That would be in the valuation term. Higher demand for shares means that the marginal holder is willing to accept a lower yield.
(I know it's a common usage, but I've always been puzzled by language like "more money coming into the stock market." By definition, flows of more in and out of a market are always equal -- for every buyer there is a seller.)
This is a very intriguing construction. I reversed your formula's order as a way of thinking about it, FWIW:
Firms' market value is based on investors' estimate of future firm payouts.
Firms' payouts comprise a percentage of their profits.
Firm's profits comprise a percentage of their value added.
Firms' value-added comprises a percentage of GDP.
I'm not sure how much it helps, but the first line's assumption highlights what I think is a big (and pervasive) problem.
My claim: equity investors set the firm sector's market value based on estimated future Total Returns (TR) including capital gains accrued and accumulated over years, decades, liftimes. NOT based just on future payouts (either dividends or your sensible measure), net earnings, free cash flows, etc etc.
TR is the measure every brokerage site shows you up front, top and center when looking at your portfolio, at a given equity, or an ETF or mutual fund. (You have to dig around to find "yield-only" return.) Total Return is the foundation and basis of Modern Portfolio Theory.
Note that even Shiller's "Total Return CAPE" doesn't encompass this; it just assumes dividend reinvestment.
To keep this short I'll just highlight one stylized and ~unrecognized macroeconomic fact:
The household sector's standard-issue "yield-only" Return on Assets as embodied in the NIPAs (interest + dividends + rental & proprietors' profits) averages 5.2% since 1960.
HHs' Total Return on assets (adding accrued/accumulated holding gains to yield) averages 9.6%.
You are certainly right that the value of a stock (or other asset) is based on total returns, inclusive of capital gains, and not merely on payouts. And probably capital gains have become a larger part of returns over time.
This is an important part of our argument in Against Money (and the larger worldview it draws from) -- that so much of the change in asset values over time reflects changes involution is an important reason why it's more productive to think of capital as a social relationship, rather than a physical or quasi-physical substance.
That said, I think it's helpful to ask what part of changes in asset values can be explained by changes in the payments received by their owners. This is perhaps especially worth doing for stocks, since we would like to distinguish between valuation changes attributable to changes in the volume of shares outstanding (due to buybacks etc.) from what you might call "pure" valuation changes. If a corporation retires, say, half of its stock and the market value of its shares doubles, then that looks from the point of view of the individual owner like capital gains. But there has been no change in the market value of a dollar of payments from the corporation.
I've always found "capital as a social relationship" befuddling and confusing to conversations, because "capital" is so polysemous. Are drill presses a social relationship? Makes it v hard to "think together" about this stuff. ("Capital" should be abolished! 🇲🇦)
Ownership, OTOH, is on its face and quite clearly a social relationship: If one person owns something, nobody else does. (Thanks to Matt Bruenig for this: ownership was meaningless to Crusoe, before Friday arrived. The defining rights of ownership are *exclusionary.*) This is easily understandable in my plodding and pettifogging accounting (measurement!) way of thinking: the asset side your balance sheet is just a list of 'things' you own.
"Attributable" holding gains: tricky bidness. Keeping this shortish, I'll just point to NIPA fixed-asset table 5.10 that I find amusing. It attributes a portion of gains to inflation, and gives us "Real" Nominal holding gains! 😀
Drill presses are not a social relationship, no. Drill presses in themselves are also not capital. *Property rights* in drill presses, on the other hand, are capital and are a social relationship, as you say.
It seems to me that capital is one of the fundamental organizing principles of the world that we live in. We cannot simply dismiss it. And the polyvalence - the superimposition of different meanings - is inherent in the thing itself, not just a confusion of language. Capital is an exclusive right to certain instruments of production, *and* a sum of money that increases over time, *and* a hierarchical relationship between people. The fact that these analytically distinct things - which in other times and places might be quite distinct - are mixed up together is a fundamental fact about the modern world.
There are a lot of funny things that happen when national accountants try for too much consistency. My favorite, not irrelevant to the discussion at hand, is the SNA practice of treating stocks at current market value as liabilities of the corporate sector. If the stock market does too well, corporations will be insolvent!
I’ll just say that I think that that complex of “capitals” can be better explained and presented and so, better modeled. (I also have big conceptual and empirical problems with factor models.)
On the SNA convention, I so agree. It makes invisible the difference between shareholder book equity – the cumulative sum of firms’ net investment spending minus payouts – and equity value at market prices. So we are left with an accounting model in which the flows radically fail to explain the changes in stocks. Cheers.
So much to absorb and think about. Instinctively my mind goes immediately to how an increase in profits and valuations as fractions of GDP means that less and is going to labour over time — is that correct?
Second, I wonder what influence, if any, increasing wealth inequality has on this over time? A small group of people are wielding a very large and growing proportion of the asset purchasing power — and they are mostly only ever buying more assets because there’s literally nothing else they can do with their immense and growing passive income. If share issuance is relatively constant (and I acknowledge that this may be an unwarranted simplification) couldn’t the “buying pressure” of this class of persons result in upward valuations over time?
That would be in the valuation term. Higher demand for shares means that the marginal holder is willing to accept a lower yield.
(I know it's a common usage, but I've always been puzzled by language like "more money coming into the stock market." By definition, flows of more in and out of a market are always equal -- for every buyer there is a seller.)
This is a very intriguing construction. I reversed your formula's order as a way of thinking about it, FWIW:
Firms' market value is based on investors' estimate of future firm payouts.
Firms' payouts comprise a percentage of their profits.
Firm's profits comprise a percentage of their value added.
Firms' value-added comprises a percentage of GDP.
I'm not sure how much it helps, but the first line's assumption highlights what I think is a big (and pervasive) problem.
My claim: equity investors set the firm sector's market value based on estimated future Total Returns (TR) including capital gains accrued and accumulated over years, decades, liftimes. NOT based just on future payouts (either dividends or your sensible measure), net earnings, free cash flows, etc etc.
TR is the measure every brokerage site shows you up front, top and center when looking at your portfolio, at a given equity, or an ETF or mutual fund. (You have to dig around to find "yield-only" return.) Total Return is the foundation and basis of Modern Portfolio Theory.
Note that even Shiller's "Total Return CAPE" doesn't encompass this; it just assumes dividend reinvestment.
To keep this short I'll just highlight one stylized and ~unrecognized macroeconomic fact:
The household sector's standard-issue "yield-only" Return on Assets as embodied in the NIPAs (interest + dividends + rental & proprietors' profits) averages 5.2% since 1960.
HHs' Total Return on assets (adding accrued/accumulated holding gains to yield) averages 9.6%.
Piketty's r?
Thanks for listening...
Hi Steve. Thanks for the comment.
You are certainly right that the value of a stock (or other asset) is based on total returns, inclusive of capital gains, and not merely on payouts. And probably capital gains have become a larger part of returns over time.
This is an important part of our argument in Against Money (and the larger worldview it draws from) -- that so much of the change in asset values over time reflects changes involution is an important reason why it's more productive to think of capital as a social relationship, rather than a physical or quasi-physical substance.
That said, I think it's helpful to ask what part of changes in asset values can be explained by changes in the payments received by their owners. This is perhaps especially worth doing for stocks, since we would like to distinguish between valuation changes attributable to changes in the volume of shares outstanding (due to buybacks etc.) from what you might call "pure" valuation changes. If a corporation retires, say, half of its stock and the market value of its shares doubles, then that looks from the point of view of the individual owner like capital gains. But there has been no change in the market value of a dollar of payments from the corporation.
You're right about capital gains' proportion of total property income, RoA: https://drive.google.com/file/d/1-h0DT6P61_kf1nEUKSA3UwPcRV_v7dKW/view?usp=sharing
I've always found "capital as a social relationship" befuddling and confusing to conversations, because "capital" is so polysemous. Are drill presses a social relationship? Makes it v hard to "think together" about this stuff. ("Capital" should be abolished! 🇲🇦)
Ownership, OTOH, is on its face and quite clearly a social relationship: If one person owns something, nobody else does. (Thanks to Matt Bruenig for this: ownership was meaningless to Crusoe, before Friday arrived. The defining rights of ownership are *exclusionary.*) This is easily understandable in my plodding and pettifogging accounting (measurement!) way of thinking: the asset side your balance sheet is just a list of 'things' you own.
"Attributable" holding gains: tricky bidness. Keeping this shortish, I'll just point to NIPA fixed-asset table 5.10 that I find amusing. It attributes a portion of gains to inflation, and gives us "Real" Nominal holding gains! 😀
https://drive.google.com/file/d/1nHLrDjROtp8G6sUjIRhrbOksJQO-Z5C9/view?usp=sharing
Drill presses are not a social relationship, no. Drill presses in themselves are also not capital. *Property rights* in drill presses, on the other hand, are capital and are a social relationship, as you say.
It seems to me that capital is one of the fundamental organizing principles of the world that we live in. We cannot simply dismiss it. And the polyvalence - the superimposition of different meanings - is inherent in the thing itself, not just a confusion of language. Capital is an exclusive right to certain instruments of production, *and* a sum of money that increases over time, *and* a hierarchical relationship between people. The fact that these analytically distinct things - which in other times and places might be quite distinct - are mixed up together is a fundamental fact about the modern world.
There are a lot of funny things that happen when national accountants try for too much consistency. My favorite, not irrelevant to the discussion at hand, is the SNA practice of treating stocks at current market value as liabilities of the corporate sector. If the stock market does too well, corporations will be insolvent!
I’ll just say that I think that that complex of “capitals” can be better explained and presented and so, better modeled. (I also have big conceptual and empirical problems with factor models.)
On the SNA convention, I so agree. It makes invisible the difference between shareholder book equity – the cumulative sum of firms’ net investment spending minus payouts – and equity value at market prices. So we are left with an accounting model in which the flows radically fail to explain the changes in stocks. Cheers.
So much to absorb and think about. Instinctively my mind goes immediately to how an increase in profits and valuations as fractions of GDP means that less and is going to labour over time — is that correct?
Second, I wonder what influence, if any, increasing wealth inequality has on this over time? A small group of people are wielding a very large and growing proportion of the asset purchasing power — and they are mostly only ever buying more assets because there’s literally nothing else they can do with their immense and growing passive income. If share issuance is relatively constant (and I acknowledge that this may be an unwarranted simplification) couldn’t the “buying pressure” of this class of persons result in upward valuations over time?
Thanks again for giving me much to ponder …
Yes, you're correct on labor share. See Figure 7: https://www.paecon.net/PAEReview/issue113/Roth113.pdf