pinch you.

  25. "before we can judge them on their conduct we have to rip down the walls of secrecy that they surround themselves with"

    That is one, but not the only, way to solve the issue.

    You can have good process and bad people or bad process and good people. I will always chose the latter over the former- it is a lot easier to change process than people.

    Remember, wasn't I the one who suggested e-bay tracking?

  26. And what are you going to put up on E-Bay Thai, in most cases you don't even know the identities of the players let alone their actions. Everything is done in secret and surrogates are presented to the public to carry out their directives.

    It may be a coincidence that Kennedy issued an order to replace FedRes notes with Treasury dollars before he was offed but it still is a fact. I can't prove it was the cause of his death and you can't dismiss it. What form of cooperation should we expect from the shadow lords, the kind that a moose receives from an encircling wolf pack?

  27. Yo- I am surprised that you of all people have not thought more about this.



    It would start at the time of birth/conception

  28. Thai,
    You'll have a surveillance camera bolted onto your bidet nozzle before you'll have any chance of spying on the shadow lords, those links are flights of fantasy although it would be nice to be able to hold the high and mighty accountable.

    This link is how things are today:

  29. Perhaps. Only this view of society has to explain away certain "inconvenient truths" such as:

    1. Wealth does not pass three generations.

    2. Gene survival over the long term follows perfect Pareto spreads.

    I suspect that if either of us ever did get into that "Star Chamber" you fear, we would find it to be just as competitively difficult staying there as it is everywhere else.

    And of course the personal interests and corruptions of the people in the star chamber tomorrow are likely to be quite different than the personal interests and corruptions of the people in it today (other than they both seek immortality).

  30. I think the Rothchilds have managed to pass their wealth for more than three generations and they probably coordinate their strategies with others similarly talented.

  31. Your example is that the richest family the world has so far ever know to date still has some wealth? They are a mere shadow of their former "glory" (no pun intended).
    (FYI, if you look at the Rothschild family tree, you will find LOTS of dead branches).

    I am not talking about about "the one" example that is till around as by definition they will always beat the odds (though I certainly wouldn't walk on a bridge built on the hope of repeating such feats).

    I am talking about all the other extinctions in the fossil record and what your odd are when looking at life forward, not backward.

    You are not making your case IMO

  32. Hell, in science, when we see highly aberrant data, we will usually consciously exclude that data from the series.

    With that in mind, what would the average be if you threw out all data after 1995?

    Further, the more I look at this, wouldn't the "volume" above the average approximately equal the volume below the average when averaged over VERY long periods of time? I will look at your data links to see if this is approximately true for Japan and their crash.

    If so, we are potentially facing a VERY VERY long L or WWW recession in the coming years. Further it is likely the market will fall quite a bit further.

    Also, assuming volumes are to be equal, wouldn't it strongly make the case that America will print?