We Are in The Biggest Global Equity Bubble Ever

The comments below are an edited and abridged synopsis of an article by The Gold Observer

Averaging stock market capitalization to GDP ratios from 17 developed economies over the past 150 years shows that the world has never experienced an equity bubble of the current magnitude.

We Are in The Biggest Global Equity Bubble Ever - BullionBuzz - Nick's Top Six
Use a needle to pierce the stock market bubble, the bubble economy

The weighted average of 17 stock market cap to GDP ratios reached 162% at the end of the third quarter of 2021, which is the highest since 1870. It’s unlikely it was higher previous to 1870, because economies were not as intertwined then. In addition, before 1870, countries were commonly on a metallic standard that prevented long periods of excessive speculation.

During the dot.com bubble in 2000, the weighted average of the developed world market cap to GDP ratio reached 123%, and during the credit bubble in 2008 it hit 116%. Before the 1980s, it only once transcended 75%. Clearly, something drastically changed in financial markets around the 1980s. 

Why are stock markets in a bubble, as opposed to fairly valued in a new economic paradigm? Because if you look at stock market cap to GDP levels in the chart included, and every peak in the past 150 years was a bubble, why wouldn’t the current peak, higher than every previous peak, be a bubble?

The author discusses data published by Dmitry Kuvshinov and Kaspar Zimmerman. Their conclusion is that the 1980s stock market caps in developed economies grew roughly in line with GDP. Hence, the weighted average market cap to GDP ratio hovered around 50% for 110 years. Since the 1980s, market cap growth accelerated faster than GDP, caused by increases in stock prices, not issuance growth. The key reason is a profit shift from other parts of the economy towards listed firms. And higher profit margins have mostly been aided by lower interest expenses.

In the US, stock market cap to GDP ratio peaks over the past 120 years have always been followed by a higher gold price. After the peak in 1929, the 1970s, 2000 and 2008, the US dollar devalued against gold.

Leave a Reply

Your email address will not be published.