I have been saying ad nauseamthat the US economy has become increasingly "asset-ized" and"financial-ized". A quick way to judge if an asset class is becomingovervalued against the economy's ability to produce goods and servicesis to examine the total value that assets represent vs. GDP, so withoutfurther ado here are a few charts.
First, the total value of stocks and Real estate vs. GDP for the US.
First, the total value of stocks and Real estate vs. GDP for the US.
Data: FRB, World Federation of Exchanges
- TotalUS stock market capitalization is now 151% of GDP, a percentageexceeded previously only during the bubble in 1999-2000. This ratio is doublewhat it was in 1994, before the starts of the massive rally whichculminated in the historic bubble. For comparison, Alan Greenspan madehis famous "irrational exuberance" speech in 1996, when the ratio wasat 110%. Stocks are not cheap currently, by any means.
- Real estate valuations are in uncharted territory - all time highs, at least on a annual basis.
- The sum ofthe two asset classes as a percent of GDP is also at an all time highof 380%. In other words, after stocks plunged in 2001-02, it was theturn of the real estate bubble to come in and save the day for theasset economy, and thus keep the party going.
- The "party" kept on going because not only was the credit punch bowl not taken away, but it was brimming with debt hootch: Total debt to GDP rose to the highest level ever.
- Wesee that debt/GDP went through four cycles of expanding faster/slowergrowth (blue line). The "debt junkie" economy apparently needed biggerand faster "hits" of debt to keep functioning. I have marked the chartbelow with the four cycles and a trendline.
- Itseems that in the past 2 years we may - just may - have finally brokenthe pattern of constantly expanding debt acceleration cycles. It doesnot mean that there is less debt, or even less debt vs. the overalleconomy; but it does mean that its growth is finally slowing down.
Data: IMF, World Federation of Exchanges
you are unearthing informational treasuries carefully hidden from unsuspecting public by wall street ponzi schemers.
sinceassets are nothing but claims on discounted future free cash flows,your graphs prove that these claims are being diluted rapidly
Stocks are far from being undervalued, all over the world.
Thequestion is whether sentiment about equities, which seems to be broadlypositive at the moment (how deep this positive sentiment is may bequestioned, e.g. volume has been generally on the light side), will(continue to) overcome concerns about valuation and bubble-ness.Currently it seems that growth is good enough in almost everymarket/region that equities remain attractive (enough). We will see.
eh
Thanks you for your comments.
Thesecharts are not meant to predict imminent events - they span too manyyears. Bubbles form because unsustainable events keep occurring wellpast "rational" limits.
Interesting remark about relatively lowvolume in markets. I had prepared a piece on that but deleted itbecause it would have seemed too much like short-term market advice.But do this:
Look at a 15 year monthly or weekly chart of theDow and you will notice that the market took off in 1995 with veryheavy volume. The sell-off followed after a two year period ofdistribution (prices churning back and forth in a range but with highvolume).
Likewise, the whole period between 2000-now could beinterpreted as a huge distribution pattern, where prices have changedlittle overall but volume has remained at the same levels.
Regards
Bond Vigilantes -- another interesting blog I found, somewhat of a bearish tone.
eh
A few questions:
1.If you chart aggregate interest payments vs. GDP over time, what wouldit show? Which matters more: total debt or total interest payments, andwhy?
2. Of the total debt shown in the graphs, what portion is consumer debt?
3.Few mainstrean commentators have picked up on the huge increase thisyear in credit card debt. How long can this trend continue beforeconsumers reduce spending?
Thelast chart is very telling. It is widely assumed that we arent in astock market bubble, but is that really true? Its the EM's that arefrothy
Lookat the growth rate of total debt minus growth rate of GDP. Debt hasoutpaced GDP for over a decade. Incremental debt required to generate$1 of GDP, over 5 years, is over $5, was $2 not too long ago.