I came across an interesting report from McKinsey Global Institute. The report includes a breakdown of the ownership of the world's financial assets as of the end of 2010. I used their information to make the below chart.
What is interesting is the U.S. fascination with equities. It should be noted that the definition of financial assets in their report excludes "the value of real estate, derivatives, physical assets such as gold, and equity in unlisted companies." The total value of the world's financial assets equaled $198.1 Trillion and the total value of all equities equaled $53.7 Trillion. Clearly equities, bonds, bank deposits and such are massively overshadowed by the notional value of the derivatives market which is over $700 Trillion.
Drilling down to the household level in the US reveals some more interesting observations. However, unfortunately this does not include retirement accounts (but that would only increase the equity allocation since US retirement accounts hold about a 60% allocation to stocks).
The yellow line in the graph is the inflation-adjusted S&P index. You can see how long-term market trends have affected investors asset allocations through time, with investors predictably increasing/decreasing allocations at the wrong times. But I think what is clear here, is that everyone who is saying that investors are too pessimistic.....they don't know what true pessimism looks like. Investor pessimism in the US looks more like their allocations in 1945-1950 or 1975-1990. Coincidentally, that is also when generational buying opportunities presented themselves......Sorry folks, now is not a generational buying opportunity by any stretch of the imagination, despite all those who use idiotic forward PE ratio's or useless graphs of the "fed model" to tell you otherwise. Please see below some more useful market valuation indicators which actually have a strong correlation with subsequent longer-term returns (this chart is from Doug Short at Advisor Perspectives)
The market is by no means cheap. In fact, it has only been more expensive than this (based on the Shiller PE10 ratio) about 20% of the time (and those resulted in poor longer-term returns).
If you want to see true investor pessimism towards stocks, then look no further than Japan
And a sampling of some other countries........
I have little doubt that as the US population continues to age and the younger generation gets a sour taste in their mouth regarding stocks we will see the overall allocation to stocks by US investors continue to decline, then finally when everyone believes stocks are a losers game, it will finally be the next generational buying opportunity.
Great post -- the 2nd and 3rd charts especially are worrisome.
ReplyDeletePerhaps this is my selective perception kicking in, but it ties in well with my expectations that this secular beat market has a few years left to run . . .
@Ritholtz Thanks, quite the compliment coming from someone with over 20,000 posts under their belt. I'm with you on the secular bear market...
DeleteI would like to see exhibit #2 back to 1921 for comparison of the 1930's. My view is we are in a secular bear that is running its course but the 666 lows hold. I believe Yamada calls this the repair phase. We can look back during cyclical bears and if one correctly identifies the absolute bottom, being invested before the next secular bull star provides for very powerful returns. Let the public continue to disown equities, it is clear they are a contrary indicator and with the proliferation of business "news" channels their track record will not improve. Of course, correctly identifying the absolute bottom is the hard part.
ReplyDeleteIncredible charts.
ReplyDeleteI'm not so sure about the younger generation being sour though. They had little to to lose in the last decade, and they have been saturated with ipo/equity news most of their conscious life. Many of them are also taking basic financial literacy / statistics courses. As a result they will think they will fare better than their parents.
@preserve, agreed, I think it is an ongoing process turning the younger generation off towards equities (that has not yet run it's full course).
DeleteIt hardly matters what the young generation has as an outlook. The same force that drove equities up relentlessly in the late nineties and the early oughts is turning around and will start driving them downwards now: the boomer generation that poured money into the markets and that now needs to start living off this money. Young westerners are too few and too poor (relative to the boomers at the peak of their careers) to reverse this trend, so they have good reason to wait to invest for a couple of decades.
ReplyDeleteAgreed. Same with home prices. As the boomers retire and need money, they have to unlock their equity from their houses. As they move on to retirement homes and eventually pass away, there will be less need for homes. Unless, our population continues to grow due to large influx of immigrants (which we control -- there are always millions waiting to immigrate to the US).
DeleteUS households are NOT fascinated with stocks. There are at least 2 easy explanations why US residents are "overweight" stocks:
ReplyDelete#1 Since the demise of pension plans, millions are forced into 401k plans. Of 16 choices in my plan, 13 are stocks, 2 bonds and 1 money market fund. with 13 out of 16 most folks will naturally put more $$ in equity funds. also, the promotional garbage shows that most of the time equity funds have outperformed. even more folks will pile into stocks
#2 In the 1990s stock outperformed and investments in equities grew more than bonds. If stocks are allowed to "correct" like int he past Depressions/deleveragings, their value will be cut and the balance will be restored
#1 is the correct answer to this question
DeleteAnother reason US households and Western Europeans have higher stock ownership compared to those in emerging markets is the relatively better accounting and transparency in the US and European stock markets and their public companies. I know, many here (inlcuding me) don't agree that there is enough transparency in the us stock markets, but if you monitor emerging markets (BRIC for example), you will notice it is hard to trust the stock markets and their public companies in those markets.
DeleteYa, it's amazing how limited most 401K plans are. Many will only have 2 non-stock options...generally a MMF/Stable Value Fund and an Intermediate Bond option. Where are options like international bond funds, short-term bond funds, high yield bond funds, floating rate funds or multi-sector bond funds? Investors should have all these options.
DeleteAlthough I don't think that accounts for the whole reason US investors are so heavy stocks.....while 401K assets are included in the 1st chart. The 2nd chart breaking down household allocations actually does not include retirement assets (IRAs, 401Ks etc) and the affinity towards stocks is still apparent.
Everybody knows that stocks are the way to get rich quick; we can all see how the Wall Street guys flash it around.
ReplyDeleteIt has taken me some time to comprehend what "pump and dump," means. It is amazing that the financial columns including the FT are still full of this sell side nonsense, yet, the FED seems to leave us almost no choice.
ReplyDeleteI advocate that only retirees with savings below, say, $350,000 +/- be eligible to purchase 10 year bonds at 5% and interest be paid quarterly to their accounts. These bonds would not be trade-able and only the Treasury could buy them back.
I seem to recall US investors overly concentrated in domestic stocks as well. The relative valuations of various benchmarks bear that out also. SPY yielding just 2% w/ pe of 14 v. say the EFA which is yielding 3.5% on a pe of just 10.
ReplyDeleteOn the flip side w/ the 10year yielding only 1.9% is hard to call equities overvalued. W/ demographics being what they are..equities prob. get even "cheaper" though.
The Q ratio is very disturbing. We could see another 25% drop if I read it correctly. Heck with Secular Bear. Call it the Rampaging Kodiak Grissly. For Main Street rants on similar subjects as yours see: www.pilogic.net
ReplyDeleteThe debt situations of many of European countries have become so influential that countries like India also get affected. India’s quarter GDP slipped low to 6.9 %. But India is somewhat in better place than its Asian peers, We can expect a slow down but we will be still running at 6 % - whereas US & Others are in Negatives; Positives for India includes the country’s low exports to GDP ratio, domestically financed fiscal deficit, limited exposure to foreign liabilities and a healthy banking system. I found this link just
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Paper assets are now more than dominated by paper debts and yet to be papered deficits. Would be interesting to see an overlay of indebtedness by region, household on the one hand, sovereign on the other, with the equities chart. It is of course no wonder why mark to market is still avoided at "all" costs given that chart; though by the same token, the debt drag on performance is also very telling. Among wealth preservationists, these days, stocks are becoming the "least" owned asset class. Smart money indeed.
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ReplyDeleteEach of these excess stock buyers has different objectives and motivations.
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ReplyDeleteWhat is exciting is the U.S. interest with shares. It should be mentioned that the meaning of economical resources in their report limits "the value of property, types, physical resources such as silver, and value in unregistered companies." The complete value of the economical resources equaled $198.1 Billion and the complete value of all shares equaled $53.7 Billion.
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ReplyDeleteI think there are several reasons why the US holds most of the world's financial assets. One of them is that households in the US may have more disposable income than households in other parts of the world.
ReplyDeleteI would like to consider another reason. I think investors in the US have ore access to the world financial markets. In countries that have tightly controlled markets, it is harder for the average citizen to invest in markets outside of their own.
In a collateralised system like ours the banks are not really lending institutions. They are glorified pawnbrokers.
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ReplyDeleteAnother alternative reason: US households and Western Europeans have higher stock ownership compared to those in emerging markets is the relatively better accounting and transparency in the US and European stock markets and their public companies
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