Monday, January 23, 2012

Who Owns The World's Financial Assets? And Why Are U.S. Households So Fascinated With Stocks?

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.



71 comments:

  1. Great post -- the 2nd and 3rd charts especially are worrisome.

    Perhaps 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 . . .

    ReplyDelete
    Replies
    1. @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...

      Delete
  2. I 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.

    ReplyDelete
  3. Incredible charts.

    I'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.

    ReplyDelete
    Replies
    1. @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).

      Delete
  4. It 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.

    ReplyDelete
    Replies
    1. Agreed. 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).

      Delete
  5. US households are NOT fascinated with stocks. There are at least 2 easy explanations why US residents are "overweight" stocks:
    #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

    ReplyDelete
    Replies
    1. #1 is the correct answer to this question

      Delete
    2. Another 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.

      Delete
    3. Ya, 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.

      Although 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.

      Delete
  6. Everybody knows that stocks are the way to get rich quick; we can all see how the Wall Street guys flash it around.

    ReplyDelete
  7. It 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.

    I 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.

    ReplyDelete
  8. 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.

    On 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.

    ReplyDelete
  9. 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

    ReplyDelete
  10. The 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
    VISIT - http://bhavikkshah.blogspot.com/2011/10/biggest-nations-of-world-in-debt-trap.html

    ReplyDelete
  11. 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.

    ReplyDelete
  12. I like your post so much ... and i like any blog talking about finance Articles and a lot of things just follow me in Articles2day.Org

    ReplyDelete
  13. Yo ass belongs to me.

    ReplyDelete
  14. Each of these excess stock buyers has different objectives and motivations.

    ReplyDelete
  15. Just generate around places and you will see unfilled houses that a difficult by ignore. The FDIC needs to phase in and quit this before we find ourselves doing this for 20 decades. The financial institutions and regulations designed this clutter, it's time for them to phase up and be accountable for their deficiency of wise practice that designed this disaster. howtoretireplan.com

    ReplyDelete
  16. What 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.


    10 Things You Must Give Up to Be a Millionaire Real Estate Investor

    ReplyDelete
  17. Interesting post. Thanks!

    ReplyDelete
  18. I would like to thank you for the efforts you have made in writing this post. I am hoping the same best work from you in the future as well.
    Land Surveyor Birmingham, AL

    ReplyDelete
  19. I 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.

    I 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.

    ReplyDelete
  20. In a collateralised system like ours the banks are not really lending institutions. They are glorified pawnbrokers.

    ReplyDelete
  21. This is a smart blog. I mean it. You have so much knowledge about this issue, and so much passion. You also know how to make people rally behind it, obviously from the responses.
    how to get credit easy approve

    ReplyDelete
  22. great work has done thanks for sharing and keep it up

    ReplyDelete
  23. Another 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

    ReplyDelete
  24. Incredible post! That was fascinating. I like your quality that you put into your post. Kindly do proceed with additional like this.

    ReplyDelete
  25. I really enjoyed reading your article. I found this as an informative and interesting post, so I think it is very useful and knowledgeable. I would like to thank you for the effort you have made in writing this article.

    ReplyDelete
  26. Thank you for the great post,It is really a big help.thanks for sharing nice blog. installment loans Texas

    ReplyDelete
  27. A company that I use is Lone Star Cash Services based in Dallas. Great source of cash loans.

    ReplyDelete
  28. A very excellent blog post. I am thankful for your blog post. I have found a lot of approaches after visiting your post. financial news for today

    ReplyDelete
  29. Wow, this is fascinating reading. I am glad I found this and got to read it. Great job on this content. I liked it a lot. Thanks for the great and unique info. http://ketquamoinhat.com/

    ReplyDelete
  30. Thanks for the blog loaded with so many information. Stopping by your blog helped me to get what I was looking for. linkw88moinhat.com

    ReplyDelete
  31. Your site is exceptionally viable and contains commendable substance. Couldn't want anything more than to visit here. What's more, you can likewise check for quality online networking administrations visit Buy Instagram Auto likes UK.

    ReplyDelete
  32. Your site is exceptionally viable and contains commendable substance. Couldn't want anything more than to visit here. What's more, you can likewise check for quality online networking administrations Buy Instagram followers.

    ReplyDelete
  33. Your established behavior pattern Cheap Ray Ban Glasses is like a familiar, well traveled road. You've used it for so long that the turns and stops are practically automatic. But at some point you realize that the route you've been taking is narrow and has some potholes.

    For proof of the power of hot buttons, look at the fascination people have Nike Air Force 1 Cheap Outlet with spectator sports and its related apparel. It defies reason. People don't root for a player, although the player may have some sort of Coach Outlet Clearance transient relevance, Coach Bags Clearance New Jordan Shoes 2020 as much as they root for a logo or a uniform. New Yeezys 2020

    Usually the fee we quote is immediately accepted MK Outlet without negotiations. Understandably, it's due to our presentation. Michael Kors Outlet Store Consider, for example: "Here's Herb's Coach Bags Outlet standard fee. Sunglasses A wraparound style will reduce UVR entering the eye from the side of the face. Sunglasses must conform to Australian and New Zealand standard Sunglasses and Fashion Spectacles AS/NZS 1067:2003. Also refer to the Australian Radiation Protection and Nuclear Safety Agency website for further information on lens protection categories.

    ReplyDelete
  34. I visit your blog regularly and recommend it to all of those who wanted to enhance their knowledge with ease. The style of writing is excellent and also the content is top-notch. Thanks for that shrewdness you provide the readers! 사다리사이트

    ReplyDelete
  35. This is a splendid website! I"m extremely content with the remarks!. Forex bank account

    ReplyDelete
  36. I was reading some of your content on this website and I conceive this internet site is really informative ! Keep on putting up. csgo ranking system

    ReplyDelete
  37. I conceive you have noted some very interesting points, regards for the post.
    ทางเข้าเดิมพัน138bet

    ReplyDelete
  38. It’s really a great and helpful piece of info. I’m glad that you shared this helpful info with us. Please keep us up to date like this. Thanks for sharing.
    부산달리기

    ReplyDelete
  39. That is the excellent mindset, nonetheless is just not help to make every sence whatsoever preaching about that mather. Virtually any method many thanks in addition to i had endeavor to promote your own article in to delicius nevertheless it is apparently a dilemma using your information sites can you please recheck the idea. thanks once more 슬롯사이트

    ReplyDelete
  40. Thanks a million and please continue the enjoyable work. 오피사이트


    ReplyDelete
  41. I am regular visitor, how are you everybody?
    This article posted at this website is in fact good
    I 카지노사이트

    ReplyDelete
  42. very great eccommerce website for custom packaging boxes try now Software Boxes Maker

    ReplyDelete
  43. Thanks to my father who shared with me concerning this website, this web site is truly amazing.

    Here is my web site - 카지노

    ReplyDelete
  44. Seriously plenty of awesome advice!

    Also visit my site : 우리카지노
    (mm)

    ReplyDelete
  45. That's a great article! The neatly organized content is good to see. Can I quote a blog and write it on my blog? My blog has a variety of communities including these articles. Would you like to visit me later? 토토사이트추천


    ReplyDelete
  46. Excellent read, I just passed this onto a friend who was doing a little research on that. And he actually bought me lunch as I found it for him smile Therefore let me rephrase that: Thank you for lunch. 먹튀신고


    ReplyDelete
  47. 메이저사이트추천November 28, 2021 at 7:43 PM

    The assignment submission period was over and I was nervous, 메이저사이트추천 and I am very happy to see your post just in time and it was a great help. Thank you ! Leave your blog address below. Please visit me anytime.


    ReplyDelete
  48. I was impressed by your writing. Your writing is impressive. I want to write like you.파워볼사이트 I hope you can read my post and let me know what to modify. My writing is in I would like you to visit my blog.


    ReplyDelete
  49. I hope you can help me. I've been thinking about this for a long time, but I'm not getting it resolved.온카지노


    ReplyDelete
  50. After those first few months, it's okay to decrease the amount of contact with your merchants. Selling Merchant Services

    ReplyDelete

  51. This seems to be the age of the entrepreneur,
    슬롯사이트

    Here I am once again trying to explain things to people.
    슬롯사이트

    ReplyDelete

  52. That's exactly what I've been looking for
    검증카지노

    Your information was very useful to me.
    온라인카지노

    ReplyDelete