With so many trillions and billions of dollars changing hands around the world today, how can the average investor make sense of it all? Follow the money. The global wealth picture is hard to follow but easier to understand through some basic money and stock market statistics.
As an investor I’m curious to the actual size of each of the major markets in terms of dollars, because bigger money forces tend to impact the macroeconomic picture, and certain ones more than others.
To understand statistics about global wealth and markets, we’ll need a few economics 101 concepts under our belt.
Wealth and Money Definitions
First, what is money?
Money is used to exchange goods and services. Money is used as investment in order to earn interest (future flows of money). Money is lots of things.
As it stands today, money around the world is mostly exchanged through the U.S. Dollar. The USD is the world’s #1 reserve currency, which means it is used the most today for monetary transactions.
Next, let’s define what wealth is.
Wealth is the sum of a person’s assets against their liabilities. In other words, what a person owns vs. what they owe. This is also called “Net Worth”.
Assets can come in many types:
- Real Estate
- Cash (in global currencies)
- Alternative assets
In the same token, liabilities can take the form of:
- Debt (also called credit)
- Credit cards
- Lines of credit
- Long term loans
- Student loans
What makes debt special to understand, and is basically glossed over by many, is that one person’s debt is another person’s assets.
There’s always a borrower and a lender in any debt instrument, and so debt on an island is not a bad thing. It’s when debt is at risk of default that the debt becomes a problem for the owner (lender) and borrower.
This means that in the calculation of global wealth, debt doesn’t detract from total wealth in the world, because one person’s debt is another person’s assets. Debt or credit can be bad for individual countries if it becomes burdensome, but there are many factors which contribute to that, like:
- Interest rates
- Income (GDP)
- Money circulation
- Investment assets
- Speculation in FX
- Etc, etc, etc
We won’t go into those, as it can get quite complex, but just remember that debt/credit is not necessarily a bad thing, and it’s a statistic that can be used as a scare tactic by people who don’t fully understand its role in the global economy.
Household vs Corporate vs Government Wealth
The next key concept to understand about wealth, money, the stock market (and more) is that all aspects of wealth and money—assets, credit, cash, and more—can all be owned and owed by people, corporations, and governments.
There’s vast shades of ownership and obligation between each of those institutions, which can really make the overall global debt picture murky.
Let’s take an example with a very common type of debt—a bond.
Bonds are a long term debt instrument where the issuer gives the borrower a large sum, and the borrower must pay the bond back over time through a coupon, which will include priniapl and/or interest.
Usually corporations and governments borrow money through bonds. There are many different types of buyers of bonds:
- Investment funds
- Pension funds
- Hedge funds
- Mutual funds
- Sovereign wealth funds
- Other Corporations
- Other large institutional investors
- Individual investors
- The Federal Reserve (and other central banks)
- Etc, etc
So you can see that a corporation and a government can be both a buyer and a seller of bonds, either directly or indirectly in form (through bonds securitized into other investments), or directly/ indirectly in ownership (through a sovereign wealth fund controlled by a government).
Of course, we know that households can have mixes of assets and liabilities—like retirement stock portfolios, real estate, and a mortgage—and so it makes sense that corporations and governments can have mixes as well.
So to get an accurate statistical representation of global wealth and money, we’ll need to take this mix of assets and liabilities into account.
Basic Drivers of Worldwide Wealth
Each of the main types of assets above have mostly liquid markets where individuals or institutions can buy or sell them. These include:
- Stock market
- Bond (or credit) market
- Real estate market
- Money supply (cash)
- Crypto and other
If we can quantify the sum of the market values of all of these assets, we can estimate the total global wealth.
Keep in mind that by measuring wealth, we are trying to measure all of the money in the “system”.
Money is nothing more than an exchange for goods and services, and it is only useful as long as it is widely accepted by people.
The value of “something” depends ultimately on the price that a buyer and seller are willing to transact at. Since the value of every major market determines the amount of money in the system, all we are estimating through quantifying these values is the sum of all of the prices which buyers and sellers are willing to transact at.
If it sounds like an abstract concept, that’s because it is.
Governments can simply print more money to generate more “paper” wealth, which drives up the prices in each of these markets.
What we are really measuring through a look at global wealth and markets statistics is the amount of money in the system.
More isn’t necessarily good or bad.
But in measuring the total global wealth, we can compare it to pockets of wealth (like the stock and bond market), and compare assets to other assets for insight on finding the best stores of wealth (and investment).
Biggest Wealth Drivers: Real Estate, Debt, and Stock Market Statistics
I found a fantastic article by Jeff Desjardins of Visual Capitalist (who we interviewed on our podcast), where he summarized all of the world’s money in mid-2020.
As of the time I discovered his post, Jeff reported on the following statistics (in USD):
- Global Real Estate Market = $280.6 trillion
- Global Debt Market = $252.6 trillion
- Global Stock Markets = $89.475 trillion
Keep in mind that in the time since Jeff’s post went live and I’m writing today, the S&P 500 is up around 35%, and so the total value for sum of all global stock markets could be closer to $120 trillion now.
These are huge numbers to be sure, and they help us understand the big picture because they are by far the biggest contributors of total global wealth.
A few things to cover before we dive into the other assets.
The debt market includes all sorts of debt, and it can come in many of the forms described above. The size of bond market has historically dwarfed the stock market by quite a bit for many years, but that gap has been closing lately with the large run-up in stocks through the end of 2020.
Remember that the stock market represents a collection of businesses that are essentially “for sale”, which you can buy part-ownership in through shares.
The overall value of the stock market can be a decent representation of the value of the biggest businesses across the world, since it generally trades efficiently according to the expected value of future cash flows to its equity owners. But, this relationship can become severed during a bubble, when investors become too optimistic about the market and its prospects.
Another interesting note, regarding real estate and its owners:
- Residential = 78.5%, $220 trillion
- Commercial = 11.9%, $33 trillion
- Agricultural = 9.7%, $27 trillion
Other Main Wealth Drivers: Money, Gold, Derivatives, and Crypto
Hopefully we know the basics about money. Now when we try to define its scope, or how much of it is “sloshing” around all over the place, we can look to a term called “broad money” as a decent proxy.
You can think of broad money as the vanilla type of money you’ll see at banks—things like checking and savings accounts, CDs, cash or coins, etc.
Broad money is also called “M2”, and you can look up the M2 for the U.S. at any time on the statistics for the Federal Reserve website.
The following values have been estimated for M2 and other alternative assets, as of May 2020:
- Global broad money = $95.7 trillion
- Gold = $10.891 trillion
- Cryptocurrencies = $244 billion
Now, those of us who have been paying attention lately are aware that Bitcoin recently crossed $1 trillion in market capitalization after a meteoric rise to close 2020.
While an impressive feat to say the least, I find it very helpful to compare the value of this cryptocurrency with the overall global market—since Bitcoin is supposed to replace fiat currency according to many of its adamant supporters. I’ve heard the argument by a bull that an investment in Bitcoin is binary (1 or 0), in that it eventually becomes the only currency or becomes worthless.
This means that Global M2, and U.S. M2, might be good metrics to watch as they relate to Bitcoin’s (and Gold’s) market cap—though these type of topics can be fiercely debated til the end of time.
The Global Market for Derivatives
The value of derivatives is a tricky beast because you have two components, market value and notional value. See the following estimates for the derivatives market:
- Derivatives (Market Value) = $11.6 trillion
- Derivatives (Notional) = $558.5 trillion – $1,000 trillion+
A derivative is simply a financial contract; options traders will understand the concept because an option is a type of derivative.
With an option, you have the power to control 100 shares of a stock at your “option”, or if it becomes favorable for you to do so. For example, if you were to buy 1 call option, you’d have the option to cash out your contract for those 100 shares at a later date at a specified price.
Using completely made up numbers…
If you paid $100 for that option, let’s say to buy 100 shares of Ford at $7, then the market value of that option is $100 but the notional value of that option is $700.
Basically you pay a premium on an option or derivative in order to have exposure to that notional value, and that premium represents the market value, which goes up or down over time as the price changes and/or time passes.
Why is Notional Value so high?? ($1,000T+)
The notional value of the global derivatives market is tough to quantify because it is made up of both OTC and non-OTC markets (OTC stands for “over-the-counter”).
It’s really hard to quantify how the very high notional value of derivatives could impact markets and result in wealth destruction in case of terrible economic calamities, but I’ll tell you from my experience studying derivatives is that one of the biggest systemic risks to them is counter-party risk. In other words, if either the holder or seller of the derivative goes bankrupt, the value of the contract can disappear.
While we might worry about the power of a large notional value of derivatives and how it can move markets, I’ll note that a chart in this article showed a large portion ($400T+) of the notional value to be comprised of interest rate contracts as of 2016. Interpret that as you will.
Total Global Wealth Estimate
With all of these numbers in hand, we can come up with a rough estimate for the total wealth in the world as of May 2020.
It’s simply a measure for how much money is sloshing around in the system, and is quantified in U.S. Dollars because that is the current world reserve currency.
Remember that the bond market will be excluded from this calculation, because one person’s debt is another person’s asset. If we were to add the debt market to the liabilities side of the Net Worth equation for the world, we also have to add it to the asset side to represent the buyer.
Global Net Worth
- Real estate = $280.6T
- Stock Market = $89.5T
- Broad money = $95.7T
- Derivatives = $11.6T
- Gold = $10.9T
- Crypto = $0.2T billion
The sum of the above = $488.5 trillion.
Comparing this number to an estimate by Credit Suisse of $399.2 trillion at the end of 2019, we might be somewhere in the ballpark with the estimate above.
Now there’s likely some double counting in our estimate above which could make one by Credit Suisse more accurate. For example, a public corporation could own a piece of real estate on their balance sheet, and this could be double counted as it could add to the company’s valuation as well as count in global wealth in the real estate category.
There’s no perfect solution to this and many other estimates trying to quantify total global wealth, but at least we have a big picture ballpark figure to answering that question:
“SHOW ME THE MONEY”–Jerry Maguire
Context is Key
Estimating the total amount of money in the world is a difficult if not impossible task, because it is so complex, interwoven, constantly changing; the different components which ultimately comprise global wealth are measured by different agencies and institutions. So as of today, there’s not one official body which houses and reports each the collective statistics used in this post.
I referenced Jeff’s excellent article on Visual Capitalist for these broad value estimates of the various assets and markets, and it should be noted that he credited the following (and more) in his research: BIS, Credit Suisse, Savills Global Research, IIF Debt Monitor, CIA Factbook, WFE, World Gold Council, U.S. Federal Reserve, World Bank, CoinMarketCap, World Silver Survey.
I hope the point of these statistics was not to scare you, but rather to inform you and provide some decent context.
I know hundreds of billions of dollars sounds like a lot, and so does trillions, but in the grand scheme of things it can be drops in the bucket.
At least as it stands today, the world seems to be controlled mainly by market forces, each collectively working to advance their own best interests.
Knowing this, maybe we can find that it is possible for us to also advance our own interests, by educating ourselves about personal finance, investing, and the stock market.
That’s an empowering thought—one I hope brings you joy today.