On a macro basis, quantification doesn't have to be complicated at all. Below is a chart, starting almost 80 years ago and really quite fundamental in what it says. The chart shows the market value of all publicly traded securities as a percentage of the country's business--that is, as a percentage of GNP. The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment.Below is an updated chart of the ratio from Fairfax's annual meeting slides:The post shows the ratio near levels of 110% at the beginning of 2008. Since then, GDP has remained essentially flat, while the S&P500 is down 11%. So, that puts the ratio at approximately 98% today.
Friday, July 11, 2008
Stock Market Capitalization to GNP Ratio
This ratio was last brought up in October in a post using "Buffett's approach" to macroeconomics. He said: