Comments on: Chart of the day, equity and GDP edition A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: Kamekon Thu, 22 Mar 2012 21:27:56 +0000 @EpicureanDeal, “the true ratio of equity dollars available for investment to gross economic activity”:

If that’s what you’re interested in, then the above chart seems largely irrelevant. MarketCap (a stock variable, see my comment re dimensions) reflects the value of past investments. It may vary without any change to investment or ‘equity dollar availability’.

In relation to investment, equity funding should be conceived as a flow variable, like investment. In macroeconomic terms:

Y = C + I or S = I and you’re looking for the equity part of S – or, more exactly, for the IPO part of the equity part.

By: Kamekon Thu, 22 Mar 2012 20:00:22 +0000 I should have referred to Beer_numbers’ comment @11:40am. which I only read properly after I had posted mine and which ties in nicely with what I said, in particular where B_n points to discount rates.

By: EpicureanDeal Thu, 22 Mar 2012 19:40:25 +0000 (Of course that last point is mitigated by the fact that most collective investment vehicles invest heavily if not exclusively in listed companies, so there would be a great deal of double counting.) / end

By: EpicureanDeal Thu, 22 Mar 2012 19:33:49 +0000 Note also that the “listed companies” whose market share in included Google’s calculation of market cap specifically excludes mutual funds, investment companies, and other collective vehicles. To the extent the *share* of the total equity market of said vehicles has increased over the past two decades–which seems reasonable to me–the chart above underreports the true ratio of equity dollars available for investment to gross economic activity.

By: Kamekon Thu, 22 Mar 2012 19:31:36 +0000 Your – or for that matter: any – enterprising PhD student should have recognized that the ‘ratio’ of MarketCap and GDP is in fact not a dimensionless number, but measured in years:

MarketCap = X [dollars], GDP = Y [dollars]/[year], so their ratio = X/Y [year].

For example, according to the chart, from 1998 to 2000, the NA ‘ratio’ wa 1.5 years.

It’s important to be aware of this before you start theorizing about trends.

By: EpicureanDeal Thu, 22 Mar 2012 19:28:53 +0000 I don’t think you’re looking at the chart properly, Felix. Market cap as a share of US GDP was 54.5% in 1988 and 119.5% in 2010. This ratio has more than doubled ($1.195 of equity capital per dollar of GDP vs 54.5 cents). By the same token, I think it may be an accurate guess to say that the minimum effective size of an IPO over the same period has more than doubled. Surely this explains a significant portion of the change. I presume one would have to adjust minimum IPO size for inflation over this period, too.

By: realist50 Thu, 22 Mar 2012 17:52:35 +0000 A significant factor in the decline of smaller equity underwriters is the long-term decline of equity trading commissions for both institutional and retail investors, which has occurred not only because of competitive factors but also due to regulatory changes beginning with deregulation of commissions in the ’70’s and continuing through decimalization of price quotes. It has saved investors a great deal of money, but it’s also shrunk the revenue pool that used to fund sell-side research. The predictable outcome is that smaller companies have a tough time attracting research coverage and hence don’t draw investor interest. The late ’90’s model where equity research was used to drum up investment banking business from companies was a flawed attempt to support research without relying on equity trading commissions, and of course the Spitzer research settlement ended that business model.

Grant Thornton has researched the topic and released a white paper proposing some intriguing solutions, though I’m not a fan of the proposed price-fixing (minimum commissions) –  /gtcom/menuitem.550794734a67d883a5f2ba4 0633841ca/?vgnextoid=e8eb2be99ea59210Vgn VCM1000003a8314acRCRD

By: dWj Thu, 22 Mar 2012 15:57:08 +0000 I thought that was approximately the idea of VC

By: Beer_numbers Thu, 22 Mar 2012 15:40:29 +0000 Suppose this chart perfectly captured the output of all companies (so there was no variation over time in the proportion of listed vs. private companies). Then, changes in market cap/GDP would more or less consist of:

– Equity discount rates
– Perceptions of current GDP relative to “permanent” GDP (or long-run average GDP)

What you’d expect is that:
– When investors are fearful (discount rates are high), market cap to GDP is lower, and vice versa
– When GDP is temporarily depressed, market cap to GDP is higher, and vice versa

Those seem like reasonable explanations for what you see in the chart. I’m not sure why you think that this chart tells you much of anything about the IPO market.

By: FifthDecade Thu, 22 Mar 2012 15:34:44 +0000 Surely there are fewer retail focussed IPOs now because the market appetite for stocks has yet to reawaken in the minds of ordinary folk? And in any case, there seems to be many more sources of Venture Capital and more Business Angels now than there was a decade or two ago.

Looking at the big picture though, what consequences do you see as a result of the growth of Market Cap as a percentage of GDP? Is it good that companies are getting bigger and bigger and hence more dominant as repositories of wealth that are controlled on an International scale by short term managers rather than by a more and more diffuse shareholder base?