Some concern has been expressed in the media about the rising level of margin debt in the US. When expressed as a percentage of GDP, NYSE margin debt is approaching 1999/2007 levels.
But not only margin debt is rising. Market capitalization, while not as fast, is also on the increase.
And market cap merely reflects the underlying rise in corporate profits, measured here as a percentage of GDP.
My initial reaction was to attribute the rise to increasing globalization of US corporations, but Rebecca Wilder points out that earnings from abroad have scarcely grown. Closer scrutiny of the Bureau of Economic Analysis Q1 2013 release shows Manufacturing is the top growth sector.
So what is contributing to the surge in corporate profits?
Employee compensation has declined as a percentage of net value added by the corporate sector over the last decade.
And there has been a sharp rise in petroleum and coal output, reflected by producers’ annual value shipped ($billion) in the graph below.
Also, the percentage of corporate profits paid as taxes is shrinking. The following graph compares corporate profits after tax to corporate profits before tax. Less than 20 percent of corporate profits is currently being paid in taxes.
Are these ratios sustainable?
While unemployment remains high, growth in employee compensation is expected to be low. And corporate taxes are likely to remain low until there is a major overhaul of the tax code (don’t hold your breath). So market capitalization is likely to remain strong for at least the next two to three years.
Australian margin debt is declining steeply as a percentage of GDP.
ASX market capitalisation as a percentage of GDP is also trending lower. The 2009/2012 lows should provide a sound base for further gains.
The ASX is muted compared to US markets, but offers value in the long-term.