Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
As HiD observed in the earlier thread, if you are in the market for the long haul, you are not gambling. But an issue that didn't come up in that thread for why the market is continually rising so spectacularly, faster than the rate of growth of GDP I believe, is not just because firms on average are performing so well, but from a continual infusion of funds into the market.

Governments are continually looking for sources of more funds to flow into financial markets, to prop up securities prices. That is one of the main things that drive privatization.

So there is something "rigged" even when it comes to long-term investment in the stock market.

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns

by Alexander on Mon Mar 26th, 2007 at 02:33:08 PM EST
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The second paragraph above doesn't make sense. Please disregard it.

The point is that, with an increasingly large share of the national income going to the very wealthy, you are going to have more and more funds for which investment opportunities have to be found. That alone will drive up stock prices.

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns

by Alexander on Mon Mar 26th, 2007 at 03:59:50 PM EST
[ Parent ]
remember though that GDP and stock market growth are two different measurements
  1.  GDP is more of a "revenue type" measurement, while stock market growth correlates more directly with earnings per share, which is a "profit type measure.
  2.  Stock markets measure profit results of publicly traded companies.  Government spending is I believe about 1/3 of the GDP, and of course 0% of the stock market.  And also private firms are not included in stock market performance.
  3.  GDP is of more of a domestic number (in the sense that the government doesn't really export, and smaller private firms would likely export at lower levels, while many of the firms on the stock market are very global.
I think there is logic that supports GDP growing slower than the market. Some examples,
  1.  I don't immediately have the % of S&P 500 overseas sales, but just from memory 20 years ago 20% overeas sales for a company were considered high, whereas today, 50% is not at all abnormal.  so overseas growth would add more to stock market growth than it does to GDP, particularly since we import more than we export.
  2.  IMHO, there is more of a growth motivation in the companies in the public stock markets, than there is in the government sector.
  3.  our public companies have gravitated to higher profitiability and growth sectors over time.  The governement can't really gravitate to faster growth sectors.  The move to financial services in the US is not only a move to a faster growth segment, but also a higher profit segment, and of course that all gets capitalized and discounted in the stock market.

just a few off the top of my head thoughts as to why they are different, and why I would expect the market to grow faster due to some of the differences.
by wchurchill on Mon Mar 26th, 2007 at 04:33:31 PM EST
[ Parent ]
Points well taken. Still, I have read that for the U.S. and U.K., "an increasing proportion of the total return on investments since the start of the 1980s has resulted from capital gains rather than earnings, with the former accounting for as much as 75 per cent of total returns—compared with well under 50 per cent (on average) in the 1900-1979 period as a whole." That does suggest that the rise in value has been driven largely by an increasing flow of funds into the market, rather than by the actual income stream produced by the securities.

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns
by Alexander on Mon Mar 26th, 2007 at 05:13:40 PM EST
[ Parent ]
I would want to read the articles you are referring to, so I could understand the context and the discussion better.  However, there is something that really sticks out about the two time periods that the article evidently refers to.  I believe 1900 was a period of low interest rates and low cost of capital--I'm remember a deflationary period in the late 1800's,,,,,,not personally remembering, -:)...   but I do personally remember the end of that period, being 1979, being a time of very high interest rates and cost of capital.  and the early '80's also being high rates, and then of course today we have low interest rates and cost of capital.  So the 1900--1979 period would start with low cost of capital and end with high cost of capital.  The second period of the early 80's to today would be the reverse--high cost of capital ending in low cost of capital.  Financial asset values are largely determined by Net Present Value formulas, as well as forecasts of future earnings streams.  So an investor in the 1900--1979 period would be hurt by this, and the investor in the second period would have been very much helped.  So directionally what your saying would make sense to me--and I couldn't guess the extent of the impact, but that could be correct.  High interest rate periods are not good for the holders of financial assets, and vice versa.  but the 1900--1979 period is so long that I'm sure those investments still overall did well, despite the headwinds.
by wchurchill on Mon Mar 26th, 2007 at 07:19:59 PM EST
[ Parent ]
  1.  we had some pretty heavy inflation in the 80's so some cap gains are not "real".  A dollar isn't really a dollar anymore, it's half a dollar at best.

  2.  With Republicans pushing ever harder to minimize taxes on cap gains vs dividends and regular income, companies have pushed hard to drive up share prices via buybacks rather than pay out.  Not to mention puffing for their bonus pools.

  3.  Coming out of the 60-70's when the stock market was horrible on return, investors were not as willing to pay for stocks so price/earnings ratios were lower.  If a money market is paying 10%, why settle for 15/1 on a stock with risk (6% basically)?   Even now p/e of the s&p 500 is not all that extreme -- 17 ish and coming down over the last few years to near the historical average.

http://www.lowrisk.com/sp500pe.htm  and


I agree that much of the pressure is money flowing into the market that used to go elsewhere, but a big reason for that is that safer investments don't return squat compared to inflation.  The Japanese and Greenspan have made borrowing way too cheap.

by HiD on Tue Mar 27th, 2007 at 04:43:55 AM EST
[ Parent ]
I would only quibble with this point:
The Japanese and Greenspan have made borrowing way too cheap.
I think Greenspan has had very little to do with this.  There are major deflationary trends in the world today, with so much low priced labor in, for example India and China, finally getting a chance to work productively.  This is putting major pressures on prices and costs in the world economy, thus keeping inflation down worldwide.  and at the same time with all of this newly available productivity, the opportunity to invest and harness those resources is incredible.  Couple that with the ability for so many people to access information, knowledge and learning on the internet real time,,,,and you have a growth explosion.  All of the things needed to produce economic access,,,,,hampered only by some of the political risk from the Middle East accented by that area controlling so much of the oil.  so cost of capital has to be low, just given the worldwide situation and economics.

Japan, imo, is a one-off due to their unusual situation in demographics.  thus a stagflation for years,,,,,and a prelude for the world looking out 5--20 years.  ie, wonderful situations don't last forever.

by wchurchill on Tue Mar 27th, 2007 at 02:09:11 PM EST
[ Parent ]
 but for 15 years!!!!!!!!!  Japan with nil interest rates is the fountain from which the carry trade flows.

As for Greenspan and Co, I just dont agree.  Our rates have been  dropping since about 1997.  I used to get 7% in a money market then and it got as low as 1%.  That forced a lot of folks into other riskier investments if they had to have the yield.  We just spent it on a house so that took care of our cash "problem".

We didn't need to go so low on rates but the liquidity was made available first for y2k and then after 9/11 to make sure the economy didn't puke.  Still, it has had some side effects of puffing real estate and other markets IMO.

The huge deflation in labor made it possible to keep these rates low without inflation.  But it was a bad bargain for many in the labor pool while making people like me richer.

by HiD on Tue Mar 27th, 2007 at 05:22:56 PM EST
[ Parent ]
The huge deflation in labor made it possible to keep these rates low without inflation
from my perspective you have the cause and effect backwards.  Greenspan didn't keep rates low, they had to be low due to economic factors in the global economy.
  1.  markets opeing globally unleashed a huge labor pool of underutilized labor.
  2. A.  this put big downward pressure on labor costs.  and,
    B.  it opened up great opportunities for growth, as this labor was put to use making less expensive products.  Capital was needed to meld with the labor to create jobs.
  1.  I'd have to check economic history, but I think as long as monetary policy was well thought out, real interest rates have been between 2--3%.  So add that on top of 0--2% inflation, you get 2--5% interest rates.
  2.  so how could this not happen (sans horrible central banking policies).  underutilized labor, lower prices, negligible inflation, growing demand, supply side begging to work.  of course cost of captial is going to be naturally low, and working in concert with the other factors,,,,voila.

I'm not trying to argue Greenspan was perfect.  I'm just saying he is not a fundamental factor that has led to low inflation, strong economic growth, and low cost of capital.  He should get credit for being an adequate central banker, implementing policies consistent with economic principles of his time.  Obviously the Fed messed it up during the great depression (but I guess some of this knowledge was not available then.)

actually I think the boom would be far stonger in the euity markets without the terror issues in the MidEast.  There is a large risk premium on financial assets, imho, due to this factor.  these factors will make markets grow steadily since the risk premium is already there.  but if things ease in the mideast (and I doubt it), but if they do.  watch out, these equity markets will explode.

as to Japan, I think it's a prelude to the future.  the next 5 years demographically will be OK for them, so their markets will be OK.  but then it comes back, and begins to hit the western world as well.  I don't know if we have answers for this one yet.  (I know this is not accepted economic thinking, btw.)

by wchurchill on Tue Mar 27th, 2007 at 06:16:12 PM EST
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could be but I question whether if cheap capital weren't available could the investment in cheap labor markets have come so quickly?  

I don't think Greenspan did a poor job either btw.  I think he and the Japanese both did what they had to for the most part.  The drop to 1% seemed a bit overdone though.  But if I was that smart I'd be rich.

by HiD on Wed Mar 28th, 2007 at 04:09:26 AM EST
[ Parent ]
well, these things are hard to call, even in retrospect.  economics is after all more social science than science.  business and investing as well.  but it makes it a lot of fun, imho.

btw, I find your comments and insight very valuable.  you're obviously a very bright guy, and I think come at things from a different experience base than mine.  one learns a lot from bright people with a different perspecitve,,,,that was a valuable lesson for me that I learned early in life.  Whew, at least I learned something early in life.

by wchurchill on Wed Mar 28th, 2007 at 04:44:19 AM EST
[ Parent ]
What's the total capitalisation of the US stock market?

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Mon Mar 26th, 2007 at 05:26:01 PM EST
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it depends of course on what stock markets (nasdaq, new york stock exchange, american, etc) you include, but this seems pretty logical and shows $13.4 trillion in 2001.  the markets are about 15% higher today, and there have been companies added, so a rough guess might be 20% higher than that $13.4 trillion.
by wchurchill on Mon Mar 26th, 2007 at 07:30:52 PM EST
[ Parent ]
there have been record equity withdrawals (via share buy-backs or companies going private again) in recent years.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Mar 27th, 2007 at 04:53:53 AM EST
[ Parent ]
the Wilshire index is still over $14.4 trillion


their site shows about 14.45 Trillion as of today.

by HiD on Wed Mar 28th, 2007 at 04:14:14 AM EST
[ Parent ]
where were you in 1987?  Or in 2000-2002 when the Dow dropped from 11,500 ish to 7500 ish.  The S&P is flat from 2000 to now.  1500-->800--->1450.  

I think the main reasons the markets have done so well the last 15 years are

  1. peace dividend.  we stopped wasting so much energy on miltary gee gaws (for a while) and fear abated.

  2. China/India among others finding a way to get hundreds of millions of people doing more than scratching a living out of the soil making a dollar a day.  

  3. General increases in productivity.

the benefits have not been shared fairly though.
by HiD on Tue Mar 27th, 2007 at 05:37:27 AM EST
[ Parent ]
I think it's impossible to talk about the markets' collective performance over the last fifteen years without getting into the Internet, which is sort of inherent to your productivity reference.  That's a benefit we still haven't fully enjoyed yet.  I've read in many places that Europe, for example, should see very strong productivity growth sometime in the next couple of years, as European businesses integrate it more into their business models.  That would seem to make sense, looking at the Internet's behavior in households.  (Americans originally were far more likely to be online than Britons, for example, but this is changing rapidly when we look to broadband.)

One major reason for why Wal-Mart has smashed companies like Sears and K-Mart into dust, aside from the utter incompetence of companies like K-Mart and the fact that the game has long passed Sears by, has been its strong integration of technologies to measure and control its inventory.  Wal-Mart has enjoyed, I believe, stunning productivity growth relative to its major competitors.  CostCo -- WallieWorld's big competitor in the Buy In Bulk market -- has, as well, if I'm not mistaken.

So there are very good reasons for the markets' solid gains.  Some of it was the result of too much hype, of course, back in the 1990s.  And, no doubt, that will happen again, because that's simply a fact of life in the stock market.  But, on the whole, I think the trend makes sense.  The primary role of Iraq has been to spook investors, who really and truly hate that sort of uncertainty, especially in a region as dangerous -- and, for now, as economically important -- as the Middle East.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Mar 27th, 2007 at 08:58:14 AM EST
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