Is The S&P Really Overvalued?
Being British, I have no dog in the US Presidential Candidate fight, but something said today about Donald Trump made me think. The UK's Daily Mail correspondent covering The Don's stop in Iowa wheeled out a slight on Combover's business acumen:
"Critics often claim that Trump's net worth is put by the Bloomberg financial service at $2.9 billion. Had he merely invested his inheritance in a stock market tracker fund, he'd have more than $8 billion."
[Does "critics often claim" mean "one of Michael Bloomberg's spinmeisters just told me?" Never mind, let's crack on.]
Far from a kill-shot, for me that represents exactly what's gone wrong on both sides of the Atlantic. The Trumpster is sneered at for building a $2.9 billion fortune by making things, employing people and satisfying needs, when he could have sat back and simply played with money - preferably other people's money, like the top 25 hedge fund managers who averaged a billion dollar payout each in a single year (2013). Can this wonderful Wall Street game go on forever? Are workers jerkers?
At first sight, it might seem so. Depending on how you stack the facts, you could argue that far from being heavily overbought, the S&P 500 is somewhere in the middle of its long-term channel!
Between 1950 and 2010, the population of the USA doubled, its nominal GDP grew 50 times and the S&P (4th quarter) grew 60 times. The relationship between the stock market and the economy as a whole is variable, but its boundaries are between c. half and double:
However, GDP is a terrible measure of the health of the economy. It doesn't distinguish between earning $100k and spending £50k, as opposed to earning $50k and spending $100k. Here is the ratio of Total Credit Market Debt Outstanding to GDP over the same six decades (data from here):
That ratio was almost exactly the same in 1975 as in 1964, but from then on it has soared.
So the question is, is the debt sustainable? If it were forced to return to the level of the mid-1970s, then perhaps both GDP and the market would crater.
I'm not a Fed debt hawk. Government debt is cheaper and safer than personal indebtedness, and better still never seems to have to be repaid! The squeals should be about total debt and especially the residential mortgages, car financing, student loans and so on that drag ever heavier on the necks of the younger generation.
And underneath it all, the withering away of the nations' makers and doers, the progressive transfer of productive capacity abroad, and the shift to foreign ownership of domestic assets.
DJT is talking to the people who remember Fred and Wilma Flintstone and yearn for the return of that happy, settled life. I don't blame them.
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