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Total Market Cap/GDP


Mephistopheles
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I'll admit that it concerns me a bit.

 

People think that we're off to a secular bull market. I don't see how giving that we're already above average valuations for many, many metrics. I'm not quite that optimistic about it. Klarman stated, by in June, I think, about how in economics, there's no free lunch. We'll see what happens. With that being said, I'm still almost fully invested. That could change though based on what I hear from Eric or Packer. Haha

 

Also, I don't think it'll change the number too much, but Buffett's metric uses GNP not GDP.

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For what's it's worth...my notes from reading Tap Dancing to Work a few year's ago on market valuation:

 

... total value of US stocks to GNP: Buffet said 70-80% according to Fortune article from 2009 is a good range to buy stocks at) 75% or less - market is Undervalued- begins to be a place to buy...over 90% begins to be overvalued and not a good time to buy..begins to be time to sell...

P286

 

There is a graphic too showing that most of last century the market was 70-90%..

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Despite whatever predictive power it may have, I don't think it is a good indicator. The big companies that move the indices all have operations in many countries and are not entirely dependent on the size of the US economy.

 

Yes, but GNP accounts for operations in other countries of U.S. companies. And the 2 numbers (GDP and GNP) are very similar. From the Gurufocus page:

 

"GDP in Q4 2012 stood at $15,851.2 billion. GNP at Q3 2012 (the last data point available) stood at $16,054.2 billion."

 

There's also a chart available on that page comparing GNP and GDP historically, and they are pretty much the same.

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I can make an argument that market is very cheap based on market cap/GDP. The GDP/GNP are practically same.

 

1) Someone (pupil I think) earlier had mentioned the profits generated by US companies in non-US soil. This reflects in market cap but not in GDP or GNP (as GNP only includes earnings by US person in foreign soil).

 

2) The corporate profits as a percentage of gdp historically is 6.2, right now it is more than 11%. Lets not go into details as to why it is high or will it mean revert. The profits drive market capitalizations.

So all things equal, we can afford to have say 25% higher market cap due to superior profits.

 

http://research.stlouisfed.org/fred2/graph/?g=cSh

 

If we apply both these factors and normalize it, we may be closer to the average market cap/GDP ratio of 60%. Far from the bubble territory.

 

 

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I can make an argument that market is very cheap based on market cap/GDP. The GDP/GNP are practically same.

 

1) Someone (pupil I think) earlier had mentioned the profits generated by US companies in non-US soil. This reflects in market cap but not in GDP or GNP (as GNP only includes earnings by US person in foreign soil).

 

 

I'm pretty sure that when they say foreign earnings of citizens, they are including American businesses as well as individuals. The definitions found on the internet are a bit misleading because many of them say "foreign earnings of U.S. residents", but I think that by residents they mean businesses too.

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In 2000 it was 200 percent to GDP.

We aren't in a bubble but it definitely isn't cheap.

 

It was 150% in 2000, per one of the charts on the gurufocus page.

 

http://www.ritholtz.com/blog/wp-content/uploads/2013/01/stock-market-cap.jpg

 

This one says it was 183% in 2000. haha how can they be that off?

 

They must be using a different index. If you look at the total market cap numbers of both on Dec. 2012, they are different by about $1.86 trillion.

 

Also I found out where the 200% in 2000 from Buffett came from the comments section on the gurufocus article. He included the value of private companies also.

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I can make an argument that market is very cheap based on market cap/GDP. The GDP/GNP are practically same.

 

1) Someone (pupil I think) earlier had mentioned the profits generated by US companies in non-US soil. This reflects in market cap but not in GDP or GNP (as GNP only includes earnings by US person in foreign soil).

 

 

I'm pretty sure that when they say foreign earnings of citizens, they are including American businesses as well as individuals. The definitions found on the internet are a bit misleading because many of them say "foreign earnings of U.S. residents", but I think that by residents they mean businesses too.

 

But of course, GNP includes foreign earnings only, not production, whereas it includes domestic production. So if American companies are doing more and more business abroad, then a higher ratio is warranted.

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