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Comment by truffle_pig | Hacker News Reader

Shameless plug (but related): https://isthestockmarketgoingtocrash.com/

Posted this here a while ago and people seemed to like it.

Instead of market cap/GDP, wouldn't market cap/earnings (p/e ratio) more directly capture "market overvaluation" and "how much the stock market costs vs how much it is providing"?

If so, it seems like we're at a fairly average place for the last 30 years:

http://www.multpl.com/

https://seekingalpha.com/article/4056553-25-p-e-s-and-p-500-...

I wonder what makes them think the stock market is overvalued. Increasing inequality combined with market saturation and the current difficulty to start a competitive business means it makes perfect sense that stock prices are historically high. Combine with the fact that passive index investing has become the norm, and it seems like it will be a new normal.

It explains each of the indicators on the page. Click the "Market Overvaluation" button (albeit with a pretty poor UI and terrible URL support so I can't link it).

It's basically the value of US companies on the stock market divided by the GDP, $27 trillion / $20 trillion = 135%.

Although it makes you wonder about if all that stashed money overseas is having a significant impact on that.

Wouldn’t companies with a strong international presence (e.g. Apple) contribute to that? It seems like increased globalization could explain that high ratio rather than “overvaluation.”

That would be counted in America's GDP.

The metric as designed is more flawed, because not all companies are public.

Exports contribute to GDP but sales between foreign subsidiaries do not. So a Toyota made in Toyota-owned Kentucky factory contributes to the US GDP. This is in contrast to GNP; that US-made Toyota would count towards Japan's GNP.

Is the value of stock supposed to equal the GDP?

It is my understanding that the value of a stock should be equal to present value of future cash flows. If those future cash flows are growing faster than the discount rate then a value higher than 100% of GDP is to be expected.

Agreed. I've never come across this particular metric before, but intuitively I would have expected something more akin to a P/E ratio in the 10's or even 20's, not a factor of 1x.

Can anyone explain here why the stock market cap isn't much, much higher than a single year's GDP?

Is it because GDP is essentially "revenue" while market cap is "discounted future profits" -- and thus 20 years of 5% profit is going to be on the same order of magnitude of 1 year of revenue?

There are only ~5,000 publicly traded companies in the U.S. There are about 25 Million small businesses in the U.S. The stock market cap represents a tiny portion of the entire U.S. economy.

Agreed. But, I prefer the term "permanently high plateau" to "new normal" personally. Same idea though....

Why do you think any of these factors relate at all to whether there is an imminent stock market crash?

Is market cap / GDP really a right measure for overvaluation? So it looks like current stocks are 7% more overvalued than dot com peak with this measure! In fact current market is likely more overvalued than any other time in the history of stock market.

"Market cap as % of GDP" is a pretty strange way to determine whether the stock market is over/undervalued. The usual yardstick is Price/Earnings ratio. In that regard we are a little above average right now, but certainly not in outlier or "DEFCON 2" territory. http://www.multpl.com/

interesting, the two years before the big one in 2007-2008 had tiny quadrilaterals.

Of those indicators, which is most concerning to you?

I think I'd lean towards public debt...

"Public Debt" is not an issue. It is probably one of the biggest economic advantages the US has. US dollars(which all US debt is denominated in) are issued by the US government. This means that it is impossible to "default", unless the government willingly chooses to default. The US doesn't owe anyone "real" resources. On the other hand, the US has acquired huge amounts of real resources(cars, services, electronics, clothing...) from (foreign) holders of US debt like China, Japan etc.

Yes, these dollars are capable of purchasing any resources available for sale in the US, but again, as a sovereign nation, the US is capable of imposing customs and taxes to regulate this flow as they see fit.

Debt issued by a sovereign nation which controls its own currency is completely unlike household debt. The US government is not revenue constrained. This means that it does not need to collect taxes in order to spend. Indeed, since all US dollars come from the government, the US government must spend first in order that there be any money to tax away.

Sort of, it's not an issue until becomes one. They way out historically is run away inflation, aggressive taxation, war, and/or violent societal reorg. These all really suck compared to just living within your means like most working households try to do.

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