Friday, January 4, 2019

International Comparisons of Equity Markets and Economic Growth

I don't really have anything interesting to say about these things, but I was comparing equity markets from some of the "housing bubble" countries, and I realized that while the US market has basically doubled from its pre-crisis high, Canada, Australia, and the UK all remain below it (in dollar terms, using US-based national ETFs).


idiosyncraticwhisk.com   2019
Maybe it's not that interesting.  Maybe, the US, Canada, and Australia are all basically moving in the same direction, and Canada and Australia had equity booms in 2007 because they are highly weighted in commodities.  And, maybe the UK has suffered from the double whammy of being the financial center for a stagnant continent.

But, at first glance, this throws me a bit for a loop.  My story is that first our economy was being held back by urban housing constraints, and now it is being held back by credit market constraints.  Both constraints, as far as I can tell, have been more severe than the constraints in the other countries.  Certainly the constrained mortgage market has been.  Yet, during the decade where our banks have been unable to fund housing and rising rents are reducing real economic growth, we are the outlier with fantastic equity growth.

Now, I can tell a just-so story here - that the housing problem costs households but it actually protects urban firms from competition to the extent that their host cities maintain a geographic monopoly on their core networks of skilled labor.  And much of those firms' profits are from overseas revenues.  The rising stock market is somewhat divorced from the broader economy, and housing is part of it.  But, I'm not sure I have a way to confirm that that isn't an ad hoc story.

Source
Here are graphs of GDP growth and unemployment rates.  Here, clearly Australia is the winner and the UK is the loser.  It's a pretty stark contrast between Australia's straight-as-a-post GDP growth and the collapse of its equity market during the crisis.  But, again, this is probably mostly due to the economics of commodities.

Source
On the unemployment rate, the US was the clear loser during the crisis, which I would attribute to the collapse of the construction sector after the mortgage industry was fettered and to less stabilizing monetary policy.  Although, real GDP didn't drop particularly sharply compared to the others.

But, unemployment has improved with the rising stock market, even though GDP (relative to the others) has not.  The same can be said for the UK.  Unemployment has been surprisingly positive there even though both GDP growth and the stock market have been poor.

Broadly speaking, I have spent most of the past few years double checking the conventional narratives about what has been happening economically, and I have become accustomed to finding data that decisively bends convention over and paddles it across the rear.  This is an unusual case where the data doesn't easily form a story that jumps out with a clear explanation.

Maybe part of what is going on here is that stock markets map to where the securities are traded, and that isn't very correlated any more to where the value is added.  Maybe stock markets just aren't good proxies any more for domestic production.  Not because of old shibboleths like "the stock market isn't the economy", but because the stock market is basically representative of parts of the economies of various locations around the world.  They are more representative of sectors than of geographical areas.

7 comments:

  1. You make an interesting observation that stock markets may be becoming disassociated with domestic economies. Apple recently declared that a weak Sino market is the reason for its sales slump. GM makes more cars in China than the US. BlackRock, which is publicly held, and which is the world's largest investor, is heavily exposed to China.

    China has had a great run, so perhaps we are seeing the US stock market respond to that.

    On the other side of the coin, the US runs chronic current-account trade deficits. I guess conventional macroeconomics is exported money is axiomatically reinvested in the US. About 35% of US stock market capitalization is owned by foreigners, and that ratio is constantly rising.

    Perhaps residential property values are driven by rents, but as we know PEs on stocks can wander all around.

    The IMF has posited that chronic and large current account trade deficits can lead to asset bubbles.

    So maybe the China story and the imported money story are an answer to why the US stock market responded differently than some other foreign stock markets.

    ReplyDelete
    Replies
    1. "About 35% of US stock market capitalization is owned by foreigners"

      Is it that high? I thought foreigners tended to invest in fixed income.

      Delete
  2. Opinion | Trump's $700 Billion Gift to Wealthy Foreigners - The New ...
    https://www.nytimes.com/2017/10/26/opinion/trump-taxes-wealthy-foreigners.html
    Oct 26, 2017 - Tax cuts: They're not just for American plutocrats. ... By Paul Krugman ... secretary, warned that stocks will crash if Congress doesn't pass tax cuts. ... that everything is different because we're now part of a global financial market. ... around 35 percent of U.S. equities are now owned by foreigners, triple the ...

    --30--

    Yeah, 35% and rising----as would be expected, in some regards. Interest rates hardly warrant buying bonds, unless the "fight to safety" factor is going on.

    The figure may be higher, I suspect. In real estate and in private-equity shops, there are a lot of local general partners who invest on behalf of the (majority owner) limited partners, who are offshore.

    I wonder how this reality is captured in official figures. For all the world, it looks like a Los Angeles-based financial shop bought Office Building X, or took an equity stake in Company Z.

    For the xenophobic crowd, a great scare line out there maybe within 10 years. "Did you know that at all those 7,000-listed US companies, all the employees of Apple, GM, IBM, Johnson & Johnson, Microsoft, or BlackRock are working diligently....but largely for the ultimate benefit of foreign shareholders?"

    Some truth in it too.....

    ReplyDelete
  3. Opinion | Trump's $700 Billion Gift to Wealthy Foreigners - The New ...
    https://www.nytimes.com/2017/10/26/opinion/trump-taxes-wealthy-foreigners.html
    Oct 26, 2017 - Tax cuts: They're not just for American plutocrats. ... By Paul Krugman ... secretary, warned that stocks will crash if Congress doesn't pass tax cuts. ... that everything is different because we're now part of a global financial market. ... around 35 percent of U.S. equities are now owned by foreigners, triple the ...

    --30--

    Yeah, 35% and rising----as would be expected, in some regards. Interest rates hardly warrant buying bonds, unless the "fight to safety" factor is going on.

    The figure may be higher, I suspect. In real estate and in private-equity shops, there are a lot of local general partners who invest on behalf of the (majority owner) limited partners, who are offshore.

    I wonder how this reality is captured in official figures. For all the world, it looks like a Los Angeles-based financial shop bought Office Building X, or took an equity stake in Company Z.

    For the xenophobic crowd, a great scare line out there maybe within 10 years. "Did you know that at all those 7,000-listed US companies, all the employees of Apple, GM, IBM, Johnson & Johnson, Microsoft, or BlackRock are working diligently....but largely for the ultimate benefit of foreign shareholders?"

    Some truth in it too.....

    ReplyDelete
    Replies
    1. I think that in the long run, after tax corporate profits aren't very sensitive to tax rates. Mostly, lower corporate taxes will lead to higher local wages and lower prices.

      On the margin, savings decisions are based on net after tax returns.

      Delete
  4. Yes, but the reason I posted the link was that you wanted to know if 35% of US stock market capitalization is owned offshore....

    Krugman's leftish response is not my response. I was a mild fan of corporate income tax cuts, through I would prefer migrating away from income taxes entirely, to property, pollution, sales and import taxes.

    For me, it will be a bit unsettling when Apples, GMs, BackRocks etc. not only have to keep their skirts clean as seen by the Communist Party of China, but then are mostly owned offshore.

    The abased response to the Khashoggi killing is a window into the future?

    The multinationals can pour unlimited money into think tanks, foundations, academia, media, trade assocIations, lobby groups, and even political campaigns.

    They control the narrative on trade, foreign policy and military involvement.

    ReplyDelete
  5. Market cap is calculated by taking the outstanding shares of the company and then multiplying it by the current price of its share. It is a factor that determines whether a company will be included in the FTSE 100 list or not. dividend yields

    ReplyDelete