Search This Blog

#148 Stock Market Assessment - May 2019

The current unprecedented wealth of stock market earnings is only of recent origin since 1980:

The growth of earnings since 1980 has quadrupled. There were 25 recessions prior to 1980 that have held back the growth of earnings for 40 years. However earnings subsequent to Ronald Reagan's presidency exploded (with the exception of the 2008 recession) from $0.20 per share to current levels of $1.25. A new era arrived.  It conveyed a steadily increased wealth for shareholders except for a suggestion of greater volatility. Shareholders who held their wealth since 2008 have now shown more than fivefold gains in wealth. 

The question before us at this time concerns whether in the future the gains in earning will continue to grow as before, whether the number of S+P shares will increase and whether the price/earnings ratio per share will continue to gain.  To evaluate such projections we need to consider that the earnings per share depend on three variables. Each of these is dependent on effects that are independent of cash earnings for the S+P companies. First, US companies can reduce the number of shares, thus increasing the earnings per share. Second, cash earnings can diminish as business profitability declines. Third, the earnings value of each share is greatly influenced by the the multiple of the valuation that is attributed to cash earnings. When shareholder costs (as measured by the cost of debt) are low the valuation multiple will be high. At present the shareholder implied costs of capital are at a historical low level whereas the multiplier of the value of shares is at an all time high. 

What are then the indicators that will suggest the future of the worth of the shareholder's wealth as indicated by the worth of its SandP shares?

The total stock market capitalization, as defined by the stock market worth of Wilshire 5000 shares, is now 1.5 times greater than the total earning capacity of the US, as measured by the current value of the US GNP. This ratio has risen three-fold since 1980 and has shown an increased volatility over the last two recessions. This ratio is now at an all time high:

There is no question that the underlying earning capacity of the US, as measured by the GNP, is currently overstated and is vulnerable to precipitous declines when the next recession strikes. If the US is restored to its 1980 equivalent GNP levels, the multiple used to calculate SandP earnings would be reduced from 125 to 25.  That would be a five fold reduction which would suggest that a share of SandP would decline by as much as 80%. One could also ask whether there is an upside of the ratio of Wilshire over GNP.  Could it rise from the current 1.5 to a much greater in the next 20 years? That is highly unlikely as the projected GNP growth would have to rise than the current rate of 2%/year. The total market capitalization of Wilshire 5000 would also have to rise well over 200%. These are highly unlikely prospects.

When future prospects are considered, the current Wilshire 5000 market valuations at a multiple of 120 or greater will give the following projections:

Despite a recent  upward spike in annualized returns (e.g. reduced corporate taxes by Trump) the annualized shareholder returns, using a high stock market multiplier of 120%, have steadily declined from 12% in 1980 to the current 2.2%. That represents a most favorable view except that it currently offers to shareholders only below current money-market returns. That is an optimistic outlook.

A more realistic outlook is a reversion to Total Market Capitalization (TMC) to GDP ratio that prevailed in the 1980's:

This graph shows a decline in annualized returns in more realistic terms of a total market valuation of 40%. The projected returns then decline from 17% in 1980 to the present -9.9% which suggests that the market is grossly overvalued if examined from a historical perspective.

As of today, the Total Market Index is at $ 30,344 billion, which is about 144.1% of the last reported GDP. The US stock market is positioned for an average annualized return of -2.1%, estimated from the historical valuations of the stock market. This includes the returns from the dividends, currently yielding at 1.76%. As pointed by Warren Buffett, the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.”:

According to Buffet the current $30 Trillion stock market is worth only $22 Trillion, which is a discount of 27%. During a recession the decline in the market could exceed its stated valuation by at least 50%. That suggests that the current TMC downside could be as high as $15 trillion. What could deliver such a large shock is not clear but it come from a recognition that the current premier position of the US dollar could be permanently threatened.

Prof. Robert Shiller of Yale University invented the Schiller P/E to measure the market's valuation. The Schiller P/E is a more reasonable market valuation indicator as compared with the P/E ratio because it eliminates fluctuation of the ratio caused by the variation of profit margins during business cycles. This is similar to market valuation based on the ratio of total market cap over GDP, where the variation of profit margins does not play a role either.

The current Shiller P/E stands at 30 at levels that is comparable to the 1929 depression. This ratio has been recently highly unstable rising from below its historical mean of 15 in the 2008 recession. Such fluctuations in the P/E ratio confirm the inherent instability of the current markets.

Another way of assessing the current conditions of the US stock market is through international comparisons (see

At present the investment returns of the US are negative, which are the lowest among major economies. Such low returns are the results of excessive market valuations as well as profit returns that are below the average global cost of capital.


There is no question that prices of shares on the US stock market are excessive as well volatile. All of the trusted indicators show that.  The current stock market is extremely vulnerable to a recession that  may see as much as 50% declines in the valuation of the S+P shares. However, the prices of some of the shares will continue to rise even during a recession. Individual investors may be able to overcome, or preserve their assets waiting for the next recovery. Whether that is feasible warrants a consideration of the global standing the US stock market as compared with other large national holdings. The huge accumulation of cash that is represented in the current valuations is most likely to be sustainable in the near future. 

What will be the effects of the next recession on the prevailing dominance of the US stock market is not clear. In the long run (10+) years there are strong chances are that a conglomeration of markets that include all emerging economies will displace the current overwhelming domination of Wall Street in market trading.

#147 China Global Expansion Strategies

China's emergence as a global superpower involves a range of different trends in its economy and military forces. These trends are still in a state of uncertain transition. China now possesses the power in technology, commerce and the military to compete with the U.S.  Yet China, as a developing economy, still faces security threats as well as internal impediments to its projected growth. 

As the world economic and strategic center is shifting ever to the Asia-Pacific region. Therefore,  the US must “rebalance” its economic and military positions. The following observations were derived from the December 2018 Net Assessment which was prepared by the Washington Center for Strategic and International Studies.

#1. The should concentrate on restoring its top position in global trade. Unfortunately, the US former comprehensive trading partnerships are deteriorating as aggressive Chinese actions are taking over:

Global trading connections will ultimately dictate political and economic relationships in the future. The Chinese current international 124 trading relationships are already dictating how the future may evolve with US keeping up 56 connections.

#2: The US should restore is the relative dominance in global GDP, which is measured in comparable PPP currency terms:

China's share of the global economy still remains inferior to the US position. The US has been declining from a 30% share in 1980s to the current 25%. Meanwhile, China has accelerated its share of the global economy from 4% in 2000 to the current 15% while continuing to grow while also displacing Europe and Japan. At current rates it is probable that China will take over as the premier ranking leader of the global economies before 2030.

At current growth projections China will overtake the US in 2028 in terms of current GDP dollars. After break-even, the differences between China and the US will continue to grow at an accelerated rate. Such differences will be also reflected in respective shares in global GDPs.

The US share of global total GNP will shrink from 23% in 1990 to less than 15% by 2020. Meanwhile China gains from 4% to 18% during the same period. The share if the remaining global total - consisting largely of emerging countries - decreases from 78% to 67%. 

As the dominant share of the US declines by 7%, China gains a 18% share of the global GNP. China's growth in the last 30 years has therefore come from a diminished position of every other emerging country. Will China continue in gaining global market share or will emerging countries improve their position by reducing the importance of countries such as the US, India and the European Union? That is hard to predict, but judging from a increased number of Asian and African leaders that currently support China the global rankings by GDP will shift from a domination by the US to a leadership from China.

As the new GNPs shift from the US it will support China's position as the new superpower. Whether all of other emerging countries, such as India, Indonesia and Brazil will accept the displacement of the current US-backed positions remains to be seen. It suffices to say that China's growth in the relative global ranking in the world is now replacing everybody else.

When the leaders of 86 countries recently met to show their support of the Chinese global expansion it should be noted that the global 5 billion people that are poor are backing the most recent 1 billion China that now have a relatively acceptable income. Hitherto the world was dominated by the 350 million of rich US people. In the future the globe may have to start abiding by new China rules how to manage developing economies. 

Wether the China rules will improve the world  cannot be predicted. When checking the scenarios of developing countries and particularly of India one should ask whether rising global importance will be extracted from the US share of the global GNP or the China share.  There is also a possibility that the relative standing of the US and China will remain set at current levels. Any growth of a newly emerging "middle" economies would have to come from a consolidation of GDP's from small countries. The most likely prospect of that happening is unlikely. The potential leader, India, cannot support global economic leadership in the immediate future because of their lacking demographics.

Using GDP parity valuations China (GDP PPP) has already exceeded the US though it still lags by $8 trillion when measured in current market dollars. Since 2000 China has shown unprecedented GDP growth rates as compared with Japan, S. Korea and Russia and has exceeded all other countries. Unless the current trend changes there is no reason to assume why China would not become the top ranking global GDP country in the next half century regardless how that is measured.


When analyzed from a global point of view the GDP ranking matters only a few countries have so far contributed to the global GDP.  Until now the US was dominant but China is now catching up in PPP terms and will exceed the US by 2030 in IMF dollar terms. Will the current US top ranking be replaced by a collection of GDP's from emerging countries, or will the future gains accrue to China as it displaces the US? The probable outcome is not clear but the likelihood of a drastic US decline appears to be the projected outcome from current projections.

#145 - Needed $94 Trillion for Global Infrastructures

Over the next 15 years, more infrastructure is projected to be built globally than currently exists. Major countries around the world are actively pursuing both economic and strategic opportunities this infrastructure transformation presents—activity that will continue and accelerate with or without U.S. involvement. Such development has long-term implications for the United States. Will the United States act strategically to protect and advance its interests? Without U.S. supporting the global infrastructure it will be build-to intensify competition and fracture the global commons.

The U.S. is home to nine of the world’s ten largest institutional investors, seven of the world’s ten largest technology firms, and eight of the world’s ten most valuable brands. U.S. innovation culture, technical expertise, financing capacity, and abundant and affordable energy resources and expertise are globally sought. The world’s developing economies want and need the technology that U.S. firms provide. Infrastructure projects, especially those in the transport, energy, information and communications technology, and water sectors, are recognized as the backbone of modern economies.

The world now needs an estimated $94 trillion in infrastructure by 2040, creating opportunities can translate into U.S. economic growth, jobs, and return on investment.

U.S. efforts are necessary but far from sufficient. China is filling the void. China’s Belt and Road Initiative promises over a trillion dollars of investment and has attracted more than 80 countries since it was announced in 2013. China has been willing to take its checkbook to places where the United States has been unwilling to invest. China also brings the construction and engineering prowess and frequently the workers themselves to deliver projects, often in record time. China has demonstrated some interest in meeting global standards through the Asian Infrastructure Investment Bank (AIIB), The China Development Bank and the China Export-Import Bank.

China's approach is fast and flexible. When a recipient country considers an offer from China, it typically interacts with a unified group of builders, financiers, and government officials. With less stringent social and environmental safeguards, Chinese projects often take less time to move from conception to construction and deal with risks as they arise. This differs from the “Western approach,” which involves dealing separately with a wider range of actors and often emphasizes mitigating risk earlier in the project evaluation process. Getting projects from idea to execution faster is appealing to politicians facing term limits. China will also work with any government and accept a wide range of repayment methods. For recipient countries, this approach magnifies incentives for starting projects and masks debt sustainability and other risks.

The key feature of the China approach can be found in its highly coordinated and centralized approach that keeps the government, private banks and state-owned enterprises aligned with over-arching policy objectives. China relies on public financing, which is often opaque and designed to favor Chinese firms. Beijing’s own government-directed banks, led by the China Development Bank and the Export-Import Bank of China, have doubled in size since 2000, and Chinese lending to developing countries now exceeds the major Western-backed Multilateral Development Banks (MDBs).

At present, however, U.S. firms are often at an economic and diplomatic disadvantage. Outside the United States, many of the world’s largest construction firms benefit from direct state subsidies and functioning export banks. Foreign firms not only receive more sustained high-level diplomatic support, but that support is often better coordinated than U.S. commercial diplomacy. U.S. diplomats are barred from advocating for a single U.S. firm (“picking a winner”) if multiple U.S. firms are competing, deferring to the target country’s decision. While that approach is well intentioned, many U.S. competitors put forward a single firm, simplifying the target country’s decision.

The United States is now sharpening its approach to infrastructure after decades of neglect. U.S. foreign assistance began to shift away from infrastructure programs in the 1970s. The “New Directions” legislation, passed by Congress in 1973, accelerated the transition from providing loans to providing grants and from focusing on delivering large capital projects to providing technical assistance.


The United States is way behind the power curve. Incremental improvements will not do. The United States needs to take a series of bold steps to become competitive and to play a leading role in those infrastructure areas and geographic regions. Enabling and energizing private business and private capital will be critical, but government has an essential catalyzing role to play. 


#143 - Global Happiness Report

The World Happiness Report is an annual publication of the United Nations Sustainable Development Solutions Network. It contains articles, and rankings of national happiness based on respondent ratings of their own lives, which the report also correlates with various life factors.

In July 2011, the UN General Assembly adopted resolution 65/309 Happiness: Towards a Holistic Definition of Development inviting member countries to measure the happiness of their people and to use the data to help guide public policy. In 2012 this was followed by the first UN High Level Meeting called Wellbeing and Happiness: Defining a New Economic Paradigm. Bhutan then adopted gross national happiness instead of gross domestic product as their main development indicator.

World Happiness Report have been issued on an annual basis. The reports primarily uses data from the Gallup World Poll and are available from the World Happiness Report website.(1) 

The 2019 ranking of the top 10 countries shows the top 58% of the world's population:

There is no correlation between the size of the population or the happiness score.  The U.S. by far exceeds the happiness score of all others. India has the lowest happiness score. The disparity between the U.S. wealth per adult or GDP per adult and all other countries is even greater except that the happiness rankings for China and the U.S. are comparable whereas the difference in wealth is ten-fold.

The distribution of happiness score on a global scale is best illustrated in the  following:

The above chart suggests that 58% of the global population, or 4.5 billion people can be grouped as poor or extremely poor. Their happiness index shows values of 5 or less. Only 7% of the global population can be categorized as reporting a happy or reasonably happy index values of 9 or 10. The balance of the population, with index  values of 6-8 represent a global population of 35% which can be classified as showing varying degrees of potential migration towards the achievement of happiness.

The range in disparity in happiness is dramatized by comparing the #1 ranking country and the bottom ranking #155. The differences in happiness are enormous.  It just happens that a large number of bottom ranking countries are small in population.

All of the bottom ranked countries, from rank 90 through 106 show happiness index values from 5.2 to 4.7.


With a few exceptions (e.g. the U.S. and China) more than 80% of the global population can be considered not happy. Of course none of that applied to the 0.5% of the global population with income over $1 million. The differences are far reaching. With the rapid dissemination of information about the unhappy conditions of most mankind the question can be asked whether the existing acceptance of poverty and unhappiness will remain for the under-privileged. In the same way as the dangers of global warming have emerged only in the last two decades, we can now anticipate the rising effects of immigration from poor and impoverished countries to the islands of prosperity, e.g. the U.S., Canada, Australia and Europe.

The current  migration of 78 million immigrants to Europe and 58 million to the USA represents a demographic change that is starting to disturb existing political alignments.  The intra-Asian migrations  of 80 million people within Asian countries creates new upheavals for the governance of many nations.

 In the next century we can see a breakdown of the international order that was based largely on the dominance from British post-colonial countries. With easy access to communication technologies an weapons it is unlikely that well over five billion poor people   will remain socially and politically indifferent to continue with the status quo.

(1) See: for 2018 Report.