Wi Gu Wong Wei: China stock markets are down big since their 2015 highs

Shanghai is down 48.7% from its 2015 high.

Hong Kong is down 6% from its 2015 high.

Meanwhile the broadest measure of US stocks, the Wilshire 5000, is up 33.6% tonight from its 2015 high. Its total stock market capitalization currently represents about $36 trillion, up about $9 trillion in the last three years.

S&P 500 market capitalization/GDP ratios the years before plus-20% crashes

http://www.advisorperspectives.com/dshort/commentaries/CAPE-at-Market-Peaks.php

1955: 104*
1956: 101
1957:   84

1960: 107
1961: 123
1962: 103

1965: 120
1966:   96

1967: 109
1968: 107
1969:   88
1970:   84

1972:   89
1973:   66
1974:   43

1979:   40
1980:   45
1981:   37
1982:   41


1986:   52
1987:   49

1999: 148
2000: 126
2001: 107
2002:   79

2006: 101
2007: 100
2008:   62
2009:   77

*The ratio is the S&P 500 level at the end of the calendar year divided by 4Q final GDP in trillions of dollars. The average peak ratio in the series is 99. The average trough ratio is 71. The average spread between peak and trough ratios in the series is 27%. The ratio through 3Q2014 is 112, 13% above the average peak in the series.

The chart from Doug Short gives the Shiller p/e ratios on the record dates. The average peak of these is 22.6, the average trough is 14.2, and the average spread between them in the series is 35%. The Shiller p/e ratio at the end of 3Q2014 was 25.16, 11% above the average peak in the series. 

Top 10 investing years for subsequent 10 year returns since 1965 to date

1988: 18.80% nominal per annum average from the S&P500 12/'88-12/'98

1987: 18.15%

1989: 17.99%

1990: 17.57%

1979: 17.27%

1981: 16.53%

1982: 16.16%

1978: 16.14%

1977: 15.02%

1985: 14.98%

These years have an average total S&P500 market capitalization to GDP (in trillions) ratio of 48.

The ratio at the end of 3Q2014 was 112, which historically produces 10 year returns averaging about 3.24% nominal.

Stock market valuation illustrated by total market capitalization to GDP ratios, selected years

Total stock market capitalization through 12/31/14 is $26.004 trillion

Wilshire 5000 level X 1.2

The latest snapshot of the asset allocation of the United States is "risk on"

Total bond market per SIFMA through 3Q2014: $38.65 trillion (49.8%)

Total stock market capitalization per ^W5000 right now: $26.07 trillion (33.6%)

Cash per MZM money stock: $12.89 trillion (16.6%)

Total: $77.61 trillion

If you add in Households, Owners' equity in real estate, you add another $10.98 trillion for a total pie of $88.59 trillion, thus 43.6% to bonds, 29.4% to stocks, 14.6% to cash, and 12.4% to real estate.

From the perspective of the Talmud this allocation is very unwise because it is much too light on cash and owners' equity. The amounts allocated to business, to cash and to your homestead should each be about 33%, indicating that we are very heavily "risk on" indeed.

Food for thought.

The stock market remains very expensive as of the end of 3Q2014

Nominal GDP rose to a level of $17.5354 trillion annualized for 3Q2014, according to the advance estimate of third quarter GDP released today.

Total stock market capitalization had an approximate value of $24.9126 trillion on September 30, 2014.

The ratio of total market cap to GDP on the record date therefore comes to 1.421, down slightly from the 1.445 level which prevailed in 2Q.

The ratio was as low as 0.74 as recently as the end of 2008.

The stock market therefore was about 92% more expensive at the end of September 2014 than it was at the end of 2008, and became just 1.7% cheaper between the second and third quarters of 2014.

Total Market Capitalization to GDP Ratio for the third and final estimate of 2Q GDP

Total market cap on June 30th: $25.0353 trillion

Final estimate of 2Q GDP: $17.3282 trillion

Ratio at the end of June 2014: 1.445

Ratio at year end 1981: 0.480

Ratio at year end 2000: 1.420

Ratio at year end 2008: 0.740

SELL! (imho)

Total World Stock Market Capitalization Through 2012 Remains 17.5% Below The 2007 Peak

According to The World Bank, here.

Total Market Capitalization To Nominal GDP Ratios, Selected Years

I have used the Wilshire 5000 level at year end multiplied by 1.2 as a proxy for total stock market capitalization (except where noted by the month), and the latest summer revisions for calendar nominal GDP, in summer 2014 for the period back to 1999, and in summer 2013 for the period back to 1971.

A ratio close to 1.0 indicates the market is fairly valued relative to GDP. A ratio less than 1.0 indicates the stock market is "on sale" to some extent (for example, a ratio of 0.48 indicates the market is trading at a 52% discount). A ratio of more than 1.0 indicates the stock market is expensive and may be considered overvalued for investment purposes (for example, a ratio of 1.72 indicates the stock market is as much as 72% too expensive).

1971   .975

1981   .480

1987   .595

1990   .622

1994   .745

1997 1.296

1999 1.715
2000 1.420
2001 1.209

2002   .912

2003 1.125
2004 1.170
2005 1.147

2006 1.234

2007 1.228

2008   .740

March 2009   .676

2009   .962

2010 1.071

2011 1.019

2012 1.113

2013 1.410

March 2014 1.407

June 2014    1.446

Historically considered, valuation of the stock market by the end of 2008 made then a much better investing opportunity than was late 2002 and early 2003, almost 20% better. And valuations have remained reasonable throughout 2010-2012 and only became expensive in 2013. The four year period beginning in late 2008 has been an excellent opportunity for those with cash to invest.

I maintain that a primary driver of conditions in 2013 was the midnight hour 2012/2013 resolution of tax uncertainty, in the form of making the Bush tax cuts and alternative minimum tax rates permanent, ending the tinkering with Social Security, and reaching a compromise on capital gains tax rates.

All hail John Boehner.

Market capitalization to GDP for 1999, before the August 2000 high and subsequent crash

The Wilshire 5000 level at the end of December 1999 was 13,812.7. Multiplied times 1.2 yields a total market capitalization of $16.57524 trillion.

Nominal GDP for 1999 was $9.6606 trillion according to the latest figures from the BEA.

The former divided by the latter yields 1.72.

The ratio through March 2014 is 1.41.

The ratio through June 2014 is 1.45.

A broad measure of market valuation flashes higher warning: 2Q2014 total stock market capitalization to GDP ratio

Now that 2Q2014 GDP is in, it's time to look again at the ratio of total stock market capitalization to GDP.

Using the Wilshire 5000 as a proxy for the whole market, you find it closed at 20862.74 on June 30, 2014, the last day of the second quarter. 20862.74 X $1.2 billion = $25.035288 trillion of total stock market capitalization on record date.

Current dollar (that is, nominal) GDP for the second quarter just came in at $17.2947 trillion in this week's report from the Bureau of Economic Analysis.

The ratio of the capitalization divided by the GDP is thus 1.45, ticking up from 1.41 at the end of 1Q2014 (23.995212 divided by 17.044).

The ratio for 1Q2009 was 0.72, exactly half what it is today.

Buyer beware.

Market cap to GDP ratios March 2009 vs. March 2014 flash valuation warning

Probably the broadest measure for stock market valuation purposes is total stock market capitalization divided by GDP. Warren Buffett uses it and John Hussman has spoken approvingly of the measure.

But because we have to wait for GDP numbers for at least a month after the quarter end, the ratio cannot be a real-time valuation tool. And given that revisions to GDP can be substantial in the 2nd and 3rd estimates, as well as in the annual summer revisions, precision using the 1st estimate is also wanting. Nevertheless the calculation provides a big picture snapshot of where we have been in the market cycle, and gives forward guidance for long term investors. Presently it appears to counsel taking chips off the table and waiting in cash for a better opportunity to invest. 

For the following I use nominal figures for GDP as revised in the most recent updates from bea.gov and calculate market cap using the popular Wilshire 5000 (level x $1.2 billion) as close to March 31 as practicable.

A comparison of March 2009 to March 2014 is instructive, since March 2009 was a pretty good buying opportunity both in terms of the absolute level of the stock market after its decline and the coincident Shiller p/e valuation which was about 13.3 on March 1. The ratio has almost doubled in the interim, indicating that now is probably not a good time to commit large new sums to stock markets. The current Shiller p/e begins the day at 26.31, which is also nearly doubled from five years ago.

That said, the 10 year Treasury presently pays just 69 basis points more than the dividend yield of the S&P500. At the October 2007 stock market high, the 10 year Treasury paid 276 basis points more than the dividend yield of the S&P500. You could argue the Fed caused the markets to crash by taking rates much too high in 2006 and 2007 and that Janet Yellen is bound and determined not to let that happen again anytime soon, meaning stock markets could have higher to go. Keep in mind that the inflation-adjusted all-time high of the S&P500 was 2045.09 on August 1, 2000. We're at 1962.46 this morning. 

March 30 2009

$10.32 trillion market cap

---------------------------------------------- = 0.72

$14.38 trillion GDP

March 31 2014

$23.99 trillion market cap

---------------------------------------------- = 1.41

$17.02 trillion GDP

Run away: Today's total market capitalization/GDP ratio is 1.46

$25.003 trillion
-------------------  = 1.46 (June 23, 2014: a really bad time to invest)
$17.101 trillion


$10.222 trillion
------------------- = 0.71 (April 6, 2009: a pretty good time to invest)
$14.381 trillion













h/t John Hussman, Warren Buffett

Total Household Net Worth Rises About 3.5% In Real Terms Since April 2007 Through The Last Quarter Of 2013

I used all items CPI of about 13.17% from April 2007 to date, not seasonally adjusted, on April 2007 peak household net worth of $68.82486 trillion.

This yields $77.889 trillion to record date in Q4 2013, meaning the current dollar figure of $80.66 trillion of household net worth represents a real gain, that is an inflation adjusted gain, of about 3.5% in household net worth since April 2007, over six years ago. That's not really saying very much.

The Fed is cited here as saying the vast majority of the increase in household net worth is attributable to rising stock prices, which rose in value by a factor of 2.4 times the rise of housing values, owing to the nearly 30% rise in the stock market in 2013:

The Fed said household net worth rose 14 percent in the full year, driven by a $5.6 trillion rise in the value of shares and a $2.3 trillion increase in the value of real estate.

Using the Wilshire 5000, total stock market capitalization increased $5.65 trillion in nominal terms in 2013. But a mere 20% correction to today's market would wipe out over $4.8 trillion in an instant, and a 40% crash would annihilate over $9.5 trillion.

Housing prices overall have reached a valuation nearly 20% above the long term mean level, which means to some that we are in a reinflated housing bubble. The Case Shiller Home Price Index is up almost 10% just in the last year. The high end of normal on the index used to be 140. Today we are in excess of 150. So reversion to the mean could easily wipe out the $2.3 trillion increase from 2013, and then quite a bit more.

The real increase in net worth may be nothing more than a Fed induced mirage based on artifically cheap money and grotesquely punitive rates of return on same which encourage speculation in asset classes like stocks and real estate.

Wise men know what wicked things are written on the skies.

If QE Were Cash Going Straight To Shareholders, Markets Would Be Up Just 6%/Year

But, of course, stocks are up almost 17% in the last year, and just under 13% annually over the last three years, and QE is NOT reaching the stock markets anywhere near so efficiently as it would if it were a direct cash distribution to shareholders.

So the penetrating thinker, John Hussman, here:

[T]he suppression of risk premiums [is] the remaining and primary effect of QE. In other words, QE has not increased the value of equities. It has only increased the price, but that increase in price has no significant fundamental underpinning.

To see this, first consider cash flows. Imagine that instead of attempting to boost stock prices indirectly through quantitative easing, the Fed took the candy-land approach of literally handing the $85 billion directly to stockholders to reward them for owning stocks. How much would that direct cash distribution benefit a stock market with a $17 trillion market capitalization? Do the arithmetic. Only 0.5% a month. Yet investors have chased prices at a far more rapid pace as a result of quantitative easing. Remember, of course, that the Fed is not in fact distributing cash to shareholders.

Presently the effect of such QE would probably be even less than 0.5% per month if every point of the Wilshire5000 represents a multiple of $1.2 billion, yielding a total market cap far higher than $17 trillion. A 0.4% per month rate of QE on $20.5 trillion of total market cap comes to $82 billion a month.

Total World Stock Market Capitalization $45.1 Trillion Year End 2011

So says the World Bank, here.

Massive Global Central Bank Balance Sheet Expansion Interferes With Interest Rates

The balance sheets of the world's biggest central banks have exploded 178 percent between May 2006 and November 2011.

So says the data compiled and illustrated by James Bianco in late January at The Big Picture here:

The combined size of [the world's largest] eight central banks’ balance sheets has almost tripled in the last six years from $5.42 trillion to more than $15 trillion and is still on the rise! ...

QE is an expanding of balance sheets via increasing bank reserves.  The purpose of QE ... is to increase bank reserves through purchases of fixed income securities in order to lower interest rates. ...

[I]t is fair to compare the size of these balance sheets (now $15 trillion) to the capitalization of the world’s stock markets (now $48 trillion). ...

Prior to the 2008 financial crisis, the eight central bank balance sheets were less than 15% the size of world stock markets and falling.  In the immediate aftermath of Lehman Brothers’ failure, these eight central bank balance sheets swelled to 37% the capitalization of the world stock market.  But keep in mind that the late 2008/early 2009 peak was due to collapsing stock market values combined with balance sheet expansion via “lender of last resort” loans.

Recently, the eight central bank balance sheets have spiked back to 33% of world stock market capitalization.  This has come about not by lender of last resort loans, but rather by QE expansion (buying bonds with “printed money“) even faster than world stock markets are rising.


Some people look at this information as evidence that the intent of the central banks is to boost asset prices to keep the illusion of growth going. But what if it's really just about buying time, attempting to secure lower roll over interest rates for refinancing massive debt loads which have become a giant millstone around the neck of the world?

The total public and private debt of the world's 35 most indebted nations alone tops $57 trillion, which is 95 percent of the $60 trillion in 2011 GDP of the world's 35 most productive nations. Of 27 of those most productive nations (not counting Greece whose 34.38 percent rate is an outlier) shown here, sovereign 10 year bond yields last week averaged 4.2 percent, implying world wide debt service payments of $2.4 trillion just to stay current.

The US alone spends nearly $0.5 trillion annually in debt service payments, and calls it a victory when $0.04 trillion in spending is cut. Meanwhile deficits and debt continue to build, here and abroad.

GDP growth averaging 3.5 percent per annum is the way out, but the debt burden eats up the progress.

This can't go on forever. 

Total World Stock Market Capitalization Year-End 2010 at $56 Trillion

Data here.