Hacker News Reader

Comment by JumpCrisscross | Hacker News Reader

> 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.

[1] https://www.bloomberg.com/view/articles/2017-04-05/aramco-ip...

View on HN

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).

An era is not forever, so...

5% of the returns is the profit being reinvested (for example stock buybacks), 2% is inflation, 2% is real gdp growth.

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.

[0] https://www.cnbc.com/2017/04/24/saudi-aramcos-valuation-repo...

> aggregate market cap will only increase by $50B

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

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.)

It does come up in practice. It's actually a common scam.

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.

Reply on news.ycombinator.com