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I'll probably get some of this wrong, but I read up on these arguments back when Piketty was in the news w/ his book: Yes, it can go on forever -- the rates of

by stvswn 9y ago

I'll probably get some of this wrong, but I read up on these arguments back when Piketty was in the news w/ his book: Yes, it can go on forever -- the rates of retun in the stock market are based, theoretically, on the changing expectations about the future and not based on current income. Thought experment: 100 of us live in small society producing widgets, we each make a widget a day at the factory. GDP is 36500 widgets/day. We also spend some time researching a way to make widgets faster. Yesterday we found a breakthrough that made it 50% likely that in 5 years we'll each be making 10 widgets a day. It would be reasonable for the valuation of our widget company to go up something like 40% on that news, right? But GDP next year is stlil going to be 36500 widgets/day. Since the stock market bakes in all optimistic expectations, then in the eras it that it outpaces GDP it could be the case that there remains unrealized optimism for the future. If the question is "but where is the capital coming from that flows into the stock market?" The answer is that it can be created via credit, or it could be created via appreciation in assets not captured in the stock market (like housing, the major one).

JimboOmega 9y ago
Your example anticipates a huge growth in productivity, which is a factor in GDP; in that case, the stock market is a forward indicator of anticipated GDP. Which, if so, still doesn't allow it to grow infinitely out of proportion to GDP, unless the time horizon keeps changing or the anticipation of the future gets steadily farther away from reality. So you mention in the eras it that it outpaces GDP... I've consistently had the message drilled into me that in the long term (20+ year horizon), stocks will return something like 7-10%, while of course, nobody would expect GDP growth anything like that (outside of a rapidly industrializing environment where productivity is rocketing upward, like China). An era is not forever, so...

by stvswn 9y ago

JimboOmega 9y ago

Your example anticipates a huge growth in productivity, which is a factor in GDP; in that case, the stock market is a forward indicator of anticipated GDP. Which, if so, still doesn't allow it to grow infinitely out of proportion to GDP, unless the time horizon keeps changing or the anticipation of the future gets steadily farther away from reality. So you mention in the eras it that it outpaces GDP... I've consistently had the message drilled into me that in the long term (20+ year horizon), stocks will return something like 7-10%, while of course, nobody would expect GDP growth anything like that (outside of a rapidly industrializing environment where productivity is rocketing upward, like China). An era is not forever, so...