All over the world stocks are rising. In the US, the S&P 500 rose over the 2,000 mark for the first time in history. The Dow is over 17,000.
And if you want to buy a share of online TV network Netflix, Inc. (NASDAQ:NFLX), you will pay $144 for every dollar the company earned over the last 12 months.
If you bought the company outright, in other words, you’d have to wait until 2158 to earn your money back.
But this story is playing out from Timbuktu to Taiwan to Texas. Here’s the latest from Bloomberg:
‘Shares worldwide added more than $2.2 trillion in value since Aug. 7, according to data compiled by Bloomberg. Optimism that central banks will support economic growth sent the MSCI All-Country World Index up 3.8 percent from its low this month. The S&P 500 has risen for 10 of the last 13 days and the Nasdaq Composite Index is about 10 percent from an all-time high.
‘Global markets are surmounting crises in Ukraine, the Gaza Strip and Iraq as investors renew bets that stimulus will revive growth. The Stoxx Europe 600 Index posted its biggest two-day gain since April after European Central Bank President Mario Draghi signaled policy makers may consider introducing an asset-buying plan. Japan’s Topix index is near its highest level since January, rebounding from losses earlier this year.’
Put them all together, and publicly traded equities are now worth more than $66 trillion — just shy of total world GDP. That’s $12 trillion more than they were worth in the beginning of 2013…and it’s $30 trillion more than they were worth 10 years ago.
What has happened during the last 10 years to make stocks so much more valuable?
We remind readers that shares are titles to ownership of real assets and the earnings they produce. And in a competitive economy, they shouldn’t be able to diverge too far from the cost of creating those assets.
Typically, investors have paid from 10 to 20 times annual earnings for shares. But when they are bearish, as they were in 1982 and again in 2009, they will want to pay less than 10 times earnings. And when they are bullish, the sky’s the limit…but seldom more than 20 times.
Currently — except for China and Russia — almost all major country stock markets are closer to the top of the range than the bottom. With the S&P 500 now trading on a Shiller P/E (which looks at the average of 10 years of inflation-adjusted earnings) of 26.5.
What would make investors so bullish? And why would this bullishness extend to practically the entire globe?
After all, corporate incomes depend on corporate sales. And one corporation’s sales can only increase if a) it takes business from other corporations (which would mean no net increase for the world’s sales) or b) the world economy is growing.
But that’s the curious thing. As stocks have gone up… growth rates have come down, from a high of nearly 5% in 2009 to just 2% last year. Last year, in the US, stocks rose 10 times faster than the economy beneath them.
The old-timers tell us that ‘the stock market always knows more than we do.’ If that is so, what is it that the market knows that we don’t? Is there another Industrial Revolution coming? Are birth rates exploding?
Not as far as we can tell.
So, what’s behind the big run-up in asset prices?
Here’s our guess: Janet Yellen, Mario Draghi and Shinzo Abe.
As Chris Hunter pointed out yesterday: At the recent central bank meeting in Jackson Hole, Wyoming, Janet Yellen let it be known she was in no particular hurry to let markets discover prices on their own again. Instead, she’ll put prices where she wants them.
And that means setting interest rates at vanishingly low levels…and asset prices at in-your-face new highs.
Mario Draghi, meanwhile, is faced with a triple-dip recession in Italy, a flat economy in France and negative growth in Germany. From Bloomberg:
‘[S]aid Patrick Spencer, head of US equity sales at Robert W. Baird & Co. in London. “Draghi gave clear indication that he’s standing ready with further measures to stimulate growth and that’s helping overall sentiment.’
As for Shinzo Abe, the Japanese prime minister, he seems ready for any sort of mischief in the name of increasing inflation and GDP — including encouraging women to cut down trees!
Shhh…. No need to accuse us of male chauvinism, as though we had something against women doing hard labour. We don’t. In fact, we’re in favour of it. But if you could raise prosperity by increasing the number of female lumberjacks, half the world’s women would already be wearing plaid shirts.
Shinzo, Janet, Mario…
Surely there is a clever magazine somewhere readying a cover story…
The Committee to Blow up the World is the headline we propose.
For Markets and Money