You pointed out that other people’s spending is not the only source of our income. There are 4 mechanisms that create new assets (and expand our collective stock of wealth). Three are easy to comprehend: Bank lending – federal deficit spending – net investment (“capital formation”).
«Holding gains» is a different story. It is by far the most important mechanism but at the same time the one with the least straight forward explanation. It seem to me there are different avenues for the «mark up»:
1. Behind some (or a lot?) of it there is «capital formation» (net investment): Companies invest in the formation of materiel and immaterial (intellectual) property. Even the maintenance adds value and is in that sense «capital formation». A stock price increase is justified. (Something similar can be applied to (household) real estate.)
2. But then there is also a mark up which is not backed by a «capital formation» (net investment): i.e. a plot of land gets sold more expensive than in the years before and therefore all the other plots close by get an accounting mark up.
3. In connection with (2) we have another form of a mark up: Rent/profit seeking. Prices get jacked up on the bases of – kind of: collective – monopoly/monopolized power of the asset owners. If they jack up the prices of the assets then the common people have no real choice. To survive – have housing and food – they have to pay the price. That goes on when people try to buy of the asset. But more commonly in this way: Prices (of housing rents, goods and services) get jacked up or even more often: workers don’t have any part in the productivity gains. The increased profits on the underlying investment warrants a mark up in the assets value. With the increase of the return on investment the rich are willing to pay more for the assets so that they can get at those ‹profit/money generators›.
Do you see any other avenues? What is the breakup between the 3 avenues?
1. Correct. Gross investment/capital formation increases firms' assets/retained earnings/book value. But firms do dividends and buybacks, so you have to look at net to see actual cumulative retained earnings/change in book value.
IAC asset markets *should* "see" increased book value and bid up shares. Right? Problem is, that market:book ratio has no definable (imaginable?) accounting relationship behind it. Here for nonfinancial firms that produce "real" stuff. https://fred.stlouisfed.org/graph/?g=1pKJd (Ask if you want that graph's measures explained; fairly simple but more complicated than it should have to be...)
So, since the black line = the sum of the colored areas, it kinda seems like book value is effectively ignored (!) by the markets, has ~zero to do with market price... Wacky. IAC the relationship is just impossibly indeterminate by any formula or measure that I know or can think of, much less demonstrate empirically.
2. Right. See above.
3. This is basically (silently) characterizing wealth as the net present value of all future (rental and corporate) profits. Doesn't change the conundrums above.
All of this is basically asking WHY asset-market prices do what they do. Je ne sais pas. If I knew that I'd be a far, far richer man...
And it's just one step away from claiming that we're in The Mother Of All decades-long asset-market bubbles. I sure wouldn't argue against that, but I have no idea what to do with it, empirically. There is no alternative numeric measure of our "true" wealth, to judge against. And I don't see how there could ever be one. Sigh.
Since – as somebody recently convincingly argued – "the only *true* wealth is…the love of friends and family" it is probably good not to get distracted (what easily happens when you constantly have to worry about the right allocation) ...
> «wealth as the net present value of all future (rental and corporate) profits»
Taking this as a – so it seems to me – quite reasonable yard stick there isn’t too much ground for speaking of «The Mother Of All decades-long asset-market bubbles», isn’t it? PE ratio currently at around 28 – above long term trend but not unseen.
Looking at assets prices in this way one could therefore easily argue that they are not (much) above their ‹real› value.
This poses the question: What made this long streak – over decades – of profit growth possible?
I see a couple of factors which together were tremendously powerful – and they all go back to a major shift in power from workers toward capital. (And it is not so that workers started from a more powerful position compared to capital. Still, in the 50ies and 60ies, probably the first (and so far only) time in capitalist history workers had some say at the power table.)
1. Trade unions lost their bargaining power at the beginning of the 70ies and never gained it back. From then on productivity gains went mainly to capital.
2. De-regulation and no (new) regulation as well as shifting burdens/costs onto workers/consumers/general public and in that way away from those who cause them: corporations (= the rich)
3. Tax relief and subsidies (among them paying for R&D, lucrative public contracts, i.e. weapons, medication, IT) all for the benefit (profits) of the corporations
4. ‹globalization›, meaning: taking advantage of cheap labor and no (health, environmental) regulation in global south (China et. al).
This begs another question: If this power shift (on so many levels) is the cause for the continuous rapid increase of profits (and therefore assets prices) how likely is it that the level of profits can be kept up or even further extended? Or is a (partial) reversal coming – and this not so much because of more strength/awarness on the side of workers/general public but because of (new) competing power elite (China, BRICS) cut into the profit margins of the current (western) elite? [Not that I would hold the predictions of our elite in high esteem but they seem quite confident in being able to extend their previous run on shifting power in their favor – therefore PE at 28.]
S&P strong outperformance over a decade+ vs other countries' indexes is IMO due to US multinationals' ability to extract income/profits/call them what you will from other countries based on US economic and military hegemony. Then add US top 20's ability to extract from bottom 80.
Shiller's PE10 (10-year PE, aka CAPE) is a much more excellent predictor of next ten years returns, BTW.... If it's right about future returns, and "true value" is discounted NPV of those, then we ARE in the MOAMABs.
> S&P strong out performance over a decade+ vs other countries' indexes is IMO due to US multinationals' ability to extract income/profits/call them what you will from other countries based on US economic and military hegemony. Then add US top 20's ability to extract from bottom 80.
If I read this correctly you put
- more emphasis on my 4th point (‹globalization›; which btw also includes pushing through ‘trade deals’ (i.e. pushing government-granted patent and copyright monopolies not only down the throat of ones own people but also on the rest of the world – with the threat of having less favorable access to the US market or even a US-instigated coup/military intervention if not ‹agreed› to))
- and less emphasis on my points 1 to 3 (weakening trade unions, deregulation, tax relief).
Your Shiller’s PE10-graph is interesting and quite convincing when it comes to MOAMAB. Still, isn't this expression implying a bit too much, namely that the mother of all crashes is inevitably? I see a couple of different ways how a PE of 35 can fall back to normal levels:
1. Crash: a sudden drop of 50% (within weeks). This has most likely (because of the ‹shock value›) a major impact on the real economy/society/political system. The stock market crash is only halving the numbers in the accounting books of rich people (and will not affect their livelihood). The fall out in the real economy can only have an impact if (!) the policy makers do not handle it well or do not want to tackle it (meaning: want to (ab)use for the rich/powerful people's power gains). In short: We will have the same situation/questions as in 2008 ff.
2. PE comes down by extraction of even higher profits -- that is: in the coming years the profits for once increase a bit faster than the assets prices.
3. Some mix of the two above: A protracted asset price ‹correction› of i.e. 20% over 1 to 2 years accompanied by a stead or increasing profits of say 10%.
I would like to mention some other points towards a less scary story:
- PE was even higher before the IT-bubble burst in the year 2000. The world didn’t go under – neither for the rich nor the broader public.
- Could it be that this wacky PE of 35 is confined to the S&P 500 companies and not far beyond? Therefore, considering that these companies ‹only› make up 30% of the total wealth the impact of them crashing wouldn't have such an impact as it might seem.
- Not to forget (what I in the end consider a very important point to keep in mind): We are talking about numbers in books/financial accounts and not about the stuff we really live off (food, houses, services, production facilities, nature, solidarity etc.). Numbers that get «bombed» isn’t the same as actual bombs which destroy real wealth (lives, houses, infrastructure).
By this metric a 20%-30% drawdown would move us into the high-normal historical range...
Also John Hussman: He's a valuation geek, though he moderates it with a measure "market internals," concentration/dispersion. If equity runups are broad based, prolly best to hold on. If they're concentrated in a few stocks and valuations are crazy, look out below...
Playing that out over the next 12 years, he predicts ~0% on equity assets if you buy (or hold) right now.
Main Q that remains regarding "true" wealth: is the post-90s period really a "new normal"? Or...? Also this doesn't even consider RE assets, for which there is no "book" value.
You pointed out that other people’s spending is not the only source of our income. There are 4 mechanisms that create new assets (and expand our collective stock of wealth). Three are easy to comprehend: Bank lending – federal deficit spending – net investment (“capital formation”).
«Holding gains» is a different story. It is by far the most important mechanism but at the same time the one with the least straight forward explanation. It seem to me there are different avenues for the «mark up»:
1. Behind some (or a lot?) of it there is «capital formation» (net investment): Companies invest in the formation of materiel and immaterial (intellectual) property. Even the maintenance adds value and is in that sense «capital formation». A stock price increase is justified. (Something similar can be applied to (household) real estate.)
2. But then there is also a mark up which is not backed by a «capital formation» (net investment): i.e. a plot of land gets sold more expensive than in the years before and therefore all the other plots close by get an accounting mark up.
3. In connection with (2) we have another form of a mark up: Rent/profit seeking. Prices get jacked up on the bases of – kind of: collective – monopoly/monopolized power of the asset owners. If they jack up the prices of the assets then the common people have no real choice. To survive – have housing and food – they have to pay the price. That goes on when people try to buy of the asset. But more commonly in this way: Prices (of housing rents, goods and services) get jacked up or even more often: workers don’t have any part in the productivity gains. The increased profits on the underlying investment warrants a mark up in the assets value. With the increase of the return on investment the rich are willing to pay more for the assets so that they can get at those ‹profit/money generators›.
Do you see any other avenues? What is the breakup between the 3 avenues?
1. Correct. Gross investment/capital formation increases firms' assets/retained earnings/book value. But firms do dividends and buybacks, so you have to look at net to see actual cumulative retained earnings/change in book value.
IAC asset markets *should* "see" increased book value and bid up shares. Right? Problem is, that market:book ratio has no definable (imaginable?) accounting relationship behind it. Here for nonfinancial firms that produce "real" stuff. https://fred.stlouisfed.org/graph/?g=1pKJd (Ask if you want that graph's measures explained; fairly simple but more complicated than it should have to be...)
So, since the black line = the sum of the colored areas, it kinda seems like book value is effectively ignored (!) by the markets, has ~zero to do with market price... Wacky. IAC the relationship is just impossibly indeterminate by any formula or measure that I know or can think of, much less demonstrate empirically.
2. Right. See above.
3. This is basically (silently) characterizing wealth as the net present value of all future (rental and corporate) profits. Doesn't change the conundrums above.
All of this is basically asking WHY asset-market prices do what they do. Je ne sais pas. If I knew that I'd be a far, far richer man...
And it's just one step away from claiming that we're in The Mother Of All decades-long asset-market bubbles. I sure wouldn't argue against that, but I have no idea what to do with it, empirically. There is no alternative numeric measure of our "true" wealth, to judge against. And I don't see how there could ever be one. Sigh.
> If I knew that I'd be a far, far richer man…
Since – as somebody recently convincingly argued – "the only *true* wealth is…the love of friends and family" it is probably good not to get distracted (what easily happens when you constantly have to worry about the right allocation) ...
> «wealth as the net present value of all future (rental and corporate) profits»
Taking this as a – so it seems to me – quite reasonable yard stick there isn’t too much ground for speaking of «The Mother Of All decades-long asset-market bubbles», isn’t it? PE ratio currently at around 28 – above long term trend but not unseen.
Looking at assets prices in this way one could therefore easily argue that they are not (much) above their ‹real› value.
This poses the question: What made this long streak – over decades – of profit growth possible?
I see a couple of factors which together were tremendously powerful – and they all go back to a major shift in power from workers toward capital. (And it is not so that workers started from a more powerful position compared to capital. Still, in the 50ies and 60ies, probably the first (and so far only) time in capitalist history workers had some say at the power table.)
1. Trade unions lost their bargaining power at the beginning of the 70ies and never gained it back. From then on productivity gains went mainly to capital.
2. De-regulation and no (new) regulation as well as shifting burdens/costs onto workers/consumers/general public and in that way away from those who cause them: corporations (= the rich)
3. Tax relief and subsidies (among them paying for R&D, lucrative public contracts, i.e. weapons, medication, IT) all for the benefit (profits) of the corporations
4. ‹globalization›, meaning: taking advantage of cheap labor and no (health, environmental) regulation in global south (China et. al).
This begs another question: If this power shift (on so many levels) is the cause for the continuous rapid increase of profits (and therefore assets prices) how likely is it that the level of profits can be kept up or even further extended? Or is a (partial) reversal coming – and this not so much because of more strength/awarness on the side of workers/general public but because of (new) competing power elite (China, BRICS) cut into the profit margins of the current (western) elite? [Not that I would hold the predictions of our elite in high esteem but they seem quite confident in being able to extend their previous run on shifting power in their favor – therefore PE at 28.]
Agree with most everything you say here.
S&P strong outperformance over a decade+ vs other countries' indexes is IMO due to US multinationals' ability to extract income/profits/call them what you will from other countries based on US economic and military hegemony. Then add US top 20's ability to extract from bottom 80.
Shiller's PE10 (10-year PE, aka CAPE) is a much more excellent predictor of next ten years returns, BTW.... If it's right about future returns, and "true value" is discounted NPV of those, then we ARE in the MOAMABs.
https://www.multpl.com/shiller-pe
https://www.google.com/search?q=shiller+pe&oq=shiller+pe&gs_lcrp=EgZjaHJvbWUqDwgAEEUYOxiDARixAxiABDIPCAAQRRg7GIMBGLEDGIAEMgcIARAAGIAEMgcIAhAAGIAEMgcIAxAAGIAEMgcIBBAAGIAEMgcIBRAAGIAEMgcIBhAAGIAEMgYIBxBFGDzSAQgyMTM3ajBqN6gCALACAA&sourceid=chrome&ie=UTF-8
> S&P strong out performance over a decade+ vs other countries' indexes is IMO due to US multinationals' ability to extract income/profits/call them what you will from other countries based on US economic and military hegemony. Then add US top 20's ability to extract from bottom 80.
If I read this correctly you put
- more emphasis on my 4th point (‹globalization›; which btw also includes pushing through ‘trade deals’ (i.e. pushing government-granted patent and copyright monopolies not only down the throat of ones own people but also on the rest of the world – with the threat of having less favorable access to the US market or even a US-instigated coup/military intervention if not ‹agreed› to))
- and less emphasis on my points 1 to 3 (weakening trade unions, deregulation, tax relief).
Your Shiller’s PE10-graph is interesting and quite convincing when it comes to MOAMAB. Still, isn't this expression implying a bit too much, namely that the mother of all crashes is inevitably? I see a couple of different ways how a PE of 35 can fall back to normal levels:
1. Crash: a sudden drop of 50% (within weeks). This has most likely (because of the ‹shock value›) a major impact on the real economy/society/political system. The stock market crash is only halving the numbers in the accounting books of rich people (and will not affect their livelihood). The fall out in the real economy can only have an impact if (!) the policy makers do not handle it well or do not want to tackle it (meaning: want to (ab)use for the rich/powerful people's power gains). In short: We will have the same situation/questions as in 2008 ff.
2. PE comes down by extraction of even higher profits -- that is: in the coming years the profits for once increase a bit faster than the assets prices.
3. Some mix of the two above: A protracted asset price ‹correction› of i.e. 20% over 1 to 2 years accompanied by a stead or increasing profits of say 10%.
I would like to mention some other points towards a less scary story:
- PE was even higher before the IT-bubble burst in the year 2000. The world didn’t go under – neither for the rich nor the broader public.
- Could it be that this wacky PE of 35 is confined to the S&P 500 companies and not far beyond? Therefore, considering that these companies ‹only› make up 30% of the total wealth the impact of them crashing wouldn't have such an impact as it might seem.
- Not to forget (what I in the end consider a very important point to keep in mind): We are talking about numbers in books/financial accounts and not about the stuff we really live off (food, houses, services, production facilities, nature, solidarity etc.). Numbers that get «bombed» isn’t the same as actual bombs which destroy real wealth (lives, houses, infrastructure).
Another you might find interesting. "Jesse Livermore" (pseudonym) is one of the sharpest big-league financial guys out there IMO.
https://mastodon.world/@SteveRoth/110045717758243418
https://fred.stlouisfed.org/graph/?graph_id=191287
By this metric a 20%-30% drawdown would move us into the high-normal historical range...
Also John Hussman: He's a valuation geek, though he moderates it with a measure "market internals," concentration/dispersion. If equity runups are broad based, prolly best to hold on. If they're concentrated in a few stocks and valuations are crazy, look out below...
Playing that out over the next 12 years, he predicts ~0% on equity assets if you buy (or hold) right now.
https://www.hussmanfunds.com/category/comment/
Main Q that remains regarding "true" wealth: is the post-90s period really a "new normal"? Or...? Also this doesn't even consider RE assets, for which there is no "book" value.