Guest Post: Stocks Priced in Real GDP

Tyler Durden's picture

Submitted by John Aziz of Azizonomics blog,

Since the 1990s, priced in Real GDP the Dow Jones Industrial Average (as well as the S&P500) has been far above their 20th-century norm:


There is an unsurprising coincidence - as stock prices (and corporate profits) have soared above their historical norm, wage growth has been very stagnant. The economy has come to be tilted toward bankers, financiers, insurance brokers and away from wage-earners, manufacturers and artisans. 

Does that mean that as Hassett and Glassman projected in Dow 36,000, stock prices have climbed to a new plateau? Well, while it is impossible to say exactly what prices will do in future (nominal, or otherwise) the “new plateau” has been very much supported by the Federal Reserve, first by lowering rates and keeping them low:


And second through expanding the monetary base by buying securities directly (Bernanke estimates a simulated interest rate decrease of 0.25% for each 250 billion dollars of quantitative easing):


Each time stocks have turned cheaper, the Fed has stepped in and eased, and stocks have reversed upward.

Some might take that as a sign that stocks aren’t going to get much cheaper, because the Fed won’t let them get much cheaper. First under Greenspan, and second under Bernanke the Fed has succeeded at reinflating the bubble. But the secular trend is back toward the pre-1990s norm. Gravity is against the Fed. The Fed (to use a tired old metaphor) is Atlas, holding stock prices up on its shoulders. Will it be third-time unlucky for the Fed, hell-bent on wealth-effecting and financialising the US economy to prosperity?

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Stoploss's picture

This is going to leave a mark.

DJ Happy Ending's picture

Ben Bernanke looks like a big gay bear.

DoChenRollingBearing's picture

Stocks are the staple at Barron's!  There, only some are even thinking about Cyprus, and many are bullish.


"Review of Barron's -- Dated 25 March 2013"

yogibear's picture

Bernanke is that financial child molester. 

He's ruined their future enabling the saturation of debt to become even more outrageous.

Society need for Bernanke, Greenspan and the rest of the fed members to spend some prison time with violent criminals.


jerry_theking_lawler's picture

the only mark this is the brown one in bennie shaloams underpants.....

Tao 4 the Show's picture

Presently my soul grew stronger; hesitating then no longer,
`Sir,' said I, `or Madam, truly your forgiveness I implore;
But the fact is I was napping, and so gently you came rapping,
And so faintly you came tapping, tapping at my chamber door,
That I scarce was sure I heard you' - here I opened wide the door; -
Darkness there, and nothing more.

A Lunatic's picture

Must have been evil Iranians at the door.........

toys for tits's picture

Fuck the stock market bubble, I got something for you to blow, Bernanke.

peter4805's picture

"The economy has come to be tilted toward bankers, financiers..."

Actually, it has been tilted that way since that tragic day back in 1913.

Hohum's picture

And stocks have really soared in comparision to real GDP/total credit market debt.  Since the GDP/debt becomes smaller, the ratio approaches infinity.  It's good to be in stocks, thanks to the great redistribution that is QE (n).

q99x2's picture

Unlike times in the past, today the FED is the market. They have their computers with access to infinite money directly jacked in to the indexes. BTFD

kaiserhoff's picture

He defines real GDP as...?

Water Is Wet's picture

+1, all GDPs are bogus.  The U.S. 'reindexes' theirs about every 5 years.  It always goes up over the long term.

ekm's picture


Imagine there is a village with 1000 houses. Average house price is $1000/house.

Then a powerful gang comes in and invades the village. The gang
produces money out of nothing and they buy all 1000 houses at
$2000/house. Hence, the market no longer exist.

Gangsters are selling houses to each other only at $5k, or $1million.
It makes no difference, because they can create any amount of money.

Question: What is the price of houses.

Answer: Since at $1000 was the supply/demand price, that is the price
if the market exists.

If the all houses are owned by a group of gangs then the price is
whatever the gang decides to be since they're not buying or selling
any. It can be $5000 or $1 million, it makes no difference.

That is the case with the stock market.

At DOW 11k, Fed + Primary dealers purchased everything with money out
of nothing are simply putting a tag on the DOW, 12k, 13k, 15k, 20k,
30k by selling the same stocks to each other over and over. It makes
absolutely no difference.

disabledvet's picture

this theory was tried in the 70' didn't work very well. they're trying something new this time around and i gotta say "dey tumped me this time."

Son of Loki's picture

<<That is the case with the stock market.>>

That is also the case with the housing market if you take away zero-down no-doc loans which are now rearing their ugly heads again.

What's that house really worth if you need 10% down and proof of a real job with a 7% mortgage (the historic norm)?

razorthin's picture

The real value of the house cannot be known (or is irrelevant) in the context of fictional reserve banking - even more so now that the credit markets have been completely hijacked.

Diogenes's picture

Try proof of employment for over one year in the same job, 25% down and you have to prove that it's not borrowed, max 32% of your income going out for housing and debt (car payment etc) combined.

Under those rules house prices are stable as long as fiscal policy is stable.

khakuda's picture

True.  The housing market is also supported by super low rates from the Fed through Treasury monetization AND the Fed buying up mortgages.  Think about it this way, the Fed is buying $40 billion of mortgages each month and if the average house has a $150,000 mortgages balance, you will find the Fed effectively directly financing a few hundred thousand homes each month.

The Fed is the basically dumb money, buying at ANY price.  That is a rigged market if there ever was one.

daveO's picture

Don't forget, that 'investors' are buying up all those empty houses.

theprofromdover's picture

I am sure I am correct when I say, the minute the bankers take out more from the system than was ever put in by the depositors (to allow them to use fractional-reserve as a multiplier), the system is destroyed.

That point was passed some time ago, we now only have xeroxed paper. Until such times as the bankers are stripped of their disproportionate wealth, there is no prospect of recovery.

assumptionblindness's picture

Ah, the dilemma of the weight of the world. Maybe the Fed will just say "fuck it" and shrug?

A Lunatic's picture

The only thing the FED produces is misery, poverty and blight, so yeah, shrug...... Take your shit sandwich off the table and go the fuck away.

Bear's picture

The chart looks like 50 Shades of Grey with some Red and Blue streaks

Black Markets's picture

The DJIA is a global index. Less than 40% of the earnings on the Dow Jones originate in the US. That figure continues to fall.

So the DJIA and GDP are not really related at all.

machineh's picture

Also, different countries have different levels of market cap vs. GDP, based on structural factors.

Because of European reliance on bank borrowing, French and German market-cap-to-GDP was miniscule before the mid-1980s.

Aziz usually writes good stuff, but this article is a misfire. Nothing to see here, folks (really).

daveO's picture

The last few QE's were to bail out Europe, where most overseas' earnings are.

NoWayJose's picture

Its hard to see a market collapse while the Fed is pumping, but that can only last so long before it comes to an end - whether by the Fed keeping QE going too long, or by some outside bubble collapsing. Its all about confidence, and that can disappear in a hurry.

BlowsAgainsttheEmpire's picture

Yep - when you're trying to reignite the economy using a stock market "wealth effect," that "marginal propensity to save" is a bitch.

rqb1's picture

This feels like summer 2008 all over again.  

If I had the balls, I would short BAC, but I don't because Ben cut them off.

daveO's picture

Yea, the last time I tried, Warren Buffet handed me mine.

MyBrothersKeeper's picture

If you look at cyclically adjusted PE ratios, than GDP, corporate profit, and savings are pretty well correlated over longer periods of time.....And much of that correlation is due to intervention and not true growth.

This way of looking at the disparities helps ypou understand why:

Real economic growth is the sum of 3 parts:  Government surplus/deficit, savings rates, and corporate profit/loss.  The government is running a deficit and the fed is printing. Much like nominal wages, the savings rate is pretty much stagnant like GDP.  So why is there such a disconnect in the stock market?  Pretty simple, most of the deficit spending is NOT going into the economy and growing the economy, it is going mostly to corporate profits.  So all of the misallocated capital is ending up in the monopolistic hands of a few. 

razorthin's picture

"Profits", my ass.  Few people have money to buy shit - especially at these inflated prices.  This can only mean that the credit bubble is blowing bigger than ever.  Boy are we fucked.

orangegeek's picture

The Dow Jones Daily has been in a near vertical ascent since last November less a break in December and January.


Adjusted revenue and earnings have been engineered into bullish moves for three quarters.  Should be interesting to see what Q1 shows.

geewhiz190's picture

if stocks  are such a great buy like some (CNBC) keep  touting, why don't companies like AAPL and all the others with zillions of dollars buy some? Why do they hold so much cash?  Taxes is a bullshit excuse.

mdtrader's picture

Cyprus saved lol. Futures and euro to infinity.

toros's picture

Take the corporate profit, FRED- and compare it to the S&P. Higher highs, for profit, but 3 top for S&P. ? ? ? More than nominal... What gives? I don't get it? How come?