This reminds me of the Nifty Fifty boom in the early 1970s. At that time, someone worked out that the P/E ratio of IBM relative to that of the S&P 500 as a whole implied that IBM would be soon be several times larger than the US economy.
But this is 2021. I suspect that the reason megacap stocks appear to be so overpriced now is because there is an implied put. There is a lot of uncertainty that would ordinarily be priced in, but markets know that whatever else happens, the Fed and the government will not and cannot let these companies fail.
In fact, it might even be said that there is another assumption underlying share prices, an assumption that laws and economic outcomes are rigged in favor of the megacaps. If enough institutions buy in, that prediction becomes a self-fulfilling prophecy.
I won’t scold you for doing the stock/flow comparison (market cap to GDP) but someone else might! Any chance you’re familiar with Bridgewater’s equity frameworks? This is very similar in flavor, and just as correct.
Yeah, stock-flow whatever. They're just measures of economic size. What matters is how much it has moved. More precisely, how much heavier at the top it has become. Still haven't read Dalio's analysis. Do you have a link?
Thank you for the writing, here are some beginner questions.
Question 1: what are the correlation between top-heavy stock market, income, inequality, and exports? (call back to Turchin)
Question 2: what is the best indicator for measuring top-heavy stock markets (calibrated to 0 being lack of oligopoly, 1 being absolute monopoly)?
Down the rabbit hole:
This reminds me of the Nifty Fifty boom in the early 1970s. At that time, someone worked out that the P/E ratio of IBM relative to that of the S&P 500 as a whole implied that IBM would be soon be several times larger than the US economy.
But this is 2021. I suspect that the reason megacap stocks appear to be so overpriced now is because there is an implied put. There is a lot of uncertainty that would ordinarily be priced in, but markets know that whatever else happens, the Fed and the government will not and cannot let these companies fail.
In fact, it might even be said that there is another assumption underlying share prices, an assumption that laws and economic outcomes are rigged in favor of the megacaps. If enough institutions buy in, that prediction becomes a self-fulfilling prophecy.
I won’t scold you for doing the stock/flow comparison (market cap to GDP) but someone else might! Any chance you’re familiar with Bridgewater’s equity frameworks? This is very similar in flavor, and just as correct.
Yeah, stock-flow whatever. They're just measures of economic size. What matters is how much it has moved. More precisely, how much heavier at the top it has become. Still haven't read Dalio's analysis. Do you have a link?
Here’s a paper they put out which has something of your approach in it https://www.bridgewater.com/research-and-insights/ray-dalio-stock-market-bubble