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S&P500 Normalized with M2

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Re: S&P500 Normalized with M2

#11

Post by VHRanger »

It might surprise no one here that people who are professionals in the finance industry are capable of adjusting for inflation:

https://www.multpl.com/inflation-adjusted-s-p-500

You can also note that M2 is correlated basically with inflation in the long run (Rsquared ~0.92)

The error on the part of the twitter user is that he's using nominal values instead of % growth (log-log) values. Something you learn in 101 econometrics.

This is why you don't listen to crypto bros on matters of monetary economics.

Re: S&P500 Normalized with M2

#12

Post by etskinner »

arcticbull wrote: post #6

Why on earth would you divide the market cap of the 500 largest companies in the US by the money supply? It's a completely arbitrary and silly thing to do. Why not divide the number of cheese wheels by the diameter of the moon? This chart isn't mind-blowing, it's straight-up meaningless. [edit] Also note the S&P 500 isn't even a consistent numerator, it's an index whose constituent companies are replaced over time at…

They should really be comparing to the total stock market, of course. Using something like DWCF or VTSAX

Re: S&P500 Normalized with M2

#14

Post by arcticbull »

etskinner wrote: post #12
arcticbull wrote: post #6

Why on earth would you divide the market cap of the 500 largest companies in the US by the money supply? It's a completely arbitrary and silly thing to do. Why not divide the number of cheese wheels by the diameter of the moon? This chart isn't mind-blowing, it's straight-up meaningless. [edit] Also note the S&P 500 isn't even a consistent numerator, it's an index whose constituent companies are replaced over time at…

They should really be comparing to the total stock market, of course. Using something like DWCF or VTSAX

Why not just adjust the market cap by CPI? Remember these companies grow, get bigger, drive more revenues, yield more profit and own more assets - ownership interest in these companies becomes more intrinsically valuable over time. If your goal is to remove the impact of the change in purchasing power, we have a way of doing that - CPI.

Re: S&P500 Normalized with M2

#16

Post by rafaelero »

arcticbull wrote: post #6

Why on earth would you divide the market cap of the 500 largest companies in the US by the money supply? It's a completely arbitrary and silly thing to do. Why not divide the number of cheese wheels by the diameter of the moon? This chart isn't mind-blowing, it's straight-up meaningless. [edit] Also note the S&P 500 isn't even a consistent numerator, it's an index whose constituent companies are replaced over time at…

Why not? In the long run M2 is basically the same as inflation.

Re: S&P500 Normalized with M2

#17

Post by arcticbull »

rafaelero wrote: post #16
arcticbull wrote: post #6

Why on earth would you divide the market cap of the 500 largest companies in the US by the money supply? It's a completely arbitrary and silly thing to do. Why not divide the number of cheese wheels by the diameter of the moon? This chart isn't mind-blowing, it's straight-up meaningless. [edit] Also note the S&P 500 isn't even a consistent numerator, it's an index whose constituent companies are replaced over time at…

Why not? In the long run M2 is basically the same as inflation.

No, it's not. It's not the same thing at all. Money supply is not the same thing as inflation, which is why we have different terms for them.

Re: S&P500 Normalized with M2

#18

Post by throw9away6 »

arcticbull wrote: post #14
etskinner wrote: post #12

Earlier quoted context omitted.

They should really be comparing to the total stock market, of course. Using something like DWCF or VTSAX

Why not just adjust the market cap by CPI? Remember these companies grow, get bigger, drive more revenues, yield more profit and own more assets - ownership interest in these companies becomes more intrinsically valuable over time. If your goal is to remove the impact of the change in purchasing power, we have a way of doing that - CPI.

CPI is a terribly gamed metric. Due to hedonic adjustment and poor weighting it’s not really clear it tracks well to anything. That is to say that the detailed level inputs are really good but the end product is manipulated.

Re: S&P500 Normalized with M2

#19

Post by arcticbull »

throw9away6 wrote: post #18
arcticbull wrote: post #14

Earlier quoted context omitted.

Why not just adjust the market cap by CPI? Remember these companies grow, get bigger, drive more revenues, yield more profit and own more assets - ownership interest in these companies becomes more intrinsically valuable over time. If your goal is to remove the impact of the change in purchasing power, we have a way of doing that - CPI.

CPI is a terribly gamed metric. Due to hedonic adjustment and poor weighting it’s not really clear it tracks well to anything. That is to say that the detailed level inputs are really good but the end product is manipulated.

Another fun conspiracy theory.

The BLS actually publishes a CPI analysis based on a consistent series without adjustments called R-CPI-U-RS. The difference between CPI-U and R-CPI-U-RS is like 0.8% IIRC [1].

By all means, prove yourself wrong. You can dig up some old newspaper ads from the 70s. None of this is something you can't calculate at home.

> That is to say that the detailed level inputs are really good but the end product is manipulated.

All the details, data and weightings are published. Are there some you specifically disagree with?

Citation needed. And for the love of God don't cite Shadowstats lol, which is trivially and obviously wrong.

[1] https://www.bls.gov/cpi/research-series/r-cpi-u-rs-home.htm

Re: S&P500 Normalized with M2

#20

Post by bryanlarsen »

rafaelero wrote: post #16
arcticbull wrote: post #6

Why on earth would you divide the market cap of the 500 largest companies in the US by the money supply? It's a completely arbitrary and silly thing to do. Why not divide the number of cheese wheels by the diameter of the moon? This chart isn't mind-blowing, it's straight-up meaningless. [edit] Also note the S&P 500 isn't even a consistent numerator, it's an index whose constituent companies are replaced over time at…

Why not? In the long run M2 is basically the same as inflation.

M2 growth relative to the growth of size of the economy is basically the same as inflation, in the Milton Friedman Chicago school.

So if M2 growth and the S&P 500 are similar, that means that the S&P 500 is fairly well correlated with the size of the economy. Quelle surprise!

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