The Breakdown - US Stock Market Cap to GDP Reaches 190%, Eclipsing Dotcom Bubble High

Episode Date: September 1, 2020

Today’s episode of The Breakdown looks at the stories the stock market is trying to tell, including: New all time high in total market capitalization to GDP ratio (higher than dotcom bubble)  ��No precedent for how high” valuations can go  Fed denies asset bubble; intimates it wouldn’t care about asset bubbles if full unemployment comes with it Bezos at $200,000,000,000 Percentage of stocks traded by individuals reaches all time high of 20% Robinhood leads in FTX complaints Buffett’s Japan trading firm bet  

Now, some of you smart math folks may be saying to yourself, well, it's probably more about the GDP cratering in the context of COVID-19 than it is about somehow the stock market going up so much more. The problem with that is that using pre-pandemic GDP, the ratio is still 170%, an all-time high, higher than that March 2000.com bubble peak. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, BitStamp, and nexo.io, and produced and distributed by CoinDess. What's going on, guys? It is Monday, August 31st, and today's episode is sort of a super brief, where I'm going to share a lot of numbers and a lot of stories, just even more briefly than usual. And the common theme is the stories the stock markets are telling us right now.

And I thought that this was a good time for this episode, given that we're in that classic transition from summer to fall, trying to wrap our heads around everything going on, looking, I think, uneasily at what's going to happen with the markets as we go into this election season. So it should be a pretty interesting way to try to get a sense of just what's out there and what's happening. Let's start with the number that this episode was named for. Sven Henrik, who's Northman trader on Twitter, tweeted out a chart this morning showing that the market cap to GDP ratio has reached 184.7%. That is the ratio of the total market capitalization of U.S. companies to the total GDP. That 184.7% number compares to around 130% at the start of the year.

According to a different tweet from Liz Ann Saunders, who's the chief investment strategist at Charles Schwartz, it's actually a hundred and ninety percent, with the total market cap of all U.S. stocks hovering just under 37 trillion. The previous high of 167 percent was in March of 2000, which was obviously at the peak of the dot-com bubble, so a precedent that isn't really great. Some of you smart math folks may be saying to yourself, well, it's probably more about the GDP cratering in the context of COVID-19 than it is a lot of, you know, about somehow the stock market going up so much more.

The problem with that is that using pre-pandemic GDP, the ratio is still 170%, an all-time high, higher than that March 2000.com bubble peak. Now, obviously, a key element in this equation has to do with valuations, and Michael Santoli at CNBC tweeted out commentary from Tony Dwyer at Canacord, who said this morning that he is, quote, withdrawing SPX targets because there is no preference. to how high valuations can go. Dwyer still thinks this is a long-running expansion backed by a Fed

intent on staying accommodating indefinitely. This is the next point I wanted to bring up about to what extent this is an asset bubble. The argument that Dwyer was making just a second ago is that there is an asset bubble that is effectively aided, abetted, and enabled by Fed policy. Interestingly, Neil Kashkari, the Fed governor, was on Joe Wisenthal and Tracy Alaw's odd law. lot show today, and Nick Carter commented on it saying, quote, my big takeaway from Neil Kashgari's Oddlots episode, even if asset inflation is real, which is something he doesn't explicitly concede, it's a mere externality of maintaining full employment and hence worth accepting. So Nick is effectively saying here that Neil is arguing that even if there were an asset

bubble, which he's not willing to concede, that asset bubble would be worth it if, it came with full employment at the same time. Now, given that, Nick's next point is really key. He writes, take this to a logical extreme. A fully employed society where the bottom 50% has guaranteed employment, say, pumping gas, while asset-owning oligarchs increase their share of wealth and the genie coefficient approaches one. Is it still acceptable under this framing?

The point that I think Nick is making and making really well is that there's a question here, and it's a question of the type of society we want to live in. Which brings us to our next number, Jeff Bezos at $200 billion. Last week, Jeff Bezos, the founder of Amazon, became the first person ever to be worth $200 billion. This instantly, as you might imagine, became an immense symbol for inequality. Robert Reich tweeted out, Today, Jeff Bezos Net Worth hit $200 billion, and Elon Musk's hit $100 billion. Yet 30 million Americans report that their households didn't have enough food in the past week.

American capitalism is off the rails. As if to put a nice exclamation point on this, protesters put up a guillotine in front of Bezos' house. This type of symbolism is incredibly important, especially moving into this election season where the stakes of this type of symbolism are higher than ever. What's going on, guys? I'm excited to share that one of this month's breakdown sponsors is Crypto.com. Crypto.com offers one of the most cost-efficient ways to purchase crypto out there, as they've just waived the 3.5% credit card fee for all crypto purchases. What's more? With crypto.com's MCO Visa card, you can get up to 10% back on things like food and grocery shopping.

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and it has to do with individual stock trading at all-time highs. In the first half of 2020, individual investors accounted for 19.5% of shares traded in the U.S. stock market. That's up from 14.9% last year and double where it was in 2010. On some days, the number has been as high as 25%. Now, importantly, and this is one of the big questions for people, is, are these folks actually moving markets? It seems to be not the case for huge large-cap stocks, but there is some evidence that there is correlation between popularity with individuals and price around some of the smaller stocks and the cases we've heard be most notable this year, the Kodaks and Nikolas. Still, what's interesting to me is to see these numbers validate what has been a key market

narrative of the increase in action of individual investors. Another number that relates to that as well is that Robin Hood is not just leading the bunch when it comes to the narrative of individual investors, it's also leading in the complaint column as well. The FTC is getting far more complaints about Robin Hood than any of the other similar platforms right now, more than 400 this year, 4753 in fact, which is about four times as many as Schwab and Fidelity. Now, the easiest explanation for this is much less about Robin Hood and much more about Robin Hood's clientele who often don't know exactly what they're getting into. They're playing with financial tools that they simply don't really understand. Now, if there is a narrative anchor around

Robin Hood's neck, it is this. It's that the idea that they make it so easy to trade isn't necessarily a good thing. It can, in fact, be a bad thing because people start doing things that they're not prepared for and betting money that they can't afford to lose. Expect this to be a bigger part of the conversation to the extent that this percentage of investors in terms of what they account for of U.S. shares traded continues to grow. Last up, I want to talk about a different market activity. I want to talk about Buffett's bet in Japan. Buffett's Berkshire Hathaway has quietly put in about $6 billion into five Japanese trading houses, taking about 5% stakes. in them. And I'm seeing a lot of chatter about this as diversification out of USD-priced assets.

This certainly seems credible as Buffett has been vocal about his complaint of how expensive things are right now. At the same time, David Fickling on Bloomberg points to a simpler explanation, which comes to Buffett's love of free cash flow. Fickling writes that of the 10 companies that produced more than $2 billion of free cash flow at a yield of more than 10% while trading at a discount to book value, three of them are Japanese trading houses. In other words, these actually are just the type of value investment that Buffett loves. The interesting thing about this, however, is that the narrative machine is already churning on this one. Is the new value trade to be found away from the U.S., away from U.S.D. denominated assets and in the global markets.

If that narrative takes hold, that could be extremely interesting in terms of behavior that follows. So I think that's a good question to leave on. That's a fun question to keep our eye on as we head into September. It's been a crazy August, and I am certainly looking forward, although not without some trepidation to what this fall has in store for us. So until tomorrow, guys, I appreciate you listening. Thanks for your ratings and comments. Thanks for your engagement on Twitter. I appreciate you all. Let's dive into fall.

And until tomorrow, guys, be safe and take care of each other. Peace.