I see things like this constantly. “Nvidia is now worth more than Japan.” Or India. Or Vietnam. In each case, the market cap of Nvidia is being compared with the Gross Domestic Product of an entire country.
The problem with this is that market cap isn’t real. It’s the current price of a stock on the open market, multiplied by the number of shares outstanding. Gross Domestic Product is the value of all the goods and services produced in a country during a year.
Market cap can turn on a dime. It just did. Less than a week ago, Nvidia’s market cap was over $5 trillion. Today it’s less than $4.5 trillion. By contrast, Japan’s GDP is about the same today as it was yesterday. Toyotas are real. Stock prices are not.
Your wealth, when defined by market cap, is ephemeral, even theoretical. It only becomes real when you sell shares and hold the cash. Whenever an insanely rich leader, like Jensen Huang, files with regulators to sell shares (and that’s how they do it, transparently and publicly, because Huang is a CEO with a fiduciary responsibility to other shareholders) the value of the shares falls, and with it the market cap.
What is Money?
It’s because market cap is so much like water that politicians won’t touch a “wealth tax.” Imposing such a tax forces someone to sell shares. This reduces the shares’ value and thus the wealth of other shareholders.
America appears wealthy because of our market cap. The market cap of the NASDAQ is nearly $50 trillion. That’s more than the GDP of the United States and China put together. But you can’t capture that wealth, and neither can its holders. It’s the old story of Aladdin’s Cave, which I told here over a decade ago. If Aladdin brought all his diamonds back to town, women would have diamonds on the souls of their shoes.
Real assets are one measure of wealth. Nvidia had about $140 billion in assets at the end of July. That includes its properties, its cash, its inventory, and its goodwill. That’s a lot. More than one-third of it was cash. But it’s no $4.5 trillion, either.
Wealth consists of assets. All assets vary in price. Even cash can vary in price, when compared with other currencies. The value of the dollar has been declining this year, so even if your home is worth 5% more, its value fell for a Chinese buyer.
I know what you’re asking now. What’s the point of money? As I’ve said many times, money is a verb. It’s what lets us exchange goods and services with each other. The British learned this over two centuries ago. They didn’t have enough gold to support trade, so they let banks issue notes based on an equivalent value of gold.
Money is useless unless it’s used.
Taxing Wealth
The richest people have this one weird trick to turn their market cap into wealth, without using it. They get loans on their stock, then use the cash to buy things.
That’s one way in which governments can profit from market cap. Tax the cash that comes from the loans. You can also treat capital gains as ordinary income. Money shouldn’t be making money easier than you do.
The point is, there are ways in which we can capture some market cap for our general welfare if we choose to, arguments over a “wealth tax” notwithstanding. We choose not to. We put all our wealth into a rich man’s basket called market cap and think we’re rich.
But are we?
