Friday, September 16, 2011

Global Market Capitalization

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.


K.M. said...

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.

In my opinion, the chance for innovation to achieve ever larger energy efficiency gains will drive the growth of the future here in the U.S. and elsewhere, that Apollo project, so to speak. Growth is far from over.

But, problems lie in our ineffectual lobbyist driven governments, corporatism including a too-large economic sector, all of which will lead to growing future corruption and underground economies. If we are lucky, improved future leadership might help, however. (Eliz Warren comes to mind.)

Michael R said...

"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"

You are confusing two different things. One is the instantaneous value placed on a marginal share of future global cashflows, as measured by a trade on the open market, which is the market price. It's marginal and instantaneous and circumstantial and not even necessarily rational:

The other is the, shall we say, "best information buyout value" of future cashflows from global capitalism (e.g. if a quantum-computing private equity fund from Alpha Centauri were to make an all-cash offer for global capitalism), and this divided by the number of shares.

The efficient markets hypothesis makes no claim about the stability vs. volatility of the relationship between the two. It only claims that your own opinion about the direction of the first is no better over time than that of the market as a whole.

The question probably should be, really, why isn't the market price / GDP volatility ratio even greater:

Anonymous said...

We already have the breakthrough technology to completely replace fuel uses of oil (leaving non-fuel uses such as fertilizer and plastics driving demand). It's embodied in Patent 7,816,601 and described at The only impediment to implementation is investment capital. We don't need a change of leadership in this country---we just need to clean house in DC and get rid of all of the looters and moochers who are keeping us from realizing our potential.

With thermopower, electricity will be essentially zero cost. That will open up a number of fields, such as recovery of minerals from seawater, desalination of seawater to irrigate deserts, cheap access to LEO, and others.

Mr. Sunshine said...

The first graph, Market Cap, looks like a "head and shoulders" to me ... not generally an indicator of good times ahead.

Anonymous said...

You can see a clear Head and Shoulders pattern in the stock market that's taken more than a decade to play out on my blog at Monster Head and Shoulders Stock Market Top. Most only look at prices, but a true H&S pattern must have confirming volume, which this one does.