On global wealth

[QUOTE=sheeshu;478678][url]https://infocus.credit-suisse.com/data/_product_documents/_shop/323525/2011_global_wealth_report.pdf[/url]

[url]http://www.unep.org/pdf/IWR_2012.pdf[/url][/QUOTE]

Hi Sheeshu, thanks for providing these 2 links. I went through both of them, dry reading though they were - but I am traveling and had little to do.


The credit suise report is based on household income with WB report on GDP growth being added to produce a fairly simple estimate. It is highly suited for asset management companies to target customers and is very successful in doing this - it is clear that its 3 authors must have been well paid and provided with finance pro staff to crunch numbers, generate some slick presentations and must have spent a fair amount of time to do this.

The other report is a mixed bag of all kinds of thought processes of various economists trying to publish their theses on how to calculate wealth. Much of it seems to be by left of center economists and environmentalists (I tend to hate them).

Both are classic examples of missing the wood for the trees (though Credit suisse like the humans in the movie Avatar - is bang on target with the one tree it is interested in - which it wants to cut for its own). I would still prefer to use my own rule of thumb calculations since it produces an actionable result for all kinds of investment related analysis.

Simply put,

1. Total wealth is 10 times global GDP. So if GDP is 40 trillion, wealth is 400 trillion

2. 50% is intangibles (you can use the contribution of services sector as a guide to how to value for every country). Overall you can say 50% of 400 million i.e 200 million is in infrastructure, natural resources and human capital). (Those 100+ economists probably measured this).

3. Rest 50% is in financial assets i.e. listed companies (market cap usually =annual GDP), unlisted companies, real estate and gold.

4. Wealth grows at annual global GDP growth rate (I really do not believe that credit suisse report which says that India's wealth likely to grow at 8.4% - they havent thought about productivity at all - currency depreciation as seen recently has already put paid to that anyway - India probably contracted last year in USD)

5. Wealth depreciates at about 2% per annum, regardless of how much it grows

6. Gold cannot be more than 10% of financial assets (i.e it cannot be >10% of 200 trillion i.e. 20 trillion

7. Value of real estate, listed stocks, discounted cash flow of private companies etc can gyrate wildly but total wealth represented by these together cannot decrease or increase by more than 30% in short term and in long term (>15 years) will change by +/- the global annual GDP growth rate i.e. +/- 5% only asuming 5% GDP growth (since by then the 2% per annum depreciation would amount to 30% depreciation and catch up i.e. RE prices can drop to 70% and stay there for 15 years and catch up with the expected depreciation).

8. Everything depreciates including bonds (by inflation reducing value), stock/company book value (depreciation of its assets), gold (making and remaking ornaments, dead end for velocity of money - two ways to destroy gold wealth), real estate (obvious depreciation of its utility).

9. Recession causes reduced wealth. Stagnation same. Inflation same. Valuation falls are also same.

10. Our interest in all of this crap is only for valuation - figuring out an assets right value so that we can make money from it. Rest doesnt matter

Simplicity works.

Thinking more and coming up with complicated methods will not help in right pricing of an asset by more than 5% (statistical error is anyway 5% being accepted). You can ignore the specifics and go by the rule of thumb. I plan to do so.

Main problem with both analysis methods in these links, in my mind was this - one was finance pros and knew little of economics, other was economist and knew little of finance and neither kept central banking in mind.

None of them were trying to generate data to base financial investment decisions. Even the finance pros were trying to find customers to sell their wealth management and to project growth of their business.

Common problem this - people are not all encompassing and comprehensive, forcing simple people like me to come up with simplified back of the envelope calculations and rules of thumb.

Of course I might be wrong - totally wrong. But I am putting my money based on these thinkings. These two groups are earning their living based on their writings - if they are wrong they dont care, they get their fee income.

If I am wrong, I lose money. And the first rule in investment is - dont lose money. It doesnt matter if you dont make it - but dont lose it.

Risk is to be reduced. That is the main aim - if two assets seem likely to give same reward, chose the one with less risk.

Again - I repeat - I might be totally wrong.