Friday, September 16, 2011
This morning I stumbled across some fascinating data from the World Federation of Stock Exchanges which covers total market capitalization of every stock market in the world so that it's possible to form an impression of the entire global capital situation.
There's a lot one could do, but I have distilled out two graphs for your viewing pleasure. The first, above, shows the ratio of total global market capitalization to GWP (gross world product). It's tempting to interpret this as a kind of price to revenue ratio for global capitalism but that's not quite right since a significant fraction of goods and services are created by private (especially small) businesses and by governments. So we would really have to multiply by some slowly changing factor that I'm guessing is somewhere in the neighborhood of 2 to get a price to revenue ratio for publicly traded firms.
The obvious features of the graph are the following - an overall upward trend, spikes in 2000 and 2007 with huge falls in the recessions in between and partial recovery in 2010. I am guessing that the overall upward trend may reflect in part fundamentals: that during this era of globalization and automation firms have been able to extract more profits from their operations relative to the share given to workers. Thus the global corporate profit stream has been growing more valuable.
The volatility seems excessive. It can't really be the case that the events of 2000 or even 2008 signal factor 30% or 50% fluctuations in the value of future cashflows from global capitalism (unless you want to interpret the great recession stock market loss as reflecting a probability 0.5 of future cashflows being zero). I think this reflects Shillerian excess volatility.
Whither the future? Peak Oil end-of-growthers would presumably argue that with future cashflows shrinking, global capitalism should be worth less and less. The retiring of the baby boom in Europe and the US would also suggest a downdraft as people and institutions sell their stock in order to fund retirement while the generation behind them to buy it is smaller. On the other hand, the ongoing trend of globalization and automation would argue that capital might be able to extract a larger and larger fraction of global value and thus stocks might become more valuable in the aggregate.
I'm not sure myself that peak oil is going to end growth as much as shift it to regions of the world that are more oil-efficient or oil-exporting. It's worth looking in a little more detail at the regional distribution. This next graph shows the fraction of total global market cap in four regions: the US, Europe, Japan, and the rest of the world:
The most striking things are the dramatic collapse of Japanese equities after 1990 - from one third of global market cap to well below 10%, and the sharp rise of "Rest of the World" after 2000. The US peaked as a total share in 2000 as a result of inventing the Internet. It has been declining since and in my opinion is likely to decline further as the US continues to fail to come to grips with the major challenges it faces. European firms have been relatively constant in total market cap share but presumably the current institutional ferment in Europe is likely to have a negative effect at least for the next few years.