I am hoping this blog entry will completely change everyone’s thinking about the US economy, and I do mean EVERYONE—the pope, Trump, you, Al Gore, Charlize Theron and even Stephanie Pomboy. But to accomplish this monumental task, I will have to quote statistics. I am sorry.
Okay, okay—getting one person to think a little differently is a start.
In the previous post, Stephanie Pomboy managed to distract me from the original question: is the ratio of equity capitalization to GDP a valuable metric? And if it’s valuable, what does the current number mean? Is it too high, too low, or just right?
So, the ratio (based on previously quoted sources) is 148%. Now one problem with this ratio is that US market cap includes a lot of multinationals—companies like McDonalds and Exxon-Mobil which do much of their business overseas, and the value of those foreign operations are reflected in their stock prices, even though the operations themselves do not count as part of US GDP. So this ratio has some imprecision built into it, and I think I will stay away from it. It’s not necessarily a bogus statistic, because it does highlight unusual cases like 1981, but not something I’d want to use often.
But is 148% too high? Well, it’s a ratio of market cap to GDP, and GDP is a given, at least in the short run. So if 148% is too high (by whatever criteria) then $27.4T must be “too high.” And granted, that is a big number.
But what is that $27.4T doing? What economic purpose does it serve? Maybe it’s performing a vital function, providing funds for Elon Musk to hire architects to design villas on Mars, et cetera.
Actually, no. It is rare for money to flow from the stock market into new product development, or any other useful purpose. Sometimes smaller companies will issue stock for the express purpose of buying new equipment or expanding their marketing reach. But the numbers involved are insignificant compared to stock buybacks, in which money flows the opposite direction—from business operations into the market. In the high tech industry in the ‘90s, stock buybacks functioned as an IQ test for CEOs. If your CEO couldn’t figure out anything better to do with a billion dollars than buy back company stock, he or she did not get a passing grade. Bear in mind that major product lines could be developed (sometimes) for much less than a billion dollars, e.g., the LaserJet printer. But of course that required the ability to distinguish good product ideas from bad and to manage the complex process required to take a concept to market.
CEO compensation is mostly linked to the company’s stock price. And if you buy a billion dollars of company stock, the price should generally go up. If you invest that billion in some thingamabob you don’t understand, and work like a slave trying to manage a bunch of nerds to get it built on time and on budget….the stock price will maybe, maybe go up in a few years, and you’ll have missed a lot tee times. So what’s a smart CEO going to do? But that’s another blog entry.
Because we have to figure out what this $27.4T is doing. Of course some of those stocks pay dividends, so that’s a source of income for stockholders, who can use that money to buy groceries or medicine or gifts for grandkids—or tickets to a Peter Thiel lecture. But the dividends are usually modest. SPY, an ETF that replicates the performance of the S&P500, paid a 2% dividend in 2016. People don’t usually buy stocks just for the dividends.
That $27.4T includes a lot of money that’s slated for retirement expenses. It includes money in 401Ks and IRAs and in big pension funds. So the stock market acts as a kind of bank for retirement money. But it’s not really a bank, because it doesn’t make loans.
And that’s the key point. Banks take in money and loan it out, and these loans serve a useful purpose, funding businesses and housing. Bank loans contribute to economic growth most of the time, and if the banks fail, it affects the overall economy profoundly, as in 2008-2009. A bear market doesn’t have the same effect. A stock market doesn’t work like a bank, and it’s not as closely linked to the economy as banks are. Yes, people make money on the stock market and they can sell the stocks and spend the money, and this contributes to GDP….but stock owners as a group never sell out. Individuals come and go, but trillions of dollars are always tied up in the market. We can’t use that money to build bridges or fix climate change or educate the next generation. Sometimes the government can tax that money and use it gainfully, over howls of outrage, but it collects far less tax on that $27.4T than it does on the $18.5T GDP, which produces most income tax and all sales and property taxes.
Investors are just buying and selling stock to each other, for the most part.
This is not, of course, an arrangement that investors chose. Most investors wouldn’t care if they were primary investors—that is, if the money they invested went directly to building new factories or paying for R&D, so long as the value of their stock was the same. (And yes, the market could be structured to include more direct investment, but that’s another blog entry.)
Readers may recall my entry, “Missing the Scale,” and so this might be a good time to think about the scale of $27.4 trillion. Of course that’s a very large number, but what does it mean functionally? What could you do with it?
It cost about $167 billion (in 2016 dollars) for the entire Apollo program. So $27.4 trillion would pay for 164 Apollo programs. (The Apollo program cost $25.4 billion according to http://www.telegraph.co.uk/news/science/space/5852237/Apollo-11-Moon-landing-ten-facts-about-Armstrong-Aldrin-and-Collins-mission.html, and there are any number of calculators online that will allow you to adjust for inflation. I assumed 1969 dollars as a starting point.)
The US spent $341 billion in 1945 dollars to fight WWII, and that would be $4.57T today. So yes, the stock market today contains more than six times the wealth required to fight WWII. Six times.
There appears to be about 913 million acres of farmland in the US, which at $3000/acre, would imply $2.74T for all the farms in the US. The $3000 per acre is just a guess and would of course include all equipment, buildings, fences and other assets, including water rights. (https://www.statista.com/topics/1126/us-agriculture/)
So the US equity market capitalization is roughly 10x the value of all the farms in the US.
And it’s also $84,568 for each individual in the US. We could buy a Mercedes E550 (at $60,650 each, MSRP) for every adult in the US….for only $15.1 trillion, including dealer prep. That would still leave us $9.6T for stereo equipment and custom rims. Expensive, yes, but you get what you pay for.
So $27.4T is an immense amount of money, more than we can easily envision. Now, some of you may be thinking, this socialism thing has potential I never realized, and others may be asking: what about BONDS?
And after that, you might wonder, what about real estate, commercial and residential?
What’s the total value of everything in the US, Corvus?
I’m so glad you asked. Estimates differ. The most credible estimates range from $124T-$188T.
Here are the details:
- Household and non-profit wealth is estimated at $87T, but this doesn’t include financial sector or government assets and liabilities. (https://en.wikipedia.org/wiki/Wealth_in_the_United_States)
- The UN estimates US wealth at $118T, including human capital, such as skills and education.
- A more inclusive effort that includes financial and government sector assets and liabilities yielded $124T in 2014, and no doubt more today. (Source: https://en.wikipedia.org/wiki/Financial_position_of_the_United_States)
- And in the realm of weird numbers from the oil industry, there’s an estimate of the oil, gas and coal reserves owned by the federal government at $150T. (http://instituteforenergyresearch.org/analysis/federal-assets-above-and-below-ground/)
I think the energy reserves estimate is way too high. First—$150T is greater than the entire world’s annual GDP. Second, in a country with a GDP of $18.5T, with energy reserves of $150T, our entire economy should be built around energy extraction, like Kuwait or Saudi Arabia, and it isn’t. Still, these reserves are obviously valuable, and are not included in most other estimates, as far as I can tell.
Nor are wind and solar rights.
Also, nowhere do I see the value of schools and universities, including medical and dental schools, explicitly included in our national wealth.
- Another estimate is $188T, made in 2009, not a good year for American wealth. This looks like a serious effort by Rutledge, but the web page just hits the high points which are covered in his book, which I haven’t bought yet. (http://rutledgecapital.com/2009/05/24/total-assets-of-the-us-economy-188-trillion-134xgdp/comment-page-1/)
I prefer this last number—his approach seems detailed and he does include government assets, possibly including mineral assets. I also like his point that GDP is roughly 7.5% of total national wealth, which makes sense, because when an “average” investment yields between 5% and 10%, you’d expect that the ratio of GDP to total wealth would fall into the same range.
Since the US economy has grown steadily since 2009, the $188T should be bigger today. Unfortunately, I can’t just take the GDP growth figures since 2009 and scale up Rutledge’s 2009 estimate, because total wealth isn’t necessarily a function of GDP, at least over the short term. But the $188T must have increased since 2009, for two reasons: quantitative easing added $3.5T to the money supply and the stock market increased in value by about $19T—(based on the increase in the S&P500 from March 2009 to Jan. 2017). Putting those known factors together, and rounding down a bit to avoid exaggeration, let’s say that our total wealth is $200T today (1-15-2017). Using $200T as a nice round number works because Rutledge’s $188T was just an estimate back in 2009.
So the $27.4T, as massive as it is, is only a fraction of our total wealth. Using the $200T estimate, total stock market capitalization is 13.7% of our wealth.
This sum is about $600K per US resident. I am not suggesting we divide the $200T up like pirates, but that number should imply a level of opportunity and freedom for the average citizen that does not exist today. Within that context, paying for college or scraping together a down payment for a house shouldn’t be nearly as challenging as it is for most Americans.
Referring back to scale…how much is $200T? That’s such a large number that coming up with a comparison is difficult. According to one estimate, that’s more dollars than there are ants on the planet. http://www.bbc.com/news/magazine-29281253. And it’s almost certainly more dollars than there are bees (source: http://biology.stackexchange.com/questions/9386/how-many-honeybees-are-there-and-how-has-the-number-changed-across-time.)
So yes, if we have to reach into the insect world to get an idea of the scale of $200T, then we are truly a land of inconceivable wealth. We cannot understand it from the point of view of the human past—$200T is too large a sum to fit into a frame bounded by history. Despite a lifetime of interest in the economy and investing, I did not fully understand how wealthy we are until I did this research. This is a fabulously wealthy country, but our people by and large do not benefit. “The shoemaker’s children run barefoot.”
And the fact that we don’t know for certain what our national wealth is just compounds the mystery of this problem. How have we never asked this question? Don’t we understand that many of our problems have as their ultimate context our total assets?
Given a total wealth of $200T, we can see that the debates over quantitative easing were conditioned by the assumption that $3.5T is a staggering sum of money—but it isn’t. And likewise the doomsday talk about the national debt, which is effectively $14.3T (https://en.wikipedia.org/wiki/National_debt_of_the_United_States).
Once, long ago, someone told me that poor people have no idea how much money rich people have. “The poor think that if you have $10,000 in the bank, you are rich,” he said. Well, it goes way beyond that—we not only fail to see how much money the rich have, we fail to see how much money we have ourselves.
The Socialist Investor 