The list of things hitting cyclical peaks gets longer every day. Besides the
nominal amounts (debt, derivatives, money supply) that are now at all-time
highs, some "as a share of GDP" indicators are starting to say similar, very
scary things:
Corporate profits
In a world of competition for scarce resources, corporations face some natural
limits on how much they can earn. For one thing, if business is too profitable
it attracts a deluge of new entrants who drive down margins -- and make stupid
investments that screw things up for everyone -- thus causing a broad-based
recession that craters corporate profits.
And when it's perceived that companies are taking too much (as when CEO salaries
and executive stock options become obscenely generous compared to worker salaries),
the other players, including government and labor, start grabbing what they
see as their fair share. That's happening now with the higher minimum wage
movement and government attempts to close offshore tax loopholes, among other
things.
So corporate profits tend to be cyclical, rising as a share of GDP in good
times and then plunging during recessions. The chart below has this number
at a new record high. In other words, every time it has been anywhere close
to today's level the result has been a nasty mean reversion.
Equities market value
If corporate profits are way up it makes sense that stock prices would be
too. And they are: The value of US equities as a percentage of GDP is at the
second highest level ever, below only the dot-com bubble peak. Again, not the
kind of number that has in the past preceded good times.
Total securities valuation
But equities are only one part of the financial securities complex. Bonds
are way up lately, which should also skew the data a bit. As Doug Noland put
it in a recent Credit
Bubble Bulletin:
"Total Securities" as a percentage of GDP is helpful for Bubble Analysis.
After beginning the nineties at 173% of GDP, "Total Securities" ended the
Bubble year 1999 at an unprecedented 341%. The bursting "tech" Bubble saw
this ratio decline to 267% to end 2002. Mortgage finance Bubble reflation
then pumped this ratio to a record 360% by the end of 2007. The Bubble burst
and "Total Securities" ended 2008 at 297%. Six years of incredible monetary
inflation had Total Securities ending 2014 at a record 417% of GDP.
Here's a chart built from Noland's figures showing the peaks and valleys of
the past few cycles, culminating in today's all-time high:
The consistency of these trends implies that either this time is very, very
different or a cyclical peak is close at hand.
