An article in the November 21, 2016 issue of Barron’s, quotes Stephanie Pomboy, who is a financial adviser:
“Relative to gross domestic product, she notes, the U.S. equity market’s capitalization is the second highest on record, at 196% of GDP. When the Gipper came in [Reagan, in 1981], stock valuations were at a postwar low of about 40% of GDP.
That decline in equities’ relative values was the result of a long bear market in bonds, she continues, which took yields from 4% in 1964 to 14% in 1981. The flip side of was the ascent of equities, in tandem with the three-decade-plus bond bull market, which any number of pundits and prognosticators have declared dead and done.”
So, does this quote make any sense? First, about that “long bear market in bonds,” she forgot to mention inflation and the Fed’s response to inflation in the ‘70s, which is what drove prices of bonds ever lower. But starting, as she does, in 1964 just muddies the waters. Bond yields were up only moderately from 1964 to 1973, (source: https://fred.stlouisfed.org/series/INTDSRUSM193N) when stocks fell dramatically—partly due to inflation. Bond yields also increased in 1973 due to inflationary fears.
But bond yields did not cause the decline in stocks; both were effects of the same cause—inflation. The big increases in bond yields didn’t start until 1977, long after the equity crash of ’73-’74. Inflation throughout the seventies tended to keep investors out of equity markets—they preferred real estate, commodities and later bonds and CDs. The very high bond yields of the late ‘70s and early ‘80s (> 9%) were due to the Fed’s anti-inflation policies and had nothing to do with stock prices.
So Pomboy appears to have the cause-and-effect wrong on the equity market’s valuation in 1981.
Be that as it may, is an equity market capitalization of 196% of GDP too high, as Pomboy seems to imply? Is that a sign the market is over-valued? It is certainly a big, big number. In fact it’s quite staggering to think that there’s twice as much money in equities as the total value of the U.S. economy for an entire year.
In researching this post I found all sorts of interesting numbers. For example, the entire world GDP in 2016 is estimated at $119T. (Source: the IMF via http://statisticstimes.com/economy/countries-by-projected-gdp.php). The IMF also estimates 2016 GDP for the US as $18.5T. So is equity market capitalization in the US ~ $37T, as Pomboy implies?
According the World Bank, no. In 2015 the US market cap was about $25T (http://data.worldbank.org/indicator/CM.MKT.LCAP.CD). The S&P500 went up 9.5% in 2016 (this number is the market value price, not total returns) so although the S&P500 isn’t total market capitalization we can use its growth to estimate the growth of total market cap. That brings us to $27.4T, which is of course a big number, but only 148% of GDP.
I don’t know how Pomboy came up with 196%, but it’s starting to look like a suspiciously exact number. However, this sort of thing is rife in the financial press. People toss off false or muddled historical narratives (like the history of the bond market in the ‘70s and ‘80s, presented without reference to inflation) and back them up with numbers that are difficult to verify—or just wrong.
Elsewhere the article introduces Pomboy: “The irrepressible Stephanie Pomboy writes to her MacroMavens clients that, if Trump implements the policies on which he campaigned, lifting the burdens of regulation and Obamacare on businesses while cutting taxes, ‘we will finally get back to genuine economic growth built on entrepreneurial spirit and a rising standard of living for the populace.’ That would mark a reversal from the ‘ping-ponging from one asset bubble to the next, papering over the deep wounds in between with more and more debt’.”
What in the world can this mean? Although we can appreciate the “papering over the deeps wounds with more and more debt” as an application of confessional poetry to economics…..was what happened in 2008 an asset bubble? Of course not. Real estate prices in 2008 were maybe a bit over-valued, but the real problem was CDOs and collusion to sell sub-prime mortgages as AAA, and to do so on a massive scale.
Systemic fraud is not the same as an asset bubble.
And the rest of it—“entrepreneurial spirit”—is just a kind of right-wing Tourette’s syndrome, where random neo-conservative catch-phrases converge like flash mobs on a paragraph. Obamacare! Regulation! Burden on businesses!
Okay, she’s a right-wing crackpot, and I should just let it go. And a year ago, or five years, I would have let it go. But I’ve come to believe that part of America’s problem is that people like me cut people like Stephanie Pomboy too much slack.
How, you might ask? For starters, Pomboy, and people like her, are a problem in getting good financial news and analysis. A fair number of the people writing articles, or being interviewed for articles, are ideologically incompetent. They are crippled by a right-wing narrative that makes it somehow impossible for them to calculate a percentage correctly, or remember the economic history of the seventies, or objectively evaluate the economic significance of Obamacare. This isn’t just bias, this isn’t just a point of view—this is a narrative or an ideology that causes people to make shocking errors in their thinking. And it’s not just Stephanie Pomboy–this is everywhere.
The “fake news” phenomenon isn’t limited to assertions that Obama founded ISIS. It’s far more subtle and pervasive than that. Fake news has as its foundation a false narrative of capitalism as victim. The constant repetition of this narrative, and its use as the unstated background for many policy discussions, amounts to a kind of hidden tax on simple realism. It makes us all a little dumber.
The Socialist Investor 