Jump to content

Market Cap to GDP ratio - crossed the 115% (significantly overvalued) level


MrB
 Share

Recommended Posts

An important aspect of this ratio that I think requires analysis is to what extent private vs. public companies contribute to GDP?  The ratio is public market cap to GDP.  If a large company went private, or went public, that would affect the numerator (market cap) but not the denominator (GDP).  If there was a long period of excessive IPO's (dot com) or lack of IPO's (recession) that would skew this ratio, but not because of overall market valuation, but instead due a change in the mix of public vs. private companies.

Link to comment
Share on other sites

Buffett's last real warning on stocks came in 1999 when the ratio was close to 180% of gdp. his last comment on stocks was that they were in a "zone of reasonableness".

http://finance.fortune.cnn.com/2013/03/01/warren-buffett-stocks/?iid=HP_Highlight

 

2000 was absurdly overvalued by any historical precedent. It was literally a "tulip mania". Given how far of an extreme it was, I think suggesting we're only overvalued when we get to that point makes it a useless indicator.  It should only be a lesson to investors how absurd things could become; not a event to be considered likely again.

An important aspect of this ratio that I think requires analysis is to what extent private vs. public companies contribute to GDP?  The ratio is public market cap to GDP.  If a large company went private, or went public, that would affect the numerator (market cap) but not the denominator (GDP).  If there was a long period of excessive IPO's (dot com) or lack of IPO's (recession) that would skew this ratio, but not because of overall market valuation, but instead due a change in the mix of public vs. private companies.

 

i think when we're talking tens of trillions, this wouldn't matter. Traditionally GNP should be used though given that U.S. companies earn a lot abroad and aren't so constrained by the U.S. geographical area.

Link to comment
Share on other sites

I agree Tiddman, I never see if there is any adjustment to account for Public/Private or international listings.

 

The IBs were all private pre-1970, then mixed, then all public by 1999. 

 

What if Koch went public? 

 

If Samsung listed on the NYSE would that count?

 

All those things would affect the metric but the change in the economy would be form, not substance.

 

 

i think when we're talking tens of trillions, this wouldn't matter. Traditionally GNP should be used though given that U.S. companies earn a lot abroad and aren't so constrained by the U.S. geographical area.

 

The article says they used the Wilshire 5000 which was just under 20 Trillion.  Take all the IBs and international listings, could that not easily reach 1-2T?  A permanent change of 5-10% which makes it not really comparable to historical figures.

 

And yeah, GNP for sure.

 

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...