The US stock bubble charted

I’ve been talking about a divergence between economic growth and asset prices being bridged by central bank liquidity and here it is, courtesy of FTAlphaville:

US stock market cap to GDP (Exhibit 2), one of Warren Buffett’s favoured valuation metrics, is currently 1.12x, clearly high by the standards of the last 60 years. The measure is at the very least a reminder that growth in 2014, rather than liquidity, is essential to prevent an overshoot of the equity market.

Of course it might deflate owing to a surge in real growth. You never know!

 

David Llewellyn-Smith
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Comments

  1. Where would the growth come from? Or, more importantly, how long would it take? It think the trouble for most people governments included, is the time it takes to do something solid. They all want something quick and dramatic and instant so they can crow about it before their political lives are over.

  2. Stephen, take a deep breath. All I was saying that the funds management industry isn’t the land of milk and honey that many (including you it would appear) assume it to be. Your comment that fund managers earn fees of 1% shows your ignorance. Wholesale fees (which dominate the industry) are nowhere near this level (large equity mandates 20 to 30bps, fixed income 10bps, direct property 50bps etc).

    Your analogy to the car industry and tariffs is weird. Tariffs act to protect local players against foreign competition. In funds management, it’s an open playing field with foreign players freely able to compete against local players. Kind of my point really. To make your analogy work you’d have to say the govt was making everyone buy cars, thereby driving up the demand for cars. I’m not sure how that’s relevant.

    Likewise “If the funds management industry is so desirable then get rid of the compulsion.”

    As I said, it’s desirable BECAUSE of the compulsion. If super wasn’t compulsory, you’d have less managers and guess what, the market would probably adjust so the profitability of the industry would be about the same because it’s a pretty efficient and competitive market. Smaller, yes, but similarly profitable (from a percentage point of view).

    As to your analysis on pricing: all good in theory. What I can tell you from experience at the coal face is that funds management fees have been consistently heading down since the introduction of compulsory super. My guesses as to why? Economies of scale. Increasing sophistication and power of buyers. Increased competition.

    If you want to have a debate about whether compulsory super is a good thing, well I think that’s a worthy debate to have. But it should probably be framed in terms of policy objectives, efficient funding of people’s retirement, social equity and so on. It wasn’t really the focus of my comment.

  3. Thats a telling graph hard to see how the market will increase based on underlying activity.

    I have a question though regarding the local market. Most people on this site are addicted to using the word bubble. claiming that local shares are bubbling or even booming.

    1. ASX 200 is around the same level it was in September 2006.

    2. This has taken place while there has been 26 out of 28 quarters of compounding GDP growth.

    3. Then I hear you say its the financials that are in a bubble. Since 2006 AnZ’s profit has doubled and its share price is up around 30%.

    I understand the sharemarket is a leading indicator driven by future expectation.
    In 2012 (not sure if this was a reputable source) the figure in Australia was 85%
    http://www.factfish.com/statistic-country/australia/market%20capitalization%20of%20listed%20companies%20of%20gdp