Ratios and rationale

Not only the U.S. equity indices are at All Time Highs. The S&P valuation is at an all time high. The ratio of U.S. market cap to GDP, the Buffett indicator, is also at an all time high. Even if we include in the denominator the Fed balance sheet, we reach the same conclusion, all time highs. What if we extend that to other countries? Same result. Total global equities are worth $135Tn, which represent 122% of global GDP. Why is this happening? Are we that rich on a global basis? Perhaps not. Global debt amounts to $324Tn, almost 3X global GDP. If we only look at the left side of the world’s balance sheet, it looks good, and it feels good, until you look at the right side, the liabilities, and realize that the leverage is gigantic. Some would say that debts are crossed between countries, and that the net debt is lower, and that may be true if we could agree on a reset mechanism like a debt jubilee, an ancient tradition in Mesopotamia, Greece and a Israel, where every 50 years, slaves were freed, land was returned to its original owners and debts were canceled. If there is no reset, and debt keeps piling up, at some point investors may have to sell some assets to repay their debts, as some borrowers will not be in a financial position to roll that debt, or the interest burden will be so high, it would be unbearable. The interesting detail about jubilees is that often coincided with the ascension of new kings, or rulers, to power. And often that was due to large indebtedness by the prior ruler. Is this time any different?

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