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« Boost Your Dividend Yield | Main | Ignore the Fed Factoid »

January 19, 2014



SCM0330 -- Some have also suggested that given the increased foreign contribution to US profits, one should use world GDP.

I'll revisit your "conflating" point after I do the full post.





The ratio is less extended looking at market cap to GNP, versus GDP. I know the increasing tilt of the largest companies is to overseas revenues and earnings; does using GNP as the denominator help to correct. (I don't pretend to be an expert at national accounting.)

I know you're a stickler for accuracy and empiricism, and your statement that "most observers think of the GDP as 'fixed'" seems a little unfair to the observers. I certainly don't view GDP/GNP in a static context.

I'd be careful not to conflate people's views on valuation with calling a top in the market. I think we can agree that calling tops (or bottoms) is a fool's errand. Whether or not stocks are rich is a related, but separate, discussion. Goldman's recent piece on SP500 valuation was an eye-opener imho.

Looking forward to a future piece on the market cap / GDP topic. Hope it's near-term!


SCM0330 -- Your question is a popular one, and it deserves a full post.

I follow this, along with various other indicators. It is pretty simple.

Suppose you have a discrepancy between these two variables. It could be resolved by one moving higher, the other moving lower, or a little of both.

Most observers think of the GDP as "fixed" and the market as the moving target. Why?

There is also a key reason for the discrepancy, but I'm going to save that for the full post.

Good question...




Wondering your thoughts on market cap / GDP as a valuation yardstick. We're told that it's a favorite measure of Buffett's, and it's looking pretty stretched right now, higher than in 2007, and higher than in any post-war moment save for the Internet bubble peak in 2000.

Market cap / GNP looks similar though not as extended.

Stuart Davies

Jeff, great charts and analysis. You seem like you have been out to the market 'wood-shed' more than once and had 'reality' slapped back into you. Since you seem to be an unencumbered thinker I think you will agree that just because 'everyone' agrees on a top (or 'the' top)- that does not preclude any top from actually occurring. I totally agree that Fed intervention by itself cannot be the only factor. After all, what is the 'Fed' and where does it get it's money and permission to act? The taxpayers and indirectly -the voters in this nation. They are not generally protesting so the assumption is we're all on board. That is another factor ignored. Like it or not, the whole nation has participated either directly or indirectly in this investment. Let's also throw out what the pundits are saying- that also does not preclude 'a' top from occuring- the degree of that top is where the debate heats up. Trying to short an up trend without serious down moves by various indicators will jeopardize your account. Let's agree on that.

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