In April 2021, Cathie Wood laid out a macroeconomic case that stocks were too low relative to GDP, based on the observation that in the late 1800s there was a much higher ratio.
In the late 1800’s and early 1900’s - as telephone, electricity, and the automobile were emerging - the US equity market cap relative to GDP appears to have been 2-3 times higher than it is today. We need to verify this difficult-to-get data but, if true, I have a hypothesis. https://t.co/7V4dNo3vBL
— Cathie Wood (@CathieDWood) April 11, 2021
In her third reply on this thread, she says
The technologically-enabled innovation evolving today dwarfs that of the late 1800s/early 1900s: genomic sequencing, robotics, energy storage, artificial intelligence, and blockchain technology. Moreover, Bitcoin could be today’s “gold standard”, increasing purchasing power!
The problem with this analysis, as I see it, is that the late 1800s saw the introduction and refinement of technologies that generated enormous amounts of leverage over physical economic results. Prior to this phase of the Industrial Revolution, human manual labor was limiting economic growth. The ratio of stock market value to GDP then reflected this new and incredibly optimistic (but rational!) result.
In contrast, the post-silicon stock market results in enormous gains in mental economic growth. This is a completely different animal, in which physical comforts (food, shelter, clothing, transportation) continue at a more or less constant or only gradually improving level, while ideas, manipulation of ideas, and computer-enhanced communication experience much greater gains. Part of the current problem with the economy is that the post-silicon world is validly better only for or primarily for information workers, not physical object workers.
As an example, consider the costs of getting a barrel of oil out of the ground, in terms of barrels of oil. There is no gain unless the ratio is more than one-to-one. In the early 1900s this ratio might have been 50-to-one from the numbers I have seen. More recently, U.S. oil fields might be more like a five-to-one ratio, with Alberta tar sands being quoted by some sources at three-to-one. Clearly, as this ratio declines less physical gain is available for increasing the basic human standard of living.
Other physical industries have improvement rates that are far less than the miraculous growth rates of information technology. Although we see technological progress in autos, chemicals, space transportation, ocean shipping, construction and other physical industries, they constantly work against the continually increasing cost of petroleum fuels and certainly experience much lower technical growth rates than IT.
It is entirely possible for the mental revolution of computation improvements to feel good, but be illusory. In fact, we have had more or less flat economic gains for most of the U.S. population since 1973 (when did the Intel 8080 debut? when did the 1970s oil crisis hit? when did worker wage gains cease climbing?) while the elite, 1%, college-educated, and knowledge workers have done quite well, but perhaps at the expense of physical workers. Leverage over physical workers could be, and was, enhanced through free-trade agreements that off-shored factory and much manual labor to countries with lower labor costs.
In short, Cathie Wood's ratios are meaningful, but she has not interpreted them correctly. Instead, they highlight the problem with reaching the limits of the physical Industrial Revolution, especially when the elite "conspire" to capture an outsized portion of the economic profits.
Hence You Must Invest in Equities
An understated theme here in Vorpal Trade is that everyone, not just the elite but especially the physical workers of the U.S., need to continually underspend their earnings, save, build capital, and invest that capital into equity of U.S. and international corporations. The economic model of the 1970s and after is that all persons, even those earning minimum wage, need to build up a capital base that pays dividends forever after the initial savings. A "factory worker" in their 40s and 50s then winds up with two revenue streams, one from manual work, but a large and increasingly important stream from dividends and capital gains. This second stream does not depend on the actions of management, and can in fact be used in conjunction with other equity owners to influence company operations, if necessary. I will have more to say about this process in future posts.
If manual labor ceases to achieve gains because the underlying technology is not advancing rapidly enough to generate gains of physical goods, then the goal of a manual laborer must be to gain capital to own the means of production. If corporations then collect rent on intellectual capital, then a manual worker owning stock of the corporation is in turn collecting rent on intellectual capital.
The alternatives to ownership are messy. Redistribution through taxation and welfare programs tends to reduce agency and cause psychological damage to those who are "helped", slows the economy, and causes increased incentives for corruption among the elite. We already see all of these effects. Some people see this result, claim that capitalism has failed, and call for socialism or other centrally-planned solutions, which are more of the same types of redistribution, but with worse results, messier side effects, and even greater corruption. Even worse, the price of redistribution schemes may turn out to be entrenching an elite class that, through personal connections and rights of family and birth, comes to feel that they are entitled to the reins of the economy.
I am not intentionally mixing normative and objective; what you personally choose to do should not be governed or directed by national policy or the tides of public opinion. Just the opposite. The point is that the solution for each individual does not depend on government action, and that individual actions are nonetheless not only the path to a personal glorious future of success, but then incidentally are the salvation of the country.
That doesn't mean that the U.S. cannot do better by reducing corruption among the elite. It should, and must. For some examples, see The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality. The legal and medical professions are rife with rent capture, as are occupational licensing, college tuition, and real estate zoning laws. Some of this is subtle, but still evil. Little Grandma in her 5,000 sf house on 16 acres in Mountain View, CA rails against further real estate development, and donates heavily to her local town councilmen; who is willing to write a newspaper article calling her evil? And yet she is corrupt, as the legal machinations that elevate the price of her real estate and keep low-earning local workers destitute are nevertheless manipulations of the system design to enrich her at the expense of others.
In the meantime, put away 10% or more of what you earn, take advantage of low stock prices, and build up a dividend stream that Grandma Tyrant can't have any effect on.
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