Really cool idea. As someone that hasn't really investigated the market indicators for collapse this is really eye opening. It really breaks things down into plain english. Hope this goes to the top for some rational/interesting conversation.
Don't put too much weight into his analysis. There are folks who spend their entire professional careers studying the economy and they haven't, on average, ever correctly predicted how the stock market will perform.
I don't want to knock on OP's analysis here, but it's important to remember the famous quote (maybe by Keynes?), "The market can remain irrational much longer than you will remain solvent"
I wouldn't worry about student loan debt being a problem. It's very likely that they're going to get a bailout before a bubble bursts. Where on earth did I come up with this, you ask? Easy - I just paid my student loans off last week. It's only natural that everyone else will now get bailed out!
Seriously, though, this is a real problem and we need to do something. Even if it doesn't have a direct effect any time soon, it's going to have an indirect effect as our generation (I'm some kind of X-ennial, apparently, but let's just say everyone 20-40) continues to replace retiring boomers in the economy. If we're all saddled with non-dischargable debt, it's going to hurt the housing and consumer spending segments.
> Seriously, though, this is a real problem and we need to do something
the thing we have to do is not borrow money we can't repay. capitalism is a distributed system. borrowing money you can't repay is a broken local protocol. don't try to fix that with anything but fixing it locally.
This is at least partially true, but ignores the "reality on the ground." Even many entry-level jobs require a college degree now, and forgoing a college education makes you unhirable in many markets. Until that changes, "college you can't afford" is pretty much a mandatory expense.
There are ways to minimize the cost -- basically two years at a community college and two years at a state school -- but the days of being able to afford college by working a part time job are long over. The reality is, if you want to participate in today's job market, you probably must take on at least some college debt.
I think college degree is highly overrated, and higher education is very inefficient overall. But it is like a prisoners' dilemma, where all of the to-be-students would be better off if say 70% of them didn't go to college, but no individual has the incentive to decide so.
They wouldn't need to pay the enormous tuition, and as the job market would change (as far less people would have a college degree), the lack of degree wouldn't hurt them.
College degrees used to be a signaling method. It was something rare and desirable. And like many rare and desirable things, the intrinsic value gets bolstered by a perceived value. The value and rarity drives commoditization, eventually making it not rare. (unless it can't or is too exepensive e.g. changing platinum to gold)
Everything has a mix of intrinsic and perceived value and this changes over time. The more a thing is composed of perceived value the more volatile it is. I'd say all stocks are composed of at least 50% perceived value.
Perceived value can often drag intrinsic value upwards so investing in things with high perceived value can still be lucrative. Analysis moves from fundamentals to psychohistory. (bad psychohistory) Probabky based on some combination of time to death of cultural momentum and half life of faith isotopes.
College degrees were a thing that quickly lost perceived value because it was based on rarity. (the only rarity that doesn't drive itself to commoditization is useless rarity like expensive wines and designer bags. 100% pure perceived value things not worth commoditixation)
At an individual level the high intrinsic value degrees do well but overall they haven't as most degrees in the US were supplementary for Masters of the Universe type. Education to fill the void in your life.
The post WW2 dominance faded though and the upper levels of Maslow's pyramid were no longer the issue. Basic survival and making a living was. Globalization also created huge pressure and competition for useful jobs.
What happened in the US was essentially a dearth of sinecure positions based on a secure moat that is now deteriorating. Those who are hit hardest by this desire a return to the past, in their eyes this is being "More American". They simply can't compete with a workforce with much stronger work ethics out of having much more experience with dealing with daily survival of a more extreme kind.
This is how the education system is failing. A country for abundance needs either output or the ability to extract rent via moats or force. The US also has a strong immigration culture that can "steal" output from other countries. Though at the cost of making "doing right by americans" a very loaded and confusing idea to parse.
And we also need to make the loans dischargable and place some of the burden on educational institutions. Aside from universities that can be very selective, all other schools have an incentive to bring in as many students as they can. They have no financial risk if the students drop out.
> They have no financial risk if the students drop out.
I like this and would love to see more commentary on it. Taking one step back, the system is broken because we removed the primary safeguard: Bankruptcy. If we could declare bankruptcy to discharge loans, it puts the burdens on banks to only make loans they evaluate as having a reasonable rate of repayment on. We've removed that check. In turn, we have a completely predictable outcome. So, as far as I know the only alternative is to provide another, equally robust counter (like your suggestions, or just "free" tuition) to balance.
I was forced when I was 17, to pick a private college, people didn't let me do what I wanted.
At same time, I was repeateadly promised by all 'adults' that I was very intelligent, and that getting into a college would ensure I would get a job, and it is why it was so important.
After lots of struggling I ended doing what people wanted, got in a college, and I had no way to pay for it, so I got into debt too. (and I hate debts, I used to never get into any debt at all).
Around time I graduated, the last crash happened, my country never really recovered from it...
I am 29 now, and I can't get unemployment benefits, because I was NEVER employed in first place, all work I list on my LinkedIn was by freelance-style contracts, I never found the promised jobs...
I did recently finished paying almost all my debts (I still have some, and my net worth is still negative).
But 'not borrowing money' wasn't really an option.
What if I can afford to repay it? So what? My wife and I can easily afford the 1500$ a month minimums we have to pay(We pay more than our minimums in an effort to expedite the process) but while we do pay off these loans we also choose not to have children, or buy a house, or buy cars. I can say without a doubt that our educations have been valuable, but not in the sense that we learned have anything other than that higher education is a signaling scam designed to keep people poorer than ourselves outside of the working class.
> the thing we have to do is not borrow money we can't repay.
Literally nobody takes student loans that they are capable of repaying. Why would you, unless you could get a 0% APR?
It'd be nice if young people - possessors of great foresight and fonts of wisdom, all - could predict whether they will be able to repay the very substantial loans they're likely to rack up in college. We are not living in a world, or an economy, where making such a prediction is easy or straightforward.
Literally nobody? My younger brother went to a state college during a time where he qualified for a ~3.4% loan from the government. I told him to take his time paying (for now), because a no-load passive index fund will yield higher than that. The past 3 years have been tremendous in terms of returns. He essentially used his student loans to net 12-18%. When family members caught wind of this, they told him it's not the best move, and our father paid off his loans.
Using student loans as a form of leverage to invest in the stock market isn't new, so yeah, not "literally nobody." Point taken I guess.
It's just such a shockingly bad idea. We went from the topic of the average kid's inability to gauge the future value of their degree to the topic of the average kid's ability to predict the stock market well enough that using leverage to invest makes sense.
> Literally nobody takes student loans that they are capable of repaying.
Probably one of the most incorrect sweeping generalizations I have ever seen.
I finished my BS in CS about 3 1/2 years ago with about $44,000 in student loan debt. I'm currently on track to pay them off within the next 3 years. It'd probably be only 1 or 2 years if I didn't buy a car.
> Probably one of the most incorrect sweeping generalizations I have ever seen.
Not really, you simply didn't read my comment and the comment I responded to very thoughtfully.
The point of my reply is twofold. First, the obvious: you wouldn't take that loan unless you needed the money for your education (or wanted to gamble on the stock market, apparently, as one poster mentioned, but let's put that aside). If you can pay for your education without it, with saved money or through scholarships or grants, you'll do it. If you can't pay for your education, you take the loan. In that sense it wasn't a deep point, it was basically a tautology to point out how vapid the grandparent's comment was: "the thing we have to do is not borrow money we can't repay," "borrowing money you can't repay is a broken local protocol." As if arranging student loan financing were in some way similar to extending credit to a successful business that needs a little extra cash on hand until the end of the month. Ridiculous.
Second, and on to the more important point that I made in the second paragraph: if we assume the grandparent really means "will not be able to repay after several years of college" the problem with this whole line of thinking becomes obvious. The average student embarking on college has no idea whether they'll graduate successfully. They have no idea whether they'll be able to find a job in their field and they certainly have no idea how much they will be paid. In short, they have no idea whether they'll be able to repay that loan. In terms of policy, saying they should not take a student loan which they will be unable to repay is not an answer to anything since at best they're making an educated guess. In a situation like that, where people are guessing, the expected outcome is that a lot of people will guess incorrectly.
If all loans were always repaid, we'd have no risk premiums, and the world would be incredibly different than it really is: Almost every worthwhile investment that has moved the world forward involved significant chances of loans not getting repaid.
What is broken with student loans is that the current scheme messes with almost every sensible market incentive out there: Colleges get more expensive for little to no reason, people can get into big loans for degrees that will never pay off, and the companies lending the money are, in practice, guaranteed repayment by the treasury, so ultimately the whole scheme leads to far higher prices than, say, college in Europe, but only provides better outcomes for some school+major combinations.
Let's not forget, the system leads to degrees that have low expected values to end up being unaffordable, while prices would go down if the system wasn't built with the silly guarantees that it has. Putting the blame on the borrower alone and ignoring the insane system design is just shortsighted.
If someone went to try to launch pets.com today, we'd not blame the founders alone for the VC's loss: They carry responsibility too for betting on a horse that had no chance of even finishing the race. A VC takes risks, but also expects losses. Anyone making loans should consider chances of delayed payments and of losing all the money completely.
Let's go back to your idea of protocols. Imagine we are making a requests over a network and expecting the network to not be lossy, and to never have long network partitions, or for other servers to go down. We can be angry at the network or the server on the other side, but in practice, what we do is understand that failures exist. Expecting everyone to pay you back all the time is like expecting a distributed database to be reliable all the time. I can scream at the network or the database vendor, but ultimately the joke is on me for expecting impossible things.
That just drives down the price of borrowing money until a borrower is found and the market clears. You could just as well place the blame on aging savers driving the price of borrowing down until taking on massive amounts of debt to get ahead in life through college looked reasonable.
What you're suggesting means abolishing student loans, since no student can (presently) repay their loan amount (or they wouldn't need it), and you're speculating on their future prospects. That is one option, but as I said elsewhere in my post, most options make it so that poor people can't go to college. That, IMHO, is bad for society.
I completely agree, this is going to be a problem for our generation. For those of us who are lucky enough to not have any student debt, how can we take advantage of this?
Well, as someone recently off the scrolls of student loan debt, I can tell you this -
Save. Don't spend it. Save it. Invest it wisely.
Paying my shit off gave me an incredible sense of freedom, even though I still have a wife and kid and household to maintain, the usual job pressure, etc. I thought about it, and the sense of relief was from knowing that I was free of debt service, so the best thing I can tell you is to save your money and not make a single interest payment more than you need to.
I think that there has to be some responsibility pushed back onto the universities and banks that are selling these loans for defaults. I think it's obscene that colleges are selling near-useless degrees to 18 year olds for $50k+. There has to be some incentive for either colleges to charge less for certain degrees or push people into degrees that will lead to higher paying jobs, or simply get pickier about who they admit.
But there isn't any risk to the school or the lender. Anyone can get student loans up to the federal cap, and they're practically not dischargeable, either.
The incentive has to come from somewhere else, but most solutions involve making it a lot harder for poor people to go to college. It's a tough problem.
It's already hurting the housing and consumer spending segments, as per the incessant and continuous "Millenials are killing the X industry" clickbait every other hour.
Replace X with home ownership, car ownership, renovation, Chili's, Applebee's, and whatever else services the traditional nuclear family.
Our economy is built off of the boomer generation and their behaviors. They enjoyed stable, living-wage jobs, affordable housing, dirt cheap education, etc.
Now we have an emerging gig economy, ridiculous tuition costs (and the expectation of a degree to do more or less anything), cheap credit to prop up the housing market (did we learn nothing in 2008?).
IMHO, it hasn't hurt housing enough, and politically, that's going to stay as long as possible. A lot of boomers also have a large portion of their net worth tied up in their home, and letting that bubble burst will just swap economically disadvantaged millenials for economically disadvantaged boomers. Even setting aside the fact baby boomers also run our political institutions, for a variety of reasons, it's still better to have young people who can't buy anything because they still at least can work, versus a bunch of displaced retirees who also can't work any more. It's a really shitty situation. I try not to blame an entire generation too much because it's more complex than that, but I'm in my mid-30s and feel like I got really lucky. The generation right behind me really had the ladder pulled up before they could get to it.
The baby boomers cry about millennials killing X industry while in the same breath cry about millennials acting entitled for demanding reasonable wages.
I paid off most of my loans the first year after graduating, but held onto the lowest interest one with minimum payments despite having been able to pay the whole thing off for five years because I expect the same - the week after I pay the damn thing off is the week unconditional loan forgiveness happens and I wasted all my money.
So something like 77.5%+ of that is already bailout guaranteed. Taxes (or more likely US debt) will rise to cover it, which will have its own long term negative effects, but barring a US default that market is very well covered.
It's also very, very challenging to discharge US student loan debt, much more than housing debt. How that really works in the end, especially if a large number of people go into default, hasn't really been tested, and it will be a political hot potato when it does.
Could the fact that a lot of US companies book profits overseas and keep them there for tax reasons foil your assumption about the meaning of a high US market cap:domestic GDP ratio?
That is already implicit in the Efficient Market Hypothesis' valuation of the total market capitalisation of stocks (that is part of the reason for which the total value of the stock market exceeds GDP).
Right, but this chart ignores that (as far as I can tell). If US listed companies are going to eat more of the global GDP, then it wouldn't be crazy that the value of the stocks will exceed GDP of the country in which it's listed (i.e., the fact that the value does exceed GDP might not be a precursor to a crash).
There's really no reason why GDP should equal market cap. Companies are largely (especially now, since interest is so low) valued on future income, rather than current income.
Look at Amazon and Netflix, both tradin at 200x earnings. This is beacuse investors think they will earn a lot more in the future than they do now. Are they overvalued? who knows.
Indeed, market valuation as a multiple of GDP is hitherto unknown to me. However that's why I wrote partially: foreign assets are factored into the value investors attribute to the stock market as a whole. In retrospect I shouldn't have argued from the standpoint of percentage of GDP.
Good point. I'd wager that US listed companies' share of profit and/or income growth outside of the US has increased since the 70s/80s. I'd at least have a global crosscheck of some kind.
Economist here. You should really keep in mind that the same GDP must go both towards paying off the national debt and paying off household debt. Also you should track commodities (at the very least, the ratio between put & call options).
If you mean Mark To Market, yes. It you mean anything else (and I am wracking my brains trying to come up with another relevant meaning for that acronym), no.
I think he is talking about Modern Monetary Theory, where one of the conclusions they arrive, after studying how modern economies work, is that private sector debt grow when there is not enough government deficit.
A site like this seems dangerous at best. Nobody can predict the stock market. Nobody can predict when a stock market is more likely to crash. This site tries to indicate otherwise. Whatever causes the crash it probably won't be one of the indicators listed here.
this is the dangerous part. No, they can't, even though it seems like they could. If they could, they would be used by people to make money and deflate the bubble that would have caused the crash in the first place. That's the theory, anyway
Holy shit, just seeing the "indicators that can help us guess" gives me shivers. The person who utters that phrase is admitting to guessing with their money. Does anyone else find that as absurd as I find it? If I hire a pro to enter/exit a position, if they are guessing(with or without the assistance of indicators), I have made a very bad decision to hire them.
Perhaps you and I have different definitions of the a word 'guess'. To me, it includes 'Making a logical estimate based on available evidemce'. Every investment decision is a guess.
Predicting the actions of human being is very difficult. The market "crashes" when 2 people throw in the towel. One of those groups is the aggregate of retail+institutional buyers. The other group is market makers. When neither group is willing to bid the price, then that price decreases. When neither group is willing over an extended period of time(say, an hour), we have a "market crash". It's a very hyperbolic way of saying no one is willing to buy, but others are still willing to sell. In that state, the price retreats as buy-side liquidity is consumed, and continues retreating until buy-side liquidity is equal to sell volume. Once buy-side liquidity is in excess of sell volume, then the price moves up.
tldr; "crash" is used to describe a very natural condition, caused entirely by the emotions of human beings.
The real problem with these sites is that it is super easy to overfit to historical data. Try enough indicators and enough parameters and you can fit historicals to the dot. Except, no one knows how the model performs on a go-forward basis. On Wall Street, these are often easy to debug -- you just run on live data, often with live trading to see if the signal is real. However, with economic data, the velocity of new data is too low to really test models on a go-forward basis...so you just have a theoretical model, likely overfit, that has little predictive value.
Since the diamond is a 2D figure, then if you add time as a third dimension, you'd get a diamond-shaped cylinder. Add a blue-red spectrum color code, whereby blue is a time slice with a small surface area and red is a time slice with a large surface area, and you'd be able to plot the dangerously large Diamonds of Economic Failure over time in a way which clearly indicates when the danger signs were worst.
Distribution of household debt is to significant to look at the health of the economy in this way, especially so when you look at how the GDP is generated and who is generating it.
But while the household debt is huge, isn't it naturally balanced by the equally massive collateral the banks have in the houses themselves? I mean, sure Joe America has a $500k mortgage, but the bank has first position on Joe's house which is worth $675k.
> first position on Joe's house which is worth $675k
Only in a healthy housing market. In an economic downturn where a lot of people are defaulting, the bank will not be able to sell the house for anywhere near that price.
Ah, I was getting the same error in Chrome Canary and it just took a while to load data. Came here to let the OP know about it and when I tabbed back it was no longer NaN/10.
Shiller Price/Earnings[1], probably. It looks at the previous 10 years of earnings to do a P/E to try to even out the earnings and get a better picture. But I'd imagine even just normal P/E ratio would be better...
The market is a conversation, not a calculation. There is no equation for its "proper" valuation because there is no equation for an asset's "proper" price. We have markets because these calculations, the economic calculation problem [1], are hard.
Financial theory has a habit of magicking uncertainty into variables that look like constants but aren't. With option theory, it's the volatility curve. With CAPM [2], it's the risk-free rate curve and general market risk premia (also beta). In the discounted cash flow model [3], it's the discount rate and future payout curve.
These models sort of work a lot of the time, but not always and not as well as we'd like them to. Unfortunately for the precision-minded, the bridge between the quantitative models are people doing their people things.
Note that I'm not saying it's all voodoo. There are models. But understanding them takes appreciating their constraints, assumptions and strengths.
On a grand scale, it's hard to tell, as the market is so big. When you break it down, there is the stock market, then there's the derivative market, the bond market, the housing market, foreign markets, crypto markets, and on and on. You also have to look at previous crashes and see what sticks out from past lessons.
With the stock market, you can look at average P/E ratios over time for the Nasdaq and get somewhat of an estimate. To dig a little deeper, you can look at individual sectors index, such as the Nasdaq Biotechnology Index - NBI
Derivatives market - Deutsch Bank last year was facing a semi crisis mode due to having too big of an open derivatives position. What was it? Idk, I didn't dig too deep. Derivatives markets are still, well, derived from an underlying product. So in theory, if you find the product, you find the bubble. Something like soymeal futures last year, is a good example.
Bond market - falling due to increasing rates. 1981-82 was caused by interest rate hikes, to fight inflation, but they were like 15-17%. We're struggling to get the glorified 2% inflation. Granted this is all what's reported to us, who really knows.
Foreign markets - A lot of countries for the past couple years have been in the shitter, in terms of GDP - Russia, Canada, Mexico, Brazil, Australia, etc. Then there are countries who have cooled off - UK, Germany, China, etc. However, the US and India just keep charging up the hill. Also, a lot of it is based on speculation. China a couple weeks ago announced that they had tied last years GDP growth, when analysts thought they were gonna miss. Regardless, this is still one piece to a massive puzzle. If you look at participation rate through out the world, http://data.worldbank.org/indicator/SL.TLF.CACT.ZS?page=2 it's been falling. This could be explained by an aging population of basically all WW2 countries - http://www.worldatlas.com/articles/countries-with-the-larges.... As well all know fine and well here, this may not be a big problem YET due to automation. In other words, it's hard to truly tell where and which pillar could break, that could really push this beast downward.
Crypto markets - the fun new kid on the block. Super entertaining to watch people hodl and meme about it, but is still no where near the size needed to cause a correction.
A few other interesting things I've seen floating around:
The VIX is at an all time low. Someone commented somewhere that they believe this is due to too many people believing there's gonna be a crash soon. As such, they're holding more cash than usual.
Around $4.2 trillion is now tied up in index funds. As such, if there is a panic in the index fund market, it could cause a crash. Idk about the validity of this one though, market makers could easily prop it, and buy on the panic and sell when it's cooled off.
I feel as though the "stock market" following the 2008 crisis has become further insulated from the larger economies fundamentals. wages can continue to not keep up with inflation, savings rate continues it's downward slide, household debt service payments consume an ever increasing slice of disposable income, etc... all the while the type of dramatic dislocation event similar to 1929, 1987 are unlikely to occur. the market "circuit breakers" ensure any crash is a slow moving trend and not a single calamitous event.
the stock market is so divorced from the actual economy that over half of Americans don't participate in any way at all whether through direct purchase, 401k, mutual funds, etc.. most of the action on the stock markets is companies rebuying their stock to generate earnings and hedge funds and the less than half of Americans who have access to retirement planning.
How is the heat matrix diagram calculated? It seems to be wrong. Public Debt has a 3.7/10, while it looks like its around 8.5 in the heat diagram.
Looking at the individual ratings:
- Household Debt: 5.5 / 10
- Market Overvaluation: 9.1/10
- Market Volatility: 0.3/10
- Public Debt: 3.7/10
--> SUM = 18.6/40 or 46.5%
Also I noted: Drawing a linear trend line through the "Market Overvaluation" diagram, does make it look a lot better though. One could argue that people get used to certain levels, hence a growing trend over time.
Taking only these factors into account, it does not look like the market is gonna crash soon. In my opinion it's likely going to be caused by another factor not listed here ;)
For market overvaluation, it says: 9.1 / 10 "DEFCON 4"
DEFCON 5 is peacetime, DEFCON 1 is imminent nuclear war. For example, during the Cuban Missile Crisis, the US reached DEFCON 2. Should this say DEFCON 2 instead? Or is "above" normal readiness the intended meaning?
We got the tongue in cheek point of the comment. However what is being discussed is the ordering. Defcon 1 is more serious than Defcon 5. ie it counts backwards from 5 to 1 as situations become more serious. So your comment should be Defcon 2.
Pedantics aside, I did enjoy those little comments you put alongside the threat level.
You can just write DEFCON 3 and this will communicate the same "moderate risk" message to everyone, no matter their understanding of how DEFCON levels work.
I've never seen market valuation expressed as market cap as % of GDP. I'm not an economist, so I'll leave the detailed arguments to them. But it would be at least useful to explain why you think this is a meaningful metric as compared to those typically used to measure market valuation (e.g. P/E ratios etc.).
Your graph also ties your valuation metric to the 2000 peak and the 2008 peak. However, there were crashes in 1990 and 1987 as well. Should readers conclude that the 1987 peak level was also too high, and that therefore the last ~30 years have also been too high as well? (Abstaining from investing in the stock market at levels above the 1987 crash would have resulted in the loss of tremendous opportunity for wealth creation.)
There are a lot of opinions implicitly expressed in this site; it would be good to try to make those explicit.
One issue I see here is how much of the S&P500 (or general market cap) are we attributing to a US-centric view of global companies? That is, if a company is "in the US" but economically are not.
> market valuation expressed as market cap as % of GDP
This metric makes little sense for this use case. Consider two countries. They are identical in every way except in Country A 90% of the companies are publicly-traded while in Country B 10% are. Country A will have a market cap to GDP 9x Country B's. Does that mean Country A is 9 times overvalued relative to Country B?
The objection works in-country, too. Saudi Aramco is going public in New York or London [1]. This will lift one of those market's aggregate capitalisation by up to $1 trillion. Does this mean that market will necessarily become overpriced?
The answer to both question is of course not. Market cap to GDP tells you the degree to which a country has developed public markets. Not anything interesting about the levels in those markets.
Nit pick: only about 5% of Saudi Aramco is going public, the total company is worth $1-2T (although this is a matter of some debate, as you might imagine), so aggregate market cap will only increase by $50B.
You sound knowledgable about these matters, and I am not. In my ignorance, "agg. market cap" sounds like an easily gamed number. For example, I could start an exchange and ask every company in the world to list 10^-10 of their shares, and so become the largest exchange in the world by agg. market cap. (Perhaps this doesn't come up in practice because most firms list in only one market, and so agg. market cap becomes a useful measure of how much of the economy a given exchange touches, in some sense.)
So I've had a fundamental complaint about Market Cap to GDP at least since 2005, which I've never gotten a good answer to:
There's this expectation that the market returns 7-10%... a number much in excess of the actual rate of GDP growth (over any significantly long period, anyway)
That can't continue forever. Especially in aggregate across the world. At some point the public market has captured substantially all the economic activity - after that there's no way for it to grow in excess of GDP without things like PE increasing (and again, that can't go FOREVER, regardless of what the "true" PE should be).
This is assuming all numbers are inflation-adjusted "real" numbers, of course, because the money supply CAN grow forever.
I'll probably get some of this wrong, but I read up on these arguments back when Piketty was in the news w/ his book:
Yes, it can go on forever -- the rates of retun in the stock market are based, theoretically, on the changing expectations about the future and not based on current income.
Thought experment: 100 of us live in small society producing widgets, we each make a widget a day at the factory. GDP is 36500 widgets/day. We also spend some time researching a way to make widgets faster. Yesterday we found a breakthrough that made it 50% likely that in 5 years we'll each be making 10 widgets a day.
It would be reasonable for the valuation of our widget company to go up something like 40% on that news, right? But GDP next year is stlil going to be 36500 widgets/day.
Since the stock market bakes in all optimistic expectations, then in the eras it that it outpaces GDP it could be the case that there remains unrealized optimism for the future.
If the question is "but where is the capital coming from that flows into the stock market?" The answer is that it can be created via credit, or it could be created via appreciation in assets not captured in the stock market (like housing, the major one).
Your example anticipates a huge growth in productivity, which is a factor in GDP; in that case, the stock market is a forward indicator of anticipated GDP.
Which, if so, still doesn't allow it to grow infinitely out of proportion to GDP, unless the time horizon keeps changing or the anticipation of the future gets steadily farther away from reality.
So you mention in the eras it that it outpaces GDP... I've consistently had the message drilled into me that in the long term (20+ year horizon), stocks will return something like 7-10%, while of course, nobody would expect GDP growth anything like that (outside of a rapidly industrializing environment where productivity is rocketing upward, like China).
The ratio has units of years - how many years of GDP does the value of the stock market represent? How long will it take the economy to produce the value assumed by the stock market valuations? Sure, that's not a pure number, but it's also not a totally nonsense number. At a minimum, it can be compared to historical values of the same number.
Here is the case for looking at Market Cap / GDP: Warren Buffet looks at the total market cap vs GDP because it is free from the influence of corporate accounting, unlike the more traditional P/E ratio.
The case against: economic activity in the US has been concentrating in larger companies (less small companies being started for example) and there is more "financialization" in general. So you would expect the ratio of market cap / GDP to go up for those reasons as well.
It makes some sense if you consider market caps to be expectation of returns. All other things being equal (like the percentage of the GDP made by publicly traded companies) it makes sense to expect the market to expand at about the same speed as the GDP.
That this ratio doubled in 8 years is worrisome.
The thing is that an alternative analysis is to look at the linear regression since 1980 and it seems clear that a background upward tendency does seem to exist, so we can see 2009 as an adjustment to the 2008 crisis and 2017 as only slightly above the expected trend.
In particular, people's evaluation of a company are not (wholly) based on its current annual output, whereas the GDP is exactly the amalgam of all companies' output. People evaluate a company at least in part on the assets it holds, intellectual property, and future earning power, none of which are captured by the GDP.
Can someone with an actual economics degree explain to me whether it's a valid criticism of the "Market cap as % of GDP" metric that many US companies derive value from multinational labor and consumption, and if not, why not? Thanks in advance.
SB in economics here and current business school student (I know, I know: burn the future MBA at the stake!).
Indeed, it is a valid criticism. The market cap/GDP measure is mismatched, since market cap theoretically reflects investors' expectation of future cash flows globally while GDP is a measure for only one country. Also, GDP is problematic for a bunch of reasons, so even if all companies were only operating in the United States, GDP would still only be a crude measure of economic output.
Plus, as you mentioned yourself mcap corresponds to the present value of all future cashflows and GDP to one years output. The only way this would make sense is you were comparing changes in GNP to changes in mcap.
It is valid criticism. The rule is a rule of thumb, so isn't like a law of physics. The amount of internationalization would be relatively similar over short periods of time, so is an OK measure cf 10-20 years ago, but yes has problems comparing over a century.
Other similar issues are the amount of private ownership of US companies (that aren't included in Total Market Cap), and also foreign ownership of US companies which is higher than it used to be (I think).
The more important question is when, and the answer to that is "who knows".
The market is a chaotic system, with severe non-linear responses. As such, it can remain stable much longer than people think, and crash much harder than anyone expects.
As the site makes clear, nobody really ever knows if the market is going to crash. On the market valuation side they claim the current market is overvalued. But overvalued is a relative term... As you have to value versus something, and that something is usually something historical.
The way I see it though is the markets are a big voting machine.. and they're making predictions about the future and incorporating future expectations. With the current US administration still pondering over tax plans and infrastructure stimulus packages that are promised, market may be underpriced???
> The way I see it though is the markets are a big voting machine.. and they're making predictions about the future and incorporating future expectations
This is likely true because of "wisdom of crowds" (aka regression to mean of randomly-sampled human estimates).
> With the current US administration still pondering over tax plans and infrastructure stimulus packages that are promised, market may be underpriced???
The president doesn't control taxes or spending, and he can't do anything about infrastructure on his own. All he can do is use political capital to push Congress in a certain direction. So far, he's been totally unable to do that.
In terms of the national economy, the US is the same as it was under Obama -- House totally under Republican control, Senate mostly under Republican control, Janet Yellen running the Fed, no major shocks.
There's little unity among Republican Congresspeople, and even less when you include Democrats. Tax reform may be a bipartisan issue, but it's likely going to be limited to simplifying the tax code (lowering taxes while closing corporate loopholes). If all the trickle-down dinosaurs believe that higher corporate taxes will harm the economy (which it almost surely won't), then the stock market should -- if anything -- go down.
This could mean that it's underpriced, but not for the reasons you seem to suggest.
American companies sell products & services outside of the United States. Comparing American GDP with the aggregate value of the US stock-market is deeply misleading, especially given a historical comparison: foreign markets such as China have gained in relative importance over timeframe under consideration.
When looking at debt, one should not just observe the nominal amount, but also the interest rates, which have never been lower. Large companies can tap public debt markets and borrow billions at 1.5% over a timeframe of ten years. Risk is thus lower than the website suggests (at lower interest rates, a company can carry more debt). Additionally, returns to equity will be higher (the I in EBIT is smaller, so profits are bigger).
The American GDP includes net exports, ie: goods that are bought in other countries. So its not a crazy comparison. But it is not great ratio for long historical comparisons because of the changing nature of economies and markets.
GDP is a correlated measurement. Trying to use correlated measurements as a leading or primary measurement is one of the many steps on the stairwell down to bankruptcy for a trader.
337 comments
[ 4.5 ms ] story [ 320 ms ] threadI don't want to knock on OP's analysis here, but it's important to remember the famous quote (maybe by Keynes?), "The market can remain irrational much longer than you will remain solvent"
Right now student loan debt is at 1.4 trillion
source: https://www.debt.org/students/
Seriously, though, this is a real problem and we need to do something. Even if it doesn't have a direct effect any time soon, it's going to have an indirect effect as our generation (I'm some kind of X-ennial, apparently, but let's just say everyone 20-40) continues to replace retiring boomers in the economy. If we're all saddled with non-dischargable debt, it's going to hurt the housing and consumer spending segments.
the thing we have to do is not borrow money we can't repay. capitalism is a distributed system. borrowing money you can't repay is a broken local protocol. don't try to fix that with anything but fixing it locally.
There are ways to minimize the cost -- basically two years at a community college and two years at a state school -- but the days of being able to afford college by working a part time job are long over. The reality is, if you want to participate in today's job market, you probably must take on at least some college debt.
They wouldn't need to pay the enormous tuition, and as the job market would change (as far less people would have a college degree), the lack of degree wouldn't hurt them.
College degree nowadays is basically a pre-requisite for not getting your resume thrown out at first glance.
Everything has a mix of intrinsic and perceived value and this changes over time. The more a thing is composed of perceived value the more volatile it is. I'd say all stocks are composed of at least 50% perceived value.
Perceived value can often drag intrinsic value upwards so investing in things with high perceived value can still be lucrative. Analysis moves from fundamentals to psychohistory. (bad psychohistory) Probabky based on some combination of time to death of cultural momentum and half life of faith isotopes.
College degrees were a thing that quickly lost perceived value because it was based on rarity. (the only rarity that doesn't drive itself to commoditization is useless rarity like expensive wines and designer bags. 100% pure perceived value things not worth commoditixation)
At an individual level the high intrinsic value degrees do well but overall they haven't as most degrees in the US were supplementary for Masters of the Universe type. Education to fill the void in your life.
The post WW2 dominance faded though and the upper levels of Maslow's pyramid were no longer the issue. Basic survival and making a living was. Globalization also created huge pressure and competition for useful jobs.
What happened in the US was essentially a dearth of sinecure positions based on a secure moat that is now deteriorating. Those who are hit hardest by this desire a return to the past, in their eyes this is being "More American". They simply can't compete with a workforce with much stronger work ethics out of having much more experience with dealing with daily survival of a more extreme kind.
This is how the education system is failing. A country for abundance needs either output or the ability to extract rent via moats or force. The US also has a strong immigration culture that can "steal" output from other countries. Though at the cost of making "doing right by americans" a very loaded and confusing idea to parse.
I like this and would love to see more commentary on it. Taking one step back, the system is broken because we removed the primary safeguard: Bankruptcy. If we could declare bankruptcy to discharge loans, it puts the burdens on banks to only make loans they evaluate as having a reasonable rate of repayment on. We've removed that check. In turn, we have a completely predictable outcome. So, as far as I know the only alternative is to provide another, equally robust counter (like your suggestions, or just "free" tuition) to balance.
At same time, I was repeateadly promised by all 'adults' that I was very intelligent, and that getting into a college would ensure I would get a job, and it is why it was so important.
After lots of struggling I ended doing what people wanted, got in a college, and I had no way to pay for it, so I got into debt too. (and I hate debts, I used to never get into any debt at all).
Around time I graduated, the last crash happened, my country never really recovered from it...
I am 29 now, and I can't get unemployment benefits, because I was NEVER employed in first place, all work I list on my LinkedIn was by freelance-style contracts, I never found the promised jobs...
I did recently finished paying almost all my debts (I still have some, and my net worth is still negative).
But 'not borrowing money' wasn't really an option.
Literally nobody takes student loans that they are capable of repaying. Why would you, unless you could get a 0% APR?
It'd be nice if young people - possessors of great foresight and fonts of wisdom, all - could predict whether they will be able to repay the very substantial loans they're likely to rack up in college. We are not living in a world, or an economy, where making such a prediction is easy or straightforward.
So. No. Not literally nobody.
It's just such a shockingly bad idea. We went from the topic of the average kid's inability to gauge the future value of their degree to the topic of the average kid's ability to predict the stock market well enough that using leverage to invest makes sense.
Probably one of the most incorrect sweeping generalizations I have ever seen.
I finished my BS in CS about 3 1/2 years ago with about $44,000 in student loan debt. I'm currently on track to pay them off within the next 3 years. It'd probably be only 1 or 2 years if I didn't buy a car.
Not really, you simply didn't read my comment and the comment I responded to very thoughtfully.
The point of my reply is twofold. First, the obvious: you wouldn't take that loan unless you needed the money for your education (or wanted to gamble on the stock market, apparently, as one poster mentioned, but let's put that aside). If you can pay for your education without it, with saved money or through scholarships or grants, you'll do it. If you can't pay for your education, you take the loan. In that sense it wasn't a deep point, it was basically a tautology to point out how vapid the grandparent's comment was: "the thing we have to do is not borrow money we can't repay," "borrowing money you can't repay is a broken local protocol." As if arranging student loan financing were in some way similar to extending credit to a successful business that needs a little extra cash on hand until the end of the month. Ridiculous.
Second, and on to the more important point that I made in the second paragraph: if we assume the grandparent really means "will not be able to repay after several years of college" the problem with this whole line of thinking becomes obvious. The average student embarking on college has no idea whether they'll graduate successfully. They have no idea whether they'll be able to find a job in their field and they certainly have no idea how much they will be paid. In short, they have no idea whether they'll be able to repay that loan. In terms of policy, saying they should not take a student loan which they will be unable to repay is not an answer to anything since at best they're making an educated guess. In a situation like that, where people are guessing, the expected outcome is that a lot of people will guess incorrectly.
What is broken with student loans is that the current scheme messes with almost every sensible market incentive out there: Colleges get more expensive for little to no reason, people can get into big loans for degrees that will never pay off, and the companies lending the money are, in practice, guaranteed repayment by the treasury, so ultimately the whole scheme leads to far higher prices than, say, college in Europe, but only provides better outcomes for some school+major combinations.
Let's not forget, the system leads to degrees that have low expected values to end up being unaffordable, while prices would go down if the system wasn't built with the silly guarantees that it has. Putting the blame on the borrower alone and ignoring the insane system design is just shortsighted.
If someone went to try to launch pets.com today, we'd not blame the founders alone for the VC's loss: They carry responsibility too for betting on a horse that had no chance of even finishing the race. A VC takes risks, but also expects losses. Anyone making loans should consider chances of delayed payments and of losing all the money completely.
Let's go back to your idea of protocols. Imagine we are making a requests over a network and expecting the network to not be lossy, and to never have long network partitions, or for other servers to go down. We can be angry at the network or the server on the other side, but in practice, what we do is understand that failures exist. Expecting everyone to pay you back all the time is like expecting a distributed database to be reliable all the time. I can scream at the network or the database vendor, but ultimately the joke is on me for expecting impossible things.
Save. Don't spend it. Save it. Invest it wisely.
Paying my shit off gave me an incredible sense of freedom, even though I still have a wife and kid and household to maintain, the usual job pressure, etc. I thought about it, and the sense of relief was from knowing that I was free of debt service, so the best thing I can tell you is to save your money and not make a single interest payment more than you need to.
The incentive has to come from somewhere else, but most solutions involve making it a lot harder for poor people to go to college. It's a tough problem.
Replace X with home ownership, car ownership, renovation, Chili's, Applebee's, and whatever else services the traditional nuclear family.
Our economy is built off of the boomer generation and their behaviors. They enjoyed stable, living-wage jobs, affordable housing, dirt cheap education, etc.
Now we have an emerging gig economy, ridiculous tuition costs (and the expectation of a degree to do more or less anything), cheap credit to prop up the housing market (did we learn nothing in 2008?).
IMHO, it hasn't hurt housing enough, and politically, that's going to stay as long as possible. A lot of boomers also have a large portion of their net worth tied up in their home, and letting that bubble burst will just swap economically disadvantaged millenials for economically disadvantaged boomers. Even setting aside the fact baby boomers also run our political institutions, for a variety of reasons, it's still better to have young people who can't buy anything because they still at least can work, versus a bunch of displaced retirees who also can't work any more. It's a really shitty situation. I try not to blame an entire generation too much because it's more complex than that, but I'm in my mid-30s and feel like I got really lucky. The generation right behind me really had the ladder pulled up before they could get to it.
https://pbs.twimg.com/media/DDQqtCyUwAAUp6e.jpg
So something like 77.5%+ of that is already bailout guaranteed. Taxes (or more likely US debt) will rise to cover it, which will have its own long term negative effects, but barring a US default that market is very well covered.
It's also very, very challenging to discharge US student loan debt, much more than housing debt. How that really works in the end, especially if a large number of people go into default, hasn't really been tested, and it will be a political hot potato when it does.
Look at Amazon and Netflix, both tradin at 200x earnings. This is beacuse investors think they will earn a lot more in the future than they do now. Are they overvalued? who knows.
https://en.wikipedia.org/wiki/Sectoral_balances
Another of the conclusions is that the national debt, for countries with a floating sovereign currency, is just a number without real meaning.
https://www.nakedcapitalism.com/2014/08/taxation-government-...
> No one knows for sure, but there are indicators that can help us guess. We can chart these indicators to give us the illusion of foresight.
this is the dangerous part. No, they can't, even though it seems like they could. If they could, they would be used by people to make money and deflate the bubble that would have caused the crash in the first place. That's the theory, anyway
tldr; "crash" is used to describe a very natural condition, caused entirely by the emotions of human beings.
It would be really interesting to see your collapse pyramid over time. How did it look in 2000? 2008?
> U.S economic risk as of ...
With the click of a button, may be also allow a view of where it was at a point in history...? i.e. U.S economic risk as of [insert point in history]
Great work so far. Simple and usable.
Only in a healthy housing market. In an economic downturn where a lot of people are defaulting, the bank will not be able to sell the house for anywhere near that price.
Current risk:
NaN / 10
"Calm waters"
(I'm using Edge)
NaN is the opposite of Calm Waters for me.
For example the page calculates "Market Overvaluation" as the US stock market value divided by the yearly US GDP. Hilarious.
[1] http://www.multpl.com/shiller-pe/
The market is a conversation, not a calculation. There is no equation for its "proper" valuation because there is no equation for an asset's "proper" price. We have markets because these calculations, the economic calculation problem [1], are hard.
Financial theory has a habit of magicking uncertainty into variables that look like constants but aren't. With option theory, it's the volatility curve. With CAPM [2], it's the risk-free rate curve and general market risk premia (also beta). In the discounted cash flow model [3], it's the discount rate and future payout curve.
These models sort of work a lot of the time, but not always and not as well as we'd like them to. Unfortunately for the precision-minded, the bridge between the quantitative models are people doing their people things.
Note that I'm not saying it's all voodoo. There are models. But understanding them takes appreciating their constraints, assumptions and strengths.
[1] https://en.wikipedia.org/wiki/Economic_calculation_problem
[2] https://en.wikipedia.org/wiki/Capital_asset_pricing_model
[3] https://en.wikipedia.org/wiki/Discounted_cash_flow
On a grand scale, it's hard to tell, as the market is so big. When you break it down, there is the stock market, then there's the derivative market, the bond market, the housing market, foreign markets, crypto markets, and on and on. You also have to look at previous crashes and see what sticks out from past lessons.
With the stock market, you can look at average P/E ratios over time for the Nasdaq and get somewhat of an estimate. To dig a little deeper, you can look at individual sectors index, such as the Nasdaq Biotechnology Index - NBI
Derivatives market - Deutsch Bank last year was facing a semi crisis mode due to having too big of an open derivatives position. What was it? Idk, I didn't dig too deep. Derivatives markets are still, well, derived from an underlying product. So in theory, if you find the product, you find the bubble. Something like soymeal futures last year, is a good example.
Bond market - falling due to increasing rates. 1981-82 was caused by interest rate hikes, to fight inflation, but they were like 15-17%. We're struggling to get the glorified 2% inflation. Granted this is all what's reported to us, who really knows.
Housing market - new housing starts, https://fred.stlouisfed.org/series/HOUST does seem to be a somewhat of a leading indicator. General housing index doesn't seem to show a general cool off -https://fred.stlouisfed.org/series/CSUSHPINSA.
Foreign markets - A lot of countries for the past couple years have been in the shitter, in terms of GDP - Russia, Canada, Mexico, Brazil, Australia, etc. Then there are countries who have cooled off - UK, Germany, China, etc. However, the US and India just keep charging up the hill. Also, a lot of it is based on speculation. China a couple weeks ago announced that they had tied last years GDP growth, when analysts thought they were gonna miss. Regardless, this is still one piece to a massive puzzle. If you look at participation rate through out the world, http://data.worldbank.org/indicator/SL.TLF.CACT.ZS?page=2 it's been falling. This could be explained by an aging population of basically all WW2 countries - http://www.worldatlas.com/articles/countries-with-the-larges.... As well all know fine and well here, this may not be a big problem YET due to automation. In other words, it's hard to truly tell where and which pillar could break, that could really push this beast downward.
Crypto markets - the fun new kid on the block. Super entertaining to watch people hodl and meme about it, but is still no where near the size needed to cause a correction.
A few other interesting things I've seen floating around:
The VIX is at an all time low. Someone commented somewhere that they believe this is due to too many people believing there's gonna be a crash soon. As such, they're holding more cash than usual.
Around $4.2 trillion is now tied up in index funds. As such, if there is a panic in the index fund market, it could cause a crash. Idk about the validity of this one though, market makers could easily prop it, and buy on the panic and sell when it's cooled off.
Bit glib, but what is the problem? How does one traditionally measure market overvaluation?
>No one knows for sure, but there are indicators that can help us guess. We can chart these indicators to give us the illusion of foresight.
Maybe it's a parody?
Looking at the individual ratings: - Household Debt: 5.5 / 10 - Market Overvaluation: 9.1/10 - Market Volatility: 0.3/10 - Public Debt: 3.7/10 --> SUM = 18.6/40 or 46.5%
Also I noted: Drawing a linear trend line through the "Market Overvaluation" diagram, does make it look a lot better though. One could argue that people get used to certain levels, hence a growing trend over time.
Taking only these factors into account, it does not look like the market is gonna crash soon. In my opinion it's likely going to be caused by another factor not listed here ;)
DEFCON 5 is peacetime, DEFCON 1 is imminent nuclear war. For example, during the Cuban Missile Crisis, the US reached DEFCON 2. Should this say DEFCON 2 instead? Or is "above" normal readiness the intended meaning?
Pedantics aside, I did enjoy those little comments you put alongside the threat level.
Your graph also ties your valuation metric to the 2000 peak and the 2008 peak. However, there were crashes in 1990 and 1987 as well. Should readers conclude that the 1987 peak level was also too high, and that therefore the last ~30 years have also been too high as well? (Abstaining from investing in the stock market at levels above the 1987 crash would have resulted in the loss of tremendous opportunity for wealth creation.)
There are a lot of opinions implicitly expressed in this site; it would be good to try to make those explicit.
Thanks for the feedback
This metric makes little sense for this use case. Consider two countries. They are identical in every way except in Country A 90% of the companies are publicly-traded while in Country B 10% are. Country A will have a market cap to GDP 9x Country B's. Does that mean Country A is 9 times overvalued relative to Country B?
The objection works in-country, too. Saudi Aramco is going public in New York or London [1]. This will lift one of those market's aggregate capitalisation by up to $1 trillion. Does this mean that market will necessarily become overpriced?
The answer to both question is of course not. Market cap to GDP tells you the degree to which a country has developed public markets. Not anything interesting about the levels in those markets.
[1] https://www.bloomberg.com/view/articles/2017-04-05/aramco-ip...
[0] https://www.cnbc.com/2017/04/24/saudi-aramcos-valuation-repo...
If you list 5% of a $1 trillion company on a stock exchange, the aggregate market capitalisation goes up by $1 trillion. (Float goes up by $50bn.)
Market capitalisation is price per share times shares outstanding [1]. Float is price per share times publicly-trading shares [2].
[1] https://www.fool.com/investing/small-cap/2005/04/29/quotouts...
[2] http://www.investopedia.com/terms/f/floating-stock.asp
When only a small fraction of shares are on the market, it's quite easy to manipulate the price higher... buying pressure goes a relatively long way.
If you can get 1% of your shares to be worth $100k, it now appears as though you are a $10 million company. This makes you appear reputable.
Drive hype about your "valuable" company, and once the stock is sufficiently pumped, dump your shares for profit.
There's this expectation that the market returns 7-10%... a number much in excess of the actual rate of GDP growth (over any significantly long period, anyway)
That can't continue forever. Especially in aggregate across the world. At some point the public market has captured substantially all the economic activity - after that there's no way for it to grow in excess of GDP without things like PE increasing (and again, that can't go FOREVER, regardless of what the "true" PE should be).
This is assuming all numbers are inflation-adjusted "real" numbers, of course, because the money supply CAN grow forever.
Yes, it can go on forever -- the rates of retun in the stock market are based, theoretically, on the changing expectations about the future and not based on current income.
Thought experment: 100 of us live in small society producing widgets, we each make a widget a day at the factory. GDP is 36500 widgets/day. We also spend some time researching a way to make widgets faster. Yesterday we found a breakthrough that made it 50% likely that in 5 years we'll each be making 10 widgets a day.
It would be reasonable for the valuation of our widget company to go up something like 40% on that news, right? But GDP next year is stlil going to be 36500 widgets/day.
Since the stock market bakes in all optimistic expectations, then in the eras it that it outpaces GDP it could be the case that there remains unrealized optimism for the future.
If the question is "but where is the capital coming from that flows into the stock market?" The answer is that it can be created via credit, or it could be created via appreciation in assets not captured in the stock market (like housing, the major one).
Which, if so, still doesn't allow it to grow infinitely out of proportion to GDP, unless the time horizon keeps changing or the anticipation of the future gets steadily farther away from reality.
So you mention in the eras it that it outpaces GDP... I've consistently had the message drilled into me that in the long term (20+ year horizon), stocks will return something like 7-10%, while of course, nobody would expect GDP growth anything like that (outside of a rapidly industrializing environment where productivity is rocketing upward, like China).
An era is not forever, so...
https://www.advisorperspectives.com/dshort/updates/2017/08/0...
The case against: economic activity in the US has been concentrating in larger companies (less small companies being started for example) and there is more "financialization" in general. So you would expect the ratio of market cap / GDP to go up for those reasons as well.
That this ratio doubled in 8 years is worrisome.
The thing is that an alternative analysis is to look at the linear regression since 1980 and it seems clear that a background upward tendency does seem to exist, so we can see 2009 as an adjustment to the 2008 crisis and 2017 as only slightly above the expected trend.
Indeed, it is a valid criticism. The market cap/GDP measure is mismatched, since market cap theoretically reflects investors' expectation of future cash flows globally while GDP is a measure for only one country. Also, GDP is problematic for a bunch of reasons, so even if all companies were only operating in the United States, GDP would still only be a crude measure of economic output.
Other similar issues are the amount of private ownership of US companies (that aren't included in Total Market Cap), and also foreign ownership of US companies which is higher than it used to be (I think).
The more important question is when, and the answer to that is "who knows".
The market is a chaotic system, with severe non-linear responses. As such, it can remain stable much longer than people think, and crash much harder than anyone expects.
The way I see it though is the markets are a big voting machine.. and they're making predictions about the future and incorporating future expectations. With the current US administration still pondering over tax plans and infrastructure stimulus packages that are promised, market may be underpriced???
This is likely true because of "wisdom of crowds" (aka regression to mean of randomly-sampled human estimates).
> With the current US administration still pondering over tax plans and infrastructure stimulus packages that are promised, market may be underpriced???
The president doesn't control taxes or spending, and he can't do anything about infrastructure on his own. All he can do is use political capital to push Congress in a certain direction. So far, he's been totally unable to do that.
In terms of the national economy, the US is the same as it was under Obama -- House totally under Republican control, Senate mostly under Republican control, Janet Yellen running the Fed, no major shocks.
There's little unity among Republican Congresspeople, and even less when you include Democrats. Tax reform may be a bipartisan issue, but it's likely going to be limited to simplifying the tax code (lowering taxes while closing corporate loopholes). If all the trickle-down dinosaurs believe that higher corporate taxes will harm the economy (which it almost surely won't), then the stock market should -- if anything -- go down.
This could mean that it's underpriced, but not for the reasons you seem to suggest.
Shows up on Chrome mobile.
When looking at debt, one should not just observe the nominal amount, but also the interest rates, which have never been lower. Large companies can tap public debt markets and borrow billions at 1.5% over a timeframe of ten years. Risk is thus lower than the website suggests (at lower interest rates, a company can carry more debt). Additionally, returns to equity will be higher (the I in EBIT is smaller, so profits are bigger).