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> "As the total value of the global financial market outgrew the value of the real economy" - the first sentence What the hell is this supposed to mean? What i

> "As the total value of the global financial market outgrew the value of the real economy" - the first sentence What the hell is this supposed to mean? What is "value" here, can financial markets conjure more houses, crops or datacenter capacity? Or does it mean that "market prices of securities" have outpaced the "market prices of" .. "the real thing"? Like, seriously, what?

dangerlibrary 5y ago
Yes. The market prices of securities, and (critically) the returns on those securities, are now higher than the book value and returns of the cash invested in companies whose shares back those securities.
- anthony_r 5y ago
  The market value of stocks and corporate bonds is pretty much always larger than the book value of the underlying companies. If this is not the case you've found yourself in a 1931-type of a bargain. The delta between the book value and the securities pricing is the estimated future profits. Now how exactly did you arrive at the conclusion that the future profits estimation is too high?
  - bordercases 5y ago
    How did you arrive at the conclusion that your estimates were correct in the first place? That argument cuts both ways.
    - deleted 5y ago
      [deleted]
  - dangerlibrary 5y ago
    I didn't come to that conclusion, and you are ignoring the part of my comment pointing out that the critical switch is that the _returns_ on securities now exceed _returns_ on actual businesses. But, since we're now talking about overvalued securities: https://www.npr.org/2021/05/05/993754418/planet-money-the-100-million-deli https://www.npr.org/2021/05/05/993754418/planet-money-the-10...
    - deleted 5y ago
      [deleted]
    - danielmarkbruce 5y ago
      You might be confusing Book Value of a business with it's value as an asset, and how returns are measured. "return on actual businesses" is impossible to measure with any precision.The time horizon chosen for returns on securities is usually short. So, the returns on securities will almost always seem too high or too low compared to what is happening in the underlying business. The market returns are calculated over a fixed and usually short time period and are easy to calculate. Because the markets in question are expectations markets the prices move around a lot and hence the measured returns move around a lot. Compare that with defining "returns on actual businesses" in a way which is both sensible (ie accurate) and has even a reasonable level of precision - it's impossible. For example, a commonly used and easy way to measure it is Return on Equity. Net Income / Book Value. Book Value is an accounting number based on the past. The "true" value put on an asset by investors is based on guesses about the future of the business and said business's ability to put cash in the pockets of the owners. Net Income misses important value changes - consider Intel, who have been making crazy decisions for years which allowed AMD back in the x86 server game. Intel don't have to report a "we did stupid things which will cost us billions in 10 years time" on their income statement for a given year. So, RoE isn't good and other similar numbers are similarly bad. So, your statement about returns on securities should really say: "for the last few years, returns on securities appear to have exceeded the changes in value for the underlying businesses". To which a reasonable response is: "Yup, it happens sometimes".
      - deleted 5y ago
        [deleted]
      - dangerlibrary 5y ago
        You appear to be under the impression that there is a strong causal/correlative relationship between the value of a security and some measure / function of the value or potential value of the underlying business. I would argue that there is an increasing amount of evidence that statement has gone from "plausibly true" to "pretty obviously not the case, for many securities." The underlying problem, regardless of the terminology or metrics being used to estimate value, seems to be that those with $10b in cash seem increasingly inclined to use it to speculate using various financial instruments, rather than e.g. building a manufacturing plant or a new housing development or apartment building. The growing size of the financial sector relative to the rest of the economy is the evidence I would put forward that "the returns on securities are exceeding the returns on actual business."
mrh0057 5y ago
A fancy way of saying an equities bubble.
- anthony_r 5y ago
  Yup, it's literally just "being bearish". If you want to see people "being bearish" or "being bullish" just flip on the CNBC or something and listen. You either claim that the interest rate (or various risk premia) are too low, or that the estimates of future profits (for whatever reason, higher COGS, higher cost of labor, higher taxes, under-measured depreciation and higher capex, natural calamities, lower GDP and thus lower revenues, or really any other reason) are too high.
- mrh0057 5y ago
  I guess I have to explain. The reason it’s a definition of a bubble is due to compounding. If the economy is growing at 1 to 3% while equities are going up 7 to 10% a year they diverge slowly at first but the divergence is exponential. What ends up happening it takes far more debt to sustain this bubble. Interest have to keep doing down so the payments stay relatively the same but at some point rates can’t go lower or a shock causing the ability to pay goes away. Then the bubble pops causing a liquidity problem(2008, March 2020) causing a massive sale off of the most liquid assets. So far the governments of the world have been transferring the liabilities of the most toxic liabilities from banks, pension funds, etc to the Central banks. It is an asset swap and doesn’t inflate the money supply directly but what it does do is tell banks lend all you want if you blow yourself up we will bail you out. This further inflates the debt bubble since banks now believe the fed has backstopped their loans there by limiting downside risks. This money being created has to go some where so it goes into asset purchases. Then you have margin and loans based on the assets further inflating then bubble. This creates a feedback loop since the increase in the asset prices increases the amount of money available to borrow which is often used to buy other assets further increasing the price.
- gnopgnip 5y ago
  Not really. The market is not a zero sum game. Debt, loans, financial products can benefit everyone
T-A 5y ago
Suppose you have some expectation about the closing value of the S&P500 in a month's time. You can bet on it using a variety of financial instruments, e.g. options and futures. How much you bet is up to you and your counterparty; the amount is not in any way constrained by the actual value of the companies in the S&P500. And that's how the size of the derivatives market can look like this when compared to the stock market: https://www.visualcapitalist.com/all-of-the-worlds-money-and-markets-in-one-visualization-2020/ https://www.visualcapitalist.com/all-of-the-worlds-money-and...
- quickthrowman 5y ago
  The stock market is $89T and the derivatives market is $11T. Notional value is somewhat meaningless, tomorrow you could buy a single out of the money SPX 0DTE option for $100 that has a notional value of $423,900
- danielmarkbruce 5y ago
  You are right in that the amount isn't constrained. But the net value of a derivative contract is zero. Ie, it's not right to say the "value". The term "notional value" is used for this reason. To further make the point - there isn't always an asset underlying a derivative - for example there is a notional value of weather derivatives. In summary, the word "value" gets thrown around loosely.
  - baq 5y ago
    for good reason. it is impossible to define strictly in general.
    - danielmarkbruce 5y ago
      There isn't a good reason to throw around the term loosely when talking about a specific field where the terms are quite well defined, like the one I gave. Folks should use the right terms if they genuinely want to communicate ideas.
danielmarkbruce 5y ago
It's a lazy, incorrect statement.
LatteLazy 5y ago
If I lent you 1 trillion dollars and you lent it right back to me (because I don't actually have it), we'd both have 1tn in assets and debt. That nets off to zero. But if you want to make up bullshit, you could pretend it doesn't and that you and I are now the world's largest economy, trading 2tn a day. It's a great way to make your maths easier (but wrong) and your headlines much more attention grabbing.
baq 5y ago
market prices of securities don't really reflect the value of 'real things'. market prices reflect capital flows. sometimes the two align - but this also depends on the definition of value you use. (you frequently hear that somethings trades at X multiple of ABC and Y multiple of DEF... and those multiples are wildly different across the whole market, yet prices are stable - because capital flows balance out.)

dangerlibrary 5y ago

Yes. The market prices of securities, and (critically) the returns on those securities, are now higher than the book value and returns of the cash invested in companies whose shares back those securities.

anthony_r 5y ago
The market value of stocks and corporate bonds is pretty much always larger than the book value of the underlying companies. If this is not the case you've found yourself in a 1931-type of a bargain. The delta between the book value and the securities pricing is the estimated future profits. Now how exactly did you arrive at the conclusion that the future profits estimation is too high?
- bordercases 5y ago
  How did you arrive at the conclusion that your estimates were correct in the first place? That argument cuts both ways.
  - deleted 5y ago
    [deleted]
- dangerlibrary 5y ago
  I didn't come to that conclusion, and you are ignoring the part of my comment pointing out that the critical switch is that the _returns_ on securities now exceed _returns_ on actual businesses. But, since we're now talking about overvalued securities: https://www.npr.org/2021/05/05/993754418/planet-money-the-100-million-deli https://www.npr.org/2021/05/05/993754418/planet-money-the-10...
  - deleted 5y ago
    [deleted]
  - danielmarkbruce 5y ago
    You might be confusing Book Value of a business with it's value as an asset, and how returns are measured. "return on actual businesses" is impossible to measure with any precision.The time horizon chosen for returns on securities is usually short. So, the returns on securities will almost always seem too high or too low compared to what is happening in the underlying business. The market returns are calculated over a fixed and usually short time period and are easy to calculate. Because the markets in question are expectations markets the prices move around a lot and hence the measured returns move around a lot. Compare that with defining "returns on actual businesses" in a way which is both sensible (ie accurate) and has even a reasonable level of precision - it's impossible. For example, a commonly used and easy way to measure it is Return on Equity. Net Income / Book Value. Book Value is an accounting number based on the past. The "true" value put on an asset by investors is based on guesses about the future of the business and said business's ability to put cash in the pockets of the owners. Net Income misses important value changes - consider Intel, who have been making crazy decisions for years which allowed AMD back in the x86 server game. Intel don't have to report a "we did stupid things which will cost us billions in 10 years time" on their income statement for a given year. So, RoE isn't good and other similar numbers are similarly bad. So, your statement about returns on securities should really say: "for the last few years, returns on securities appear to have exceeded the changes in value for the underlying businesses". To which a reasonable response is: "Yup, it happens sometimes".
    - deleted 5y ago
      [deleted]
    - dangerlibrary 5y ago
      You appear to be under the impression that there is a strong causal/correlative relationship between the value of a security and some measure / function of the value or potential value of the underlying business. I would argue that there is an increasing amount of evidence that statement has gone from "plausibly true" to "pretty obviously not the case, for many securities." The underlying problem, regardless of the terminology or metrics being used to estimate value, seems to be that those with $10b in cash seem increasingly inclined to use it to speculate using various financial instruments, rather than e.g. building a manufacturing plant or a new housing development or apartment building. The growing size of the financial sector relative to the rest of the economy is the evidence I would put forward that "the returns on securities are exceeding the returns on actual business."

mrh0057 5y ago

A fancy way of saying an equities bubble.

anthony_r 5y ago
Yup, it's literally just "being bearish". If you want to see people "being bearish" or "being bullish" just flip on the CNBC or something and listen. You either claim that the interest rate (or various risk premia) are too low, or that the estimates of future profits (for whatever reason, higher COGS, higher cost of labor, higher taxes, under-measured depreciation and higher capex, natural calamities, lower GDP and thus lower revenues, or really any other reason) are too high.
mrh0057 5y ago
I guess I have to explain. The reason it’s a definition of a bubble is due to compounding. If the economy is growing at 1 to 3% while equities are going up 7 to 10% a year they diverge slowly at first but the divergence is exponential. What ends up happening it takes far more debt to sustain this bubble. Interest have to keep doing down so the payments stay relatively the same but at some point rates can’t go lower or a shock causing the ability to pay goes away. Then the bubble pops causing a liquidity problem(2008, March 2020) causing a massive sale off of the most liquid assets. So far the governments of the world have been transferring the liabilities of the most toxic liabilities from banks, pension funds, etc to the Central banks. It is an asset swap and doesn’t inflate the money supply directly but what it does do is tell banks lend all you want if you blow yourself up we will bail you out. This further inflates the debt bubble since banks now believe the fed has backstopped their loans there by limiting downside risks. This money being created has to go some where so it goes into asset purchases. Then you have margin and loans based on the assets further inflating then bubble. This creates a feedback loop since the increase in the asset prices increases the amount of money available to borrow which is often used to buy other assets further increasing the price.
gnopgnip 5y ago
Not really. The market is not a zero sum game. Debt, loans, financial products can benefit everyone

T-A 5y ago

Suppose you have some expectation about the closing value of the S&P500 in a month's time. You can bet on it using a variety of financial instruments, e.g. options and futures. How much you bet is up to you and your counterparty; the amount is not in any way constrained by the actual value of the companies in the S&P500. And that's how the size of the derivatives market can look like this when compared to the stock market: https://www.visualcapitalist.com/all-of-the-worlds-money-and-markets-in-one-visualization-2020/ https://www.visualcapitalist.com/all-of-the-worlds-money-and...

quickthrowman 5y ago
The stock market is $89T and the derivatives market is $11T. Notional value is somewhat meaningless, tomorrow you could buy a single out of the money SPX 0DTE option for $100 that has a notional value of $423,900
danielmarkbruce 5y ago
You are right in that the amount isn't constrained. But the net value of a derivative contract is zero. Ie, it's not right to say the "value". The term "notional value" is used for this reason. To further make the point - there isn't always an asset underlying a derivative - for example there is a notional value of weather derivatives. In summary, the word "value" gets thrown around loosely.
- baq 5y ago
  for good reason. it is impossible to define strictly in general.
  - danielmarkbruce 5y ago
    There isn't a good reason to throw around the term loosely when talking about a specific field where the terms are quite well defined, like the one I gave. Folks should use the right terms if they genuinely want to communicate ideas.

danielmarkbruce 5y ago

It's a lazy, incorrect statement.

LatteLazy 5y ago

If I lent you 1 trillion dollars and you lent it right back to me (because I don't actually have it), we'd both have 1tn in assets and debt. That nets off to zero. But if you want to make up bullshit, you could pretend it doesn't and that you and I are now the world's largest economy, trading 2tn a day. It's a great way to make your maths easier (but wrong) and your headlines much more attention grabbing.

baq 5y ago

market prices of securities don't really reflect the value of 'real things'. market prices reflect capital flows. sometimes the two align - but this also depends on the definition of value you use. (you frequently hear that somethings trades at X multiple of ABC and Y multiple of DEF... and those multiples are wildly different across the whole market, yet prices are stable - because capital flows balance out.)