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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.
a sandwich is more valuable than two slices of bread.. and it's ingredients: it's component assets.
Surely* this is not a surprise? Am I missing something here?
*Don't call me Shirley
History repeating itself, because the people who know history are shouted down by those not willing to learn from it.
The problem is, that "last time" people started shouting "bubble" in 1996. Then again in 1997, 1998, 1999, and 2000. Then in 2001, the crash came, and they said "I told you so", despite the fact that the bottom of the crash was still higher than when they first started shouting.
If you really think you are so much smarter than the market, then feel free put your money where your mouth is, and sell some shorts. Then when the crash comes, right when you predicted, you can come back here and brag about your new yacht.
"it is probably the best single measure of where valuations stand at any given moment." - Warren Buffett
http://www.advisorperspectives...
Both Buffett Indicator And Shiller P/E Continue To Imply Long Term Negative Market Returns; 2015 Market Valuation
http://www.forbes.com/sites/gu...
Yes, the market is looking a bit frothy. Locally here in NYC, assets such as real estate are looking pretty high...
Effectively, they have been. The Federal Reserve has been keeping interest rates at levels that should be causing significant inflation. The goal is to prevent a deflationary spiral by pumping up the money supply: when you can borrow lower than inflation, people should borrow and pay it back with tomorrow's less-valuable dollars.
They've been doing that for nearly a decade now, and it has successfully prevented the deflation, but it's a little baffling that it hasn't touched off more inflation than it has. The consumer confidence is hovering around 100, which should be a decent level for a stable economy. Unemployment is still higher than we'd like but it's well off the bust years.
My hypothesis is that people have gotten too used to boom economies. If people aren't getting triple-digit returns they don't want to invest. What we've got is a very stable economy, exactly the kind that people should be able to take risks in, but without a real estate boom or dotcom boom or other scheme to get people to dump their whole life savings and then borrow on margin, they just don't bother.
Stability means that those who have been left behind continue to be left behind. That's the worst thing that can be said about the economy. There just isn't an engine of growth.
There are a lot of other factors, I'm sure. Europe went mostly for less aggressive measures, and their economies haven't come out as well, meaning fewer markets there. China's growth has ceased to be ridiculous. Oil prices should have sparked some kind of boom, and I've got a nasty cynical feeling that Wall Street is ideologically predisposed not to invest in the emerging energies as much as they should.
But a lot of it is the catch-22 you mentioned. Consumers and investors each seem to be waiting for the other to go first. We've been technically out of recession for more than five years, and it's gotten past the point where the recovery could be called mere accounting. It's real. But America just hasn't gotten its feet back under it in the way that it usually does.
All those things used to be "the conventional wisdom", but nowadays all of those things have been proven to be quite volatile.
I never believed in "making money from money"... I guess that's called "financial engineering" nowadays? That kinda insults me as an engineer, since we generally abide by physical laws. With financial laws, you're pretty much playing games using other people's rules. Other people who profess to love money above all else, and play the game to generate more money out of "nothing", and if you would just give them some of your money to play with, they'll help you "grow" your money too for a cut of the "take". But they don't add any value to the economy... they "multiply" it. And then they can just take "a little bit off the top", because no one will notice.
I'd love to invest in actual production... you know, things that add value and subtract costs instead of just "multiply" monopoly money. What options are there for that kind of thing?