According to a 2001 Fortune interview [7], Warren Buffett believes that Market-Cap-to-GDP is "probably the best single measure of where valuations stand at any given moment." As Doug Short shows [8] in the following charts, we suspect Warren is a little more than worried about the valuation of his portfolio (unless of course, it's different this time).
Via Doug Short of dshort.com, [8]
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The raw data for the "Buffett indicator" only goes back as far as the middle of the 20th century. Quarterly GDP dates from 1947, and the Fed's B.102 Balance sheet has quarterly updates beginning in Q4 1951. With an acknowledgement of this abbreviated timeframe, let's take a look at the plain vanilla quarterly ratio with no effort to interpolate monthly data or extrapolate since the end of the most recent quarterly numbers. Here is a chart I created using the Federal Reserve Economic Data (FRED) data and charting tool.
[9]
That strange numerator in the chart title, MVEONWMVBSNNCB, is the FRED designation for Line 36 in the B.102 balance sheet (Market Value of Equities Outstanding), available on the Federal Reserve website here in PDF format [10].
For those of you who may have reservations about the Federal Reserve economists' estimation of Market Value, I can offer a more transparent alternate snapshot over a shorter timeframe. Here is the Wilshire 5000 Full Cap Price Index divided by GDP, again using the FRED repository charting tool.
[11]
So... Both the "Buffett Index" and the Wilshire 5000 variant suggest that today's market is at lofty valuations, now above housing-bubble peak in 2007.
So, given the unprecedented beta (and very little alpha) of Berkshire Hathaway's stock price to the market...
[12]
We suspect Warren is worried...