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Forget Shiller's CAPE, Warren Buffett's "Best Indicator" Is Flashing Bubble Red

Tyler Durden's picture




 

While Bob Shiller's CAPE has been flashing red warnings for a while, String Advisors Stephen Jones warns it is flawed because corporate events can affect a specific company’s earnings and the broader profit outlook differently. However, Warren Buffett's "best single measure of where valuations stand," comparing the market value of US companies to the gross national product before inflation, is flashing near record bubble red... Still we are sure, you'll be able to exit before everyone else when this ends...

 

 

Source: Bloomberg

 

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Thu, 07/24/2014 - 15:53 | 5000097 Al Huxley
Al Huxley's picture

Well, I think everybody got out pretty much unscathed back in 2000, so no reason to think it will be different this time - overnight market buy orders FTW.

Thu, 07/24/2014 - 15:57 | 5000119 Raymond K Hessel
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If I read the chart against who has been president, then I'm reading the market has priced in a win for Hill Clinton.

Thu, 07/24/2014 - 16:16 | 5000202 max2205
max2205's picture

Still room to run in a blow off....awesome

Thu, 07/24/2014 - 15:54 | 5000108 sunny
sunny's picture

Looks like there is still room for a bit more up, don't you think?

Thu, 07/24/2014 - 16:13 | 5000190 NOTaREALmerican
NOTaREALmerican's picture

Yup,  surely we can do better than 99.    Maybe 2 or 3 more years at this rate.

Thu, 07/24/2014 - 16:30 | 5000279 Chief Wonder Bread
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Grandpa sitting at Starbux tweeting social media shit doesn't notice he's broke. Therefore, BTFATH.

Thu, 07/24/2014 - 15:58 | 5000124 farmboy
farmboy's picture

Not bad thinking for a guy that has been bailed out by the US government in 2008/2009 so can retain his status of greatest investor ever :) 

Thu, 07/24/2014 - 16:00 | 5000130 fonzannoon
fonzannoon's picture

depends on how you look at it. try looking at it this way. A guy got bailed out by the U.S government. That in itself may qualify him for greatest investor ever.

Thu, 07/24/2014 - 16:30 | 5000280 NotApplicable
NotApplicable's picture

Have to say, I haven't seen anyone else able to loan GS money at 10%.

Thu, 07/24/2014 - 15:59 | 5000133 toady
toady's picture

Gotta time it juuussst right...

Thu, 07/24/2014 - 16:07 | 5000135 NoDebt
NoDebt's picture

So, Warren Buffet uses something that looks almost exactly like a log chart of the S&P 500 as his "best indicator"?  When it gets higher, it's more expensive.  When it gets lower, it's less expensive.

That's just so fucking fantastic and insightful I crapped my pants.

That's the kind of keen market insight it takes to be a billionaire and have everyone marvel at your unparalleled genius.

 

Thu, 07/24/2014 - 16:08 | 5000172 negative rates
negative rates's picture

Banker don't mind crapping his pants when he knows another hard liner will clean up his mess.

Thu, 07/24/2014 - 16:00 | 5000136 TabakLover
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God I just hope live to see another day like in Oct '87, and I'm holding  boatload of SPY puts.............

Thu, 07/24/2014 - 16:00 | 5000137 TabakLover
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God I just hope live to see another day like in Oct '87, and I'm holding  boatload of SPY puts.............

Thu, 07/24/2014 - 16:00 | 5000138 TabakLover
TabakLover's picture

God I just hope live to see another day like in Oct '87, and I'm holding  boatload of SPY puts.............

Thu, 07/24/2014 - 16:04 | 5000154 Hindenburg...Oh Man
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The fact that you are holding these makes me think that the market will continue to go up. It's only when every last bear and individual with a short position has been utterly destroyed, will the market then go down. 

Thu, 07/24/2014 - 17:21 | 5000527 Ben Ghazi
Ben Ghazi's picture

They can have my TZA and FAZ when they pry them .........

 

From My Cold Dead Hands!

Thu, 07/24/2014 - 18:44 | 5001119 Midnight Rider
Midnight Rider's picture

Not sure you literally mean 100.0% of all shorts are covered at the top do you? Is this a published verifiable fact at every market top in history? And does this also mean that every last person has sold every last share of stock they own at all the market bottoms?

Thu, 07/24/2014 - 16:06 | 5000161 khakuda
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Conveniently, Warren seems to have forgotten about this measure that he touted in Fortune magazine years ago.  Like Yellen, his recent comments suggest that he still believes stocks on balance to be in a "reasonable range".

By the way, you can use FRED to calculate this as well.  I also have http://www.gurufocus.com/stock-market-valuations.php bookmarked.  The numbers vary, but none of them show stocks anywhere near Buffett's 70 - 80% buy zone.

Thu, 07/24/2014 - 16:06 | 5000167 Carpenter1
Carpenter1's picture

Whether or not this thing blows in the next 6  months or a year is irrelevant to me. I have my sizeable position of shorts I took at DOW 17k, and I know it'll pay me very well one day, even if I lose for a while.

 

All the braintrust on this site, yet so many think the FED can do this forever,  or that they'll be the lucky .5% who gets out in time.

 

People never learn. 

Thu, 07/24/2014 - 16:11 | 5000183 negative rates
negative rates's picture

At least the Fed does'nt, the failed experiment will soon fail in getting out of trouble.

Thu, 07/24/2014 - 16:25 | 5000227 NOTaREALmerican
NOTaREALmerican's picture

Well,  some aren't even playing the game anymore and are just watching the fun.   

I personally think "things" will continue until somebody big doesn't get paid.  But, because the Fed can pay everybody that changes the definition of "getting paid".   So, now, it's more like:  "things" will continue until somebody big doesn't accept payment and want's something else instead.   I think we're a long long long way from that.

Thu, 07/24/2014 - 16:14 | 5000194 DOGGONE
DOGGONE's picture

Obama hides this
http://patrick.net/forum/?p=1246619
Will Putin unhide it?

Thu, 07/24/2014 - 16:18 | 5000213 Spungo
Spungo's picture

I'll echo what the bulltard are saying: this metric needs to factor in the interest rates.

This is best explained using an example. If government bonds paid 10% interest, what would you expect the dividend yield on stocks to be? A minimum of 10%. It just makes sense. The prices of stocks should fall until the dividend yield surpasses the treasury yield (in a perfectly efficient market). This is why rising interest rates cause falling stock prices, and why falling interest rates cause rising stock prices. You can even see this by looking at the S&P from 1970 to 1980 (rising interest rates, falling S&P) and again from 1980 to 2000 (falling interest rates, rising S&P).
Since the 10 year is about 2.5% interest, a fair price of the S&P (SPY) would be when the dividend yield is higher than 2.5%. It is currently below that level, at 1.8%, so yes we are in expensive territory, but it's not fair to say it's ridiculously super expensive.

I'll pull some grade 5 math to estimate how much SPY should drop to reach maximum fair price. (1.8%/2.5%)= 0.72, or 72% of its current price, so about 28% drop from where it is now. Markets tend to overshoot, so we could expect maybe a 50% drop. Ok, I'm actually surprised by how large that number is. Even when factoring in the interest rate, this is not good.

Thu, 07/24/2014 - 16:35 | 5000295 Whootie_who
Whootie_who's picture

Good math:but what if the ltr goes to 3% or a much more normal 5%.... how much will those puts be worth then?

Thu, 07/24/2014 - 16:18 | 5000214 orangegeek
orangegeek's picture

would like to know where GNP data comes from

 

Thu, 07/24/2014 - 16:19 | 5000219 debtor of last ...
debtor of last resort's picture

When they 'gate' this bitch, the Fema camp fences will look like kindergarten.

Thu, 07/24/2014 - 16:25 | 5000254 PTR
PTR's picture

Yeah, but price-to-equity is looking fantastic.

Thu, 07/24/2014 - 16:27 | 5000258 windcatcher
windcatcher's picture

 

USA Gross Domestic Product is a bankster FRAUD (are you surprised). We are not a wealthy nation with industry, we have been de-industrialized remember? How can we have a GNP of an industrialized country? 50% of our claimed GDP is not in production but in fraudulent debt posing as a product.

 

Thu, 07/24/2014 - 17:22 | 5000542 Ban KKiller
Ban KKiller's picture

Playbook!

Thu, 07/24/2014 - 16:32 | 5000285 Farmer Brown
Farmer Brown's picture

buy - buy - buy !!!!

Thu, 07/24/2014 - 17:15 | 5000500 Fletch F. Fletch
Fletch F. Fletch's picture

Market value of companies is based on global sales, not just US GDP.  S&P 500 companies are almost 50% offshore revenue now -- about 2x pre-dot.com meltdown.  Apples and oranges.

Thu, 07/24/2014 - 17:42 | 5000647 Ben Ghazi
Ben Ghazi's picture

The rest of the world lies about their GDP numbers because they have Central Banks to make shit up too.

 

Add illegal drug sales and prostitution (like part of Europe does) to U.S. GDP and it would be much higher than -2.9%

Thu, 07/24/2014 - 18:36 | 5001068 Midnight Rider
Midnight Rider's picture

And what was the percent offshore in 2007? Maybe not so apples and oranges?

Fri, 07/25/2014 - 15:13 | 5004728 Fletch F. Fletch
Fletch F. Fletch's picture

In 2007 it was close to 40%.  But, it was <20% in 1990, and <10% in 1970.  My point is that increased offshore revenues make US equity valuations relative to US GDP tough to compare across time.  A better measure would be value of US equities relative to global GDP.

Thu, 07/24/2014 - 17:24 | 5000565 londoncalling
londoncalling's picture

cash s&p 1990 was my level for the year (annual R1) might hold for a day, a week, a month or years but it was certainly worth a sell, and i did.

Thu, 07/24/2014 - 18:02 | 5000856 huggy_in_london
huggy_in_london's picture

Thanks for the update on this ZH.

Sat, 07/26/2014 - 01:23 | 5006517 cobra1650
cobra1650's picture

Since the GDP figure is a hedonic steamer corporate profits are more like 30-40% of GDP

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