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Stock Market Valuation Exceeds Its Components' Actual Value
An anonymous reader writes: James Tobin, a Nobel Prize-winning economist, developed a concept called "Q-value" — it's the ratio between two numbers: 1) the sum of all publicly-traded companies' stock valuations and 2) the value of all these companies' actual assets, if they were sold. Bloomberg reports that the continued strength of the stock market has now caused that ratio to go over 1 — in other words, the market values companies about 10% higher than the sum of their actual assets. The Q value is now at its highest point since the Dot-com bubble. Similar peaks in the past hundred years have all been quickly followed by crashes.
Now, that's not to say a crash is imminent — experts disagree on the Q-value's reliability. One said, "the ratio's doubling since 2009 to 1.10 is a symptom of companies diverting money from their businesses to the stock market, choosing buybacks over capital spending. Six years of zero-percent interest rates have similarly driven investors into riskier things like equities, elevating the paper value of assets over their tangible worth." Others point out that as the digital economy grows, a greater portion of publicly traded companies lack the tangible assets that were the hallmark of the manufacturing boom.
Now, that's not to say a crash is imminent — experts disagree on the Q-value's reliability. One said, "the ratio's doubling since 2009 to 1.10 is a symptom of companies diverting money from their businesses to the stock market, choosing buybacks over capital spending. Six years of zero-percent interest rates have similarly driven investors into riskier things like equities, elevating the paper value of assets over their tangible worth." Others point out that as the digital economy grows, a greater portion of publicly traded companies lack the tangible assets that were the hallmark of the manufacturing boom.
Now, that's not to say a crash is imminent — experts disagree on the Q-value's reliability.
Economics is a weird and wonderful science.
Always looking backwards, always telling us *why* something happened, never making future predictions.
In the days since Adam Smith penned his first thoughts on economics, engineers have taken us to the moon, physicists have split the atom, doctors invented antibiotics, philosophers invented human rights, chemists invented plastics, farmers quadrupled the per-acre food yield, programmers invented the internet, and much *much* more.
And economists, always backwards looking, now think that the Q-value might explain past crashes.
What a world we live in!
The problem with 'economics' is that the word is used to identify two mutually-exclusive concepts:
The scientific investigation into human responses to scarcity, and
Mathematical techno-babble designed to disguise the wishful thinking of politicians and the wealthy who own politicians.
By random chance, the two are occasionally the same thing.
Never mind that gold and silver were used as money for thousands of years before the printing press made it possible to issue fiat currency.
Compare for instance the prices for platinum and gold, two precious metals with very similar properties: Same frequency of occurrence in the Earth crust, same properties (density between 19-20 g per cubic centimeter, does not oxydate easily, can be cast and cold formed), same usages (mainly jewelry, some industrial usage, some coined or cast into bars to be stored as assets). Their prices have been so volatile recently, that platinum was about twice the price of gold, and vice versa within just a decade. Compared with that, the dollar/euro exchange rate is an example of long time stability.
Never mind that gold and silver were used as money for thousands of years before the printing press made it possible to issue fiat currency.
Nonsense. Gold and silver can be "fiat" currency just as paper money can be. Fiat currency just means that a currency derives part of its value from the government's declaration that it shall function as a currency.
For example, the U.S. government says that the "dollar" must be used to pay taxes. It could equally say that "gold" must be used to pay taxes, in which case gold's price would probably go up, since it would be more useful to pay for things with. That addition in value due to the government's endorsement is what produces "fiat" money.
People who don't understand what the term "fiat" means assume that "fiat" currency is always based on something that they consider "valueless" while whatever alternative "non-fiat" currency has some sort of "inherent value."
Except who determines that "inherent value"? Where does it come from? Food and water will always have some inherent value for humans, since they need it to survive. Other goods that fulfill basic needs (shelter, protection, etc.) also generally have a pretty basic value.
But gold only has value because it's rare and shiny, but there are many things in the world that are rare and shiny. Under sufficiently dire circumstances (e.g., being lost in the desert), your gold brick might be worthless compared to a canteen of water.
In sum, other than basic human needs, things only have value because as a society we agree that they have value. If a society starts valuing other things, the old "inherent value" items will lose value. Do I think it's likely that gold will become worthless anytime soon? No -- but its price in relation to other goods has and will fluctuate the same way a supposed "fiat currency" does. It's true that in sufficiently dire circumstances (e.g., hyperinflation) "fiat currencies" may lose significant value.
But in sufficiently dire circumstances, "all bets are off," i.e., what people may want is to trade for food or water or weapons or whatever -- they won't want gold unless they know that someone else will be willing to take it in exchange for food or water or weapons (and that's not always guaranteed in sufficiently dire circumstances).