Author Topic: Wilshire 5000 market cap / GDP exceeds dot-com peak  (Read 5398 times)

RuleNumberOne

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Wilshire 5000 market cap / GDP exceeds dot-com peak
« on: January 09, 2020, 10:00:45 AM »
Yeah, I know, GDP is not a good metric. But it is more accurate than non-GAAP adjusted earnings.

https://fred.stlouisfed.org/graph/?g=qLC

Trump has ordered drones to keep circling above the houses of FOMC members. Jay Powell hasn't come out of his house since he heard the Iran news and is even avoiding sunlight.

Richard Clarida reassured everyone (from his basement) that the Fed will not hike rates - i.e. that he is worried about low inflation. In Silicon Valley, oil change prices go up 20% every 6 months, healthcare providers have promised and are delivering a 10% price hike every year, home price growth has resumed.

Debt held by Wilshire 5000 would be much higher than the dot-com peak, meaning the EV would be much higher.


ValuePadawan

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #1 on: January 09, 2020, 11:21:40 AM »
The link you provided only shows up to 2014 as its default adjust it to 2020 and sit down before you do. I always understood the important thing to look at was GNP not GDP. That being said the GNP still is higher than it was in the dot com bubble but I think it's better apples to apples.

https://fred.stlouisfed.org/graph/?g=oQt

Don't forget to adjust the time scale to now.

stahleyp

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #2 on: January 09, 2020, 12:10:07 PM »
If you're so bearish, why be 100% stock?
Paul

RuleNumberOne

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #3 on: January 09, 2020, 07:02:12 PM »
Yeah, thanks. We need to click on "Max". Pretty staggering that the Fed vice-chair reassured everyone today that they won't raise rates.

Wilshire 5000 / GNP at all-time highs, though it first crossed the dot-com peak in Q3 2018.

US corporate debt at all-time highs.

The link you provided only shows up to 2014 as its default adjust it to 2020 and sit down before you do. I always understood the important thing to look at was GNP not GDP. That being said the GNP still is higher than it was in the dot com bubble but I think it's better apples to apples.

https://fred.stlouisfed.org/graph/?g=oQt

Don't forget to adjust the time scale to now.

RuleNumberOne

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #4 on: January 09, 2020, 07:10:33 PM »
stahleyp, I am mostly cash today, but i might get back into the market any time. We have a very weak Fed Chairman - no courage, no credibility, no confidence, easily bullied by the likes of Trump/Bullard/Cramer.

Greenspan raised rates to 6% and inverted the yield curve at a lower level for the Wilshire 5000/GNP ratio (and higher unemployment). Paul Volcker said if you don't want deflation, don't blow bubbles. Volcker also thought the obsession over 2% inflation was ridiculous. This is either in Volcker's latest book or some WSJ/FT op-ed he wrote before he died.

This is a special bubble, one so big that central banks are too scared to pop it and are doing everything they can to preserve the bubble. Europe is worse off than it was in 2007-2008. The debt to GDP in US+Europe is higher than 2008. US corporate debt ratios are at all-time highs.

The Wilshire 5000/GNP first exceeded the dot-com peak in Q3 2018. The Fed has only lowered rates since then.


If you're so bearish, why be 100% stock?
« Last Edit: January 09, 2020, 07:44:02 PM by RuleNumberOne »

thepupil

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #5 on: January 09, 2020, 07:17:54 PM »
Which companies in the S&P 500 are overlevered? What percent of the market cap and earnings power do they comprise?

Banks are in the best shape they’ve been. Publicly traded corporate America is not overlevered, in my opinion. Debt has been well termed out. Rates are super low, interest coverage is high.

Show me otherwise. PE/LBO’s are another story, but not big companies

https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/buybacks-have-exceded-free-cash-flow-for-the-first-time-since-the-financial-cris/msg377459/#msg377459

RuleNumberOne

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #6 on: January 09, 2020, 07:51:53 PM »
Look at the graph:
https://www.dallasfed.org/research/economics/2019/0305.aspx

Overlevered depends on the rate. If the rate is zero, there is no interest expense, and nothing overlevered (like Italy).


Which companies in the S&P 500 are overlevered? What percent of the market cap and earnings power do they comprise?

Banks are in the best shape they’ve been. Publicly traded corporate America is not overlevered, in my opinion. Debt has been well termed out. Rates are super low, interest coverage is high.

Show me otherwise. PE/LBO’s are another story, but not big companies

https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/buybacks-have-exceded-free-cash-flow-for-the-first-time-since-the-financial-cris/msg377459/#msg377459

Cigarbutt

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #7 on: January 10, 2020, 06:13:52 AM »
^This is not a black or white topic (corporate leverage) and a fundamental reflex is to reflect on individual holdings in one’s portfolio and not ‘worry’ about aggregate numbers.

Despite the above, this may be relevant. First step, strengthen the opposing view’s argument. Yes, banks are in a much better shape and, for corporate debt, bond issues have taken the lead and depository institutions have not really participated in the rising ‘loan’ presence (especially leveraged loans, CLOs etc). Yes, averages, in a way, don’t tell much but (according to S&P sources), of the about 2000 issuers that are graded in the US, 25 firms hold about 50% of the cash and smaller firms tend to show increasingly poor coverage ratios. Also, if one focuses on the average debt service ratios, historical norms are respected and, of course, that’s an input used to justify also the real estate market dynamics in Canada (and other countries), the public debt levels etc.

However, in balance, the corporate debt level has reached very unusual levels and for this level to be maintained requires a relatively unusual set of assumptions.

-----

Personal anecdote (so extremely limited value)
When I graduated in the 90’s, for various reasons, most of my ‘colleagues’ went back or decided to go to the US and I kept contact. This was also a fundamental source of ‘bottom’ sentiment when, for instance, I became interested in the US real estate phenomenon in the years 2000s. These acquaintances and ‘friends’ had strong earning power, strong debt-service ratios and basically signaled that averages didn’t really matter. This group was exposed to real estate (sometimes in more ways than one) and they really hurt when prices came down and, in fact, have barely recovered. When I spoke to them around the holidays (most are doing reasonably well, average for their group I guess), it was mentioned that the relief had come in part from the booming equity markets. It would have been inappropriate to discuss corporate leverage during those conversations and, because of social conventions and the always present uncertainty, I did not tell them that, maybe, again, I may end up buying what they’re selling. Most of the times, I just shut up but anonymity alters conventions.
FWIW, I think thepupil will do very well whatever the circumstances but that may not be true for the average (corporate or not) citizen.

RuleNumberOne

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #8 on: January 10, 2020, 09:31:20 AM »
The 13 states in the West were found by the government to have an inflation around 3% over the last two years. That implies the remaining states dragged down the inflation average. (See the link below).

https://www.bls.gov/regions/west/news-release/consumerpriceindex_west.htm

Anybody who lives in Silicon Valley can check their credit card statements from a few years ago and see that they were paying around $35 for an oil change. Now the prices have doubled to around $70 in just 3-4 years.

Why does the Fed expect the NASDAQ boom to generate inflation in deserted states like Alabama or Mississippi? If inflation is weighted by GDP, it should be easily above the Fed's 2% target.

If GDP-weighted inflation is found to be above 2%, the pile of debt will catch fire. Poof!

^This is not a black or white topic (corporate leverage) and a fundamental reflex is to reflect on individual holdings in one’s portfolio and not ‘worry’ about aggregate numbers.

Despite the above, this may be relevant. First step, strengthen the opposing view’s argument. Yes, banks are in a much better shape and, for corporate debt, bond issues have taken the lead and depository institutions have not really participated in the rising ‘loan’ presence (especially leveraged loans, CLOs etc). Yes, averages, in a way, don’t tell much but (according to S&P sources), of the about 2000 issuers that are graded in the US, 25 firms hold about 50% of the cash and smaller firms tend to show increasingly poor coverage ratios. Also, if one focuses on the average debt service ratios, historical norms are respected and, of course, that’s an input used to justify also the real estate market dynamics in Canada (and other countries), the public debt levels etc.

However, in balance, the corporate debt level has reached very unusual levels and for this level to be maintained requires a relatively unusual set of assumptions.

-----

Personal anecdote (so extremely limited value)
When I graduated in the 90’s, for various reasons, most of my ‘colleagues’ went back or decided to go to the US and I kept contact. This was also a fundamental source of ‘bottom’ sentiment when, for instance, I became interested in the US real estate phenomenon in the years 2000s. These acquaintances and ‘friends’ had strong earning power, strong debt-service ratios and basically signaled that averages didn’t really matter. This group was exposed to real estate (sometimes in more ways than one) and they really hurt when prices came down and, in fact, have barely recovered. When I spoke to them around the holidays (most are doing reasonably well, average for their group I guess), it was mentioned that the relief had come in part from the booming equity markets. It would have been inappropriate to discuss corporate leverage during those conversations and, because of social conventions and the always present uncertainty, I did not tell them that, maybe, again, I may end up buying what they’re selling. Most of the times, I just shut up but anonymity alters conventions.
FWIW, I think thepupil will do very well whatever the circumstances but that may not be true for the average (corporate or not) citizen.

RuleNumberOne

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #9 on: January 10, 2020, 09:50:48 AM »
The 13 states in the Western region contribute 22.1% of US GDP. With a 3% inflation rate, the Western region alone would contribute 0.66% to the overall total if inflation were weighted by GDP.

https://en.wikipedia.org/wiki/List_of_U.S._states_and_territories_by_GDP