(B)(N) Extreme Economics – The Russia House (MICEX)

The New American Dow?

Drama. The New American Dow (absent the 100-year veteran, the General Electric Company) is trading at $6.4 trillion today but it’s up only 2% this year in aggregate and the investors are now paying an average of $25 for $1 of the earnings and a hopeful 2.3% dividend yield ($147 billion) on 60% of those earnings which, of course, is small compensation should the Dow decline by just 3% ($180 billion) which could happen on any day.

Accordingly, the “price of an income” in the US is very high because investors are willing to pay $1 now to possibly earn 4 cents or less in one year’s time ([P/E]-25× as above) reduced by the payout rate of 60% to 2.3 cents and that is the hallmark of a “deflationary economy” and not a growth or inflationary economy but one that is tied to banking, defense, mergers and acquisitions, and share buy-backs, and the five robustly-valued FAANG-stocks (Facebook, Amazon, Apple, Netflix, and Google) which are valued at $3.4 trillion and half as much as the Dow on a net worth of $350 billion and a tenth as much as their market value for a current dividend yield of 40 basis points which is hard to eat.

All of that is true – it’s not a dream – and we accept those facts which the investors deny until the government decides to give them a 5% bond for all of that “inflated” money in the stock float and ready to drop at any time into a “recessionary economy“.

And since the economies of Europe, China, South Korea, and Japan are also trading at high prices, we need to look at Russia for an example of what happens when our money is tight (illiquid and stacked in high-yielding government bonds guaranteed by the taxpayers) and the trade is tough.

First of all, the Wall Street investors are willing to pay about 4× the net worth ($6.4 trillion for $1.6 trillion) to own an interest in the Dow companies which, with the numbers above, is comparable to paying $4 million for a glamorous rental property worth only $1 million and expecting to get $92,000 a year (2.3% of $4 million) in rent with the hope that the property values will increase and not decline by more than 3% ($120,000) this year and next in the absence of adequate maintenance in a soft rental market.

In Russia, however, the “property” values are quite different – we might say “cheap” – and the net worth of the Russian Dow (MICEX) barely breaks even with a market value of $28 trillion rubles for a net worth of $22 trillion rubles (1.25× and about 60 rubles to the US dollar) and this was also an “exuberant” market with the highest values in the last five years since their lows in 2012 when we could buy the US dollar for only 30 rubles.

The other unsurprising conclusion is that when government policy such as embargoes and trade wars or investor fantasies are not consistent with the prospects of earning an income, the former lose and the latter wins; please see Exhibit 1 below for more information on these markets and their worth (and click on it and again to make it larger as required):

Exhibit 1: The Bull Market in Stocks & The MICEX Alternative

For more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

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