The Last Two Times This Happened, Stocks Crashed

Tyler Durden's picture

Are stocks disconnected from reality? Probably, according to Tobin’s Q, a rather elegant way to assess equity valuations developed by the late Nobel Prize-winning Yale economist James Tobin. Put simply, Tobin’s Q compares the total value of stock prices with the value of underlying assets such as plants, inventory, and equipment (i.e. replacement costs). Add up the value of the equity, then buy all the assets, and see if you have some cash left over. If you do, stocks were overvalued. 

We’ve looked at this on a number of occasions, most recently in January when we noted that the Q ratio was near peaks observed over most of history’s bull markets, and as Bloomberg reports, stocks are now more overvalued than at any time in history with the exception of the tech bubble and the 1929 highs.

Via Bloomberg:

If you sold every share of every company in the U.S. and used the money to buy up all the factories, machines and inventory, you’d have some cash left over. That, in a nutshell, is the math behind a bear case on equities that says prices have outrun reality.


The concept is embodied in a measure known as the Q ratio developed by James Tobin, a Nobel Prize-winning economist at Yale University who died in 2002. According to Tobin’s Q, equities in the U.S. are valued about 10 percent above the cost of replacing their underlying assets -- higher than any time other than the Internet bubble and the 1929 peak.

Here's a look at the chart:

The above should come as absolutely no surprise to regular readers. Indeed, corporate management teams have adopted policies that virtually ensure the value of their equity will far outrun the replacement costs of the underlying assets. 

As we’ve documented exhaustively — in fact, one might argue that it’s been the single most important narrative we’ve pushed this year — companies are taking advantage of record low borrowing costs and voracious demand for corporate bonds by issuing record amounts of debt. The problem: the proceeds aren’t going towards capex (i.e. future growth and productivity) but rather towards buybacks which not only inflate EPS but also management’s equity-linked compensation.

This means that while stocks climb ever higher thanks to a perpetual bid from price insensitive corporate management teams and investors (and central banks) frontrunning the buybacks (repurchase authorizations hit a record in April, so it’s not difficult to see what’s coming), productive assets deteriorate, jeopardizing top line growth and, in turn, the ability to service debt costs down the road. Here are a few graphics that tell the story

One may argue that “capex is higher than ever”, but that is slightly misleading because while it may be at its highest level on record in absolute terms, a look at the following pretty clearly indicates that buybacks have the momentum...

...and buybacks have officially reached escape velocity...

Here's more from Bloomberg:

The ratio’s doubling since 2009 to 1.10 is a symptom of companies diverting money from their businesses to the stock market, choosing buybacks over capital spending. Six years of zero-percent interest rates have similarly driven investors into riskier things like equities, elevating the paper value of assets over their tangible worth, he said.


Standard & Poor’s 500 Index members last year spent about 95 percent of their profits on buybacks and dividends, with stock repurchases exceeding $2 trillion since 2009, data compiled by S&P Dow Jones Indices show.


In the first four months of this year, almost $400 billion of buybacks were announced, with February, March and April ranking as three of the four busiest months ever, according to data compiled by Birinyi Associates Inc.

Spending by companies on plants and equipment is lagging behind. While capital investment also rose to a record in 2014, its growth was 11 percent over the last two years, versus 45 percent in buybacks, data compiled by Barclays Plc show.


With equity prices surging and investment growth failing to keep pace, the Q ratio has risen to 58 percent above its average of 0.70 since 1900, according to data compiled by Birinyi and the Federal Reserve on market and asset values for non-financial companies. Readings above 1 are considered by some to be too high and the ratio has exceeded that threshold only 12 percent of the time, mostly between 1995 to 2001.

So congratulations to the Fed and to corporate America. Thanks to a protracted period of ultra-low rates and a combination of corporate short-sightedness and greed, stock prices have been driven to their third-largest disconnect with underlying productive assets in history. 

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HedgeAccordingly's picture

But but .. 

Wall Street Underestimates The Great American Earnings Machine

KnuckleDragger-X's picture

Ask the average stock buying sheep exactly what a stock share is and you'll get all kinds  interesting answers. The stock market is completely decoupled from the real world. Now a share is a chip in the casino and you have guru's who will tellyou what to do with it.

Lets Buy The Dip's picture

I think people keep seeing a stockmarket crash, but we keep going higher. That must be painful for many people. 

Did anyone see CARL ICAHN today. He is a very rich guy, and should be listened to. you should see what he said about AAPL today. 

Have a look at this guy CARL ICAHN, famous US BILLIONAIRE in the US, his calls on the market have been killer and ridiculously accurate. See here. ==>

And to think I listened to those dummies from CNBC say the EARNINGS season was gunna be HORRIFIC!!! those buggers….I have been had yet again!! Pack of liars….pissed me off

anonnn's picture

Tobin's Q using Replacement Value?

As in $16 BILLION for San Onofre's 2 Nuc Power Plants?

[disappeared from the news rather quickly, eh?]

Bobbo's picture

Market value.  Discounted for large purchase.

Upset Your Worries's picture

If any of you ZHers have some time and are not yet too jaded and have an open mind why not read these essays I came across recently.

"Together these are quite simply the most insightful piece of economic theory I have ever read.

If the author is right and I think he is we are all in the midst of a tragedy of epic proportions.  It is sad unstoppable and will devastate the lives of much of humanity."

Understand Everything Fundamentally

Understand everything fundamentally covers the broader principle of collectivism and its dangers including the tragic consequences of our current economic trajectory. It also covers the principles of centralization and degrees-of-freedom in the economy. Next up is

The Rise of Knowledge

The rise of knowledge is in my opinion the very best of Anonymint's writing. In it he covers finance and why the role of finance and debt will progressively decline in the future. It is a compelling argument that describes how and why humanity will eventually and inevitability break free of the chains of finance and unrestrained collectivism and enter an age of knowledge.

A general road map to the "Economic Devastatio" thread.




Lyman54's picture

Good link, I read the Understanding Everything.  For the most part it makes sense.

thepigman's picture

Janet and Ben got your back. Yessireebob. New thing called polyamory. Ethical fucked-upness.

thepigman's picture

Janet and Ben got your back. Old thing called a clusterfuck.

thepigman's picture

Janet and Ben got your back....whatever

Butterflying's picture
Butterflying (not verified) HedgeAccordingly May 18, 2015 3:20 PM

My last pay check was $9500 working 12 hours a week online. My sisters friend has been averaging 15k for months now and she works about 20 hours a week. I can't believe how easy it was once I tried it out. This is what I do...

wareco's picture

Thanks for sharing, Buttfucking, er, I mean Butterflying.


Glass Seagull's picture



Carl Icahn is single-handedly trying to fix this mess by making Apple go up 100%, which will drag the "indices" higher. 

Beacause math, I think.



Ham-bone's picture

3rd times the charm!!!

This time we're really going to nail it...permanently high plateua and no need for economic cycles any longer...true progress.  No need for more jobs or even more consumers.  The future is now and it's ammmmmmazzzzzzing.


Shizzmoney's picture

The Fed didn't own 70% of the "market" the last two times.

Folks, we are going the way of Japan.  Stagnation for 20 years here we come.

vamper's picture

Stagnation, my, arn't we optimistic, I would guess stagnation would be the best of outcomes.

Shizzmoney's picture

LOL good point....I do interpret "stagnation" as "the top 20% do pretty well, with the 1% doing great and the 0.01% killing it".

A total depression would mean everybody would love everything...which I think needs to happen to save humanity IMO

vamper's picture

Stagnation, my, arn't we optimistic, I would guess stagnation would be the best of outcomes.

JustAboutThatActionBoss's picture

Looks like we still have a LONG way to go to the upside!

Sudden Debt's picture

These numbers can’t be commaired at all.

GDP has been recalculated so many times in the last decade alone that and so does revenue for companies that we’re 200% above any historic top.

There’s more people working on tweaking the number than there’s people working on sollutions to actually grow the economy in a sane way.

Real inflation? Against what?

Real gdp? Against what?

Real employment? Against what?

We’ll keep going to that light at the end of the tunnel untill somebody feels a hard iron wall against hist nose.

Statistics... give me 5 minutes to make one up and say this is the new truth, better than the old truth.

put it on facebook, twitter take a pic and put it on pinterest, whatsapp and just throw it out there with the right tags And it will become a historic truth.

Ham-bone's picture

SD - easitiest way to see the coming economic collapse?  Look at the growth (or lack there-of) of the working core of the US...25-54yr/old segment began shrinkng in '08 and this segments population is down 1%, and employment among this segment have fallen 5% (FT jobs even worse)...25-64 will begin shrinking next year and their employment will likewise not be good.

DavidC's picture

Post Europe close today was pure algo activity.


BlowsAgainsttheEmpire's picture

Powered by the slow-motion LBO of the stock market . . .

besnook's picture

proof the equity market is factoring in the real forex value of the dollar.

daveO's picture

Discounting the future value. Keeping a lot overseas.

JoeTurner's picture

Looks like Ill be watching those Yuri Bezmenov videos on Youtube again...

Especially the parts about how the KGBs principals of ideaolgical subversion were designed to live on long after the collapse of USSR

JoeTurner's picture

Looks like Ill be watching those Yuri Bezmenov videos on Youtube again...

Especially the parts about how the KGBs principals of ideaolgical subversion were designed to live on long after the collapse of USSR

TeethVillage88s's picture

4 a sec I thought you said Leonid Brezhnev.

BoPeople's picture
BoPeople (not verified) May 18, 2015 3:28 PM

Now that computers are in charge of what happens to stock prices and the (non)market, instead of people, what happened before is now irrelevant.

Those who are clued in to what the computers are doing make a lot of money and those who are not typically lose money.

undercover brother's picture

IMHO, the KEY point this article makes is that only twice in the history of the stock market were Tobin Q's higher than they are today.   This means stock prices will go MUCH higher because the fed won't be satisfied until every record is broken, including previous Tobin's Q from 1929 and 2000

Platinum's picture

The happening train continues to roll with QE4. Should hit the bend at over 100mph...

khakuda's picture

Sad, but true.  The biggest monetary easing gangbang will end in the biggest bubble ever.  It will happen, then blow up in such a horrific way that the entire system will blow up and they will, once again, blame the "free" markets for letting it happen so they can completely take over control.

hungrydweller's picture

Sweet.  Bring it on.

khakuda's picture

The most ironic and satisfying part of this is that Yellen IS the Tobin expert.  The Yellen Tobin study notes are still in use at Yale.  He is her intellectual mentor and she is pumping up stocks with easy monetary policies that are flashing Tobin Q warnings all over Will Robinson's face.

CHC's picture
CHC (not verified) May 18, 2015 3:53 PM

Yeah...but everyone knows that NOW everything is really awesome!!

devo's picture

Give up already; stocks aren't crashing.

drewbby's picture

Won't crash until the staunchest of bears give up and turn bullish which, given recent valuations and rising levels of absurdity, might be close. Then again, all conventional market wisdom apparently no longer applies so we should all dispense with thought and BTFD. On the other hand, those who have fought the fed for the last few years (myself included) are, IMHO, just about at their wits end. 


Casino Capitalism at its finest moment before the crash to end all crashes begins in earnest Tuesday morning at the opening bell of the NYSE. Frankly, the only thing propping Wall Street up right now is Cocaine n' Hookers.

LetsGetPhysical's picture

The last 10 times ZH posted a story like this the market went higher.

theFNG's picture

Double wages and half the full time work week to 20hr/week.  It is a real solution that will work.

maxamus's picture

Does someone have a count on the number of times ZH has said "the last time XXX happened the stock market crashed"??  I'd guess about 100 at least?

maxamus's picture

Does someone have a count on the number of times ZH has said "the last time XXX happened the stock market crashed"??  I'd guess about 100 at least?