Buffett's Favorite Indicator Exposes A Stock Market More Primed For A Crash Than Ever Before

Authored by Michael Snyder via The Economic Collapse blog,

Warren Buffett’s favorite indicator is telling us that stocks are more overvalued right now than they have ever been before in American history

That doesn’t mean that a stock market crash is imminent.  In fact, this indicator has been in the “danger zone” for quite some time.  But what it does tell us is that stock valuations are more bloated than we have ever seen and that a stock market crash would make perfect sense. 

So precisely what is the “Buffett Indicator”?  Well, it is actually very simple to calculate.  You just take the total market value of all stocks and divide it by the gross domestic product.  When that ratio is more than 100 percent, stocks are generally considered to be overvalued, and when that ratio is under 100 percent stocks are generally considered to be undervalued.  The following comes from MSN

That being said, the Buffett Indicator, while it’s not a flawless indicator, does tend to peak during hot stock markets and bottom during weak markets. And as a general rule, if the indicator falls below 80%-90% or so, it has historically signaled that stocks are cheap. On the other hand, levels significantly higher than 100% can indicate stocks are expensive.

For context, the Buffett indicator peaked at about 145% right before the dot-com bubble burst and reached nearly 110% before the financial crisis.

So where are we today?

Source: Advisor Perspectives

Right now we are at almost 149 percent, which is the highest level ever recorded

Where does the Buffett Indicator stand now? It may surprise you to learn that, at nearly 149%, the total market cap to GDP ratio has never been higher. It’s even higher than the 145% peak we saw during the dot-com bubble.

In recent days we have seen a “tech bloodbath”, but that was nothing compared to what is eventually coming.  Ultimately, the stock market would need to fall by at least one-third in order for prices to be properly balanced again.

And it appears that Warren Buffett is taking his own advice.  His company is currently sitting on more than 100 billion dollars in cash

Having said that, it does seem like Buffett himself is paying attention and agrees that the market is generally expensive. After all, the lack of attractive investment opportunities has resulted in Berkshire Hathaway accumulating nearly $110 billion of cash and equivalents on its balance sheet. Plus, Buffett has specifically cited valuation when discussing the absence of major acquisitions lately.

Warren Buffett didn’t become one of the wealthiest men in America by being stupid.  He knows that valuations are absurd right now, and he is waiting to strike until valuations are not so absurd.

And he knows that another recession is inevitably coming.  I wrote about some of the trouble signs yesterday, and more trouble signs seem to pop up on a daily basis now.

Earlier today, CNN published an article entitled “Two recession warning signs are here”

Home sales have declined in four of the past five months as housing prices have grown — but paychecks have remained stagnant. Many people can’t afford to buy homes, and those who can are taking on a lot of debt to get into them.

I feel really bad for those that purchased a home in recent months, because those poor people are getting in right at the top of the bubble.  The housing bubble is about to burst in a major way, and there will be a tremendous amount of pain afterwards.

And we received more bad news about the housing market on Wednesday.  According to Redfin, housing demand plunged 9.6 percent in June…

The long list of housing headwinds is finally taking its toll on potential buyers. Housing demand fell 9.6 percent in June, compared with June 2017, according to a monthly index from Redfin. That is the largest decline since April 2016.

CNN’s second “warning sign” is the fact that the yield curve is about to invert

The Federal Reserve, which is finishing up its two-day meeting Wednesday, is expected to raise its target rate two more times this year. Higher rates have boosted short-term US Treasury bond rates. But the longer-term bond rates haven’t risen along with the shorter-term rates, because investors are growing wary about the economy over the long haul.

With two more interest rate hikes planned, the Fed could boost short-term rates higher than long-term ones, inverting the so-called yield curve. An inverted yield curve has preceded every recession in modern history.

If you don’t understand the yield curve or you just want a deeper examination of this issue, please see my previous article entitled “Beware – The Last 7 Times The Yield Curve Inverted The U.S. Economy Was Hit By A Recession”.

In recent weeks, there has been renewed interest in my economics website as people begin to wake up and understand that a major economic crisis is looming.  Of course the truth is that we are way, way overdue for a stock market crash and another recession.  The only thing that is surprising is that it took us so long to get here.

Sadly, most people are still very much asleep.  Average Americans spend most of their waking hours staring at either a television or a computer screen, and the big media companies control almost all of the media that we are so voraciously consuming.  Instead of thinking for themselves, most people simply regurgitate what they have been fed by the media giants, and we are never going to turn things around if we continue to allow “the matrix” to tell us what to think.

The Buffett Indicator is very simple, but it is also very accurate.  If you want to do well in the stock market, you want to buy low and sell high, and right now we are in absurdly high territory.  Stock valuations always return to their long-term averages eventually, and many believe that the coming stock market crash is going to arrive sooner rather than later.

Comments

bshirley1968 south40_dreams Thu, 08/02/2018 - 09:29 Permalink

Well you don't hear the "Oracle of Omaha" out telling everyone that the market is overpriced more than ever before, do ya? Has he mentioned he's selling? Has he been on his stump at CNBC telling everyone it might be a good time to liquidate? No he has not.

Because he is an industry shill.....An inside trader......a globalist tool.

But no worries, he'll be there to buy your shit for pennies on the dollar after the crash.....and tell you, "Price is what you paid, value is what I get."

In reply to by south40_dreams

mtl4 spastic_colon Thu, 08/02/2018 - 09:56 Permalink

Uncle Warren is a great indicator himself, just do the opposite of what he says and you'll be in like flint.  When the ECB is on life support, EM markets in shambles and the US economy on a tear, no wonder the money is still pouring into the US markets.  This could go on longer than folks think before you finally do see a correction.

In reply to by spastic_colon

mkkby mtl4 Thu, 08/02/2018 - 15:48 Permalink

He talks this bearish shit, but he's not selling anything.  Just like in 2009 he didn't buy anything.

Buffet is rich because he gets inside information.  Lending billions to GS at 10% plus free in the money options... right before the forced gov't bailout.

In reply to by mtl4

TimeTraveller spastic_colon Thu, 08/02/2018 - 11:10 Permalink

Actually the indicator is so last century. The largest publicly traded companies (Think AAPL / Alphabet/ Amazon / GE / Facebook / etc), now earn close to 40% of their income from OUTSIDE of the United States. Hence, Market Cap (of US stocks) to (American) GDP as an indicator DON"T TELL YA SHIT anymore.

Geez, you guys are amatuers....and Tyler is a complete joke....but I guess doom porn click bait is what gets people to the site.

In reply to by spastic_colon

HRClinton south40_dreams Thu, 08/02/2018 - 11:53 Permalink

Buffet is the penultimate example that you don't have to produce, create or inspire one bit to get obscenely rich with OPM.

All you need is 1. common sense, 2. be a great analyst (watch and make the most useful financial numbers and ratios), and 3. use OPM.

We speak with forked tongue, when we spout the virtues of labor and then turn around and glorify guys like 'Bufet'. But then, America has always been rather schizo/2-faced about almost everything. Or, as philosopher Carlin said: "The whole country is full of shit".

In reply to by south40_dreams

onewayticket2 ShrNfr Thu, 08/02/2018 - 09:26 Permalink

it's Wilshire/GNP and it's too high....BC the tax cuts, reg thawing, trade deal prospects JUST kicked in (or are about to in the case of trade deals) and GNP (denominator) is slow to reflect...but prices (numerator) are very quick to reflect the future impact on revenue/sales/etc, etc.

In reply to by ShrNfr

bshirley1968 onewayticket2 Thu, 08/02/2018 - 09:35 Permalink

Do you ever wake up or do you stay in that dream world 24/7?

Prices outstripped GDP a long time ago and have continued that divergence......fueled by an ever growing debt bubble.

You have 24 months...tops....for your little dream land theory to be proven either correct or complete bullshit. I'll be here and we can discuss it further. My gut tells me we will know within the next 6 months.....but 24 tops.

In reply to by onewayticket2

onewayticket2 bshirley1968 Thu, 08/02/2018 - 09:54 Permalink

I realize the world did not begin with trump tax cuts and didn't suggest that and agree we're a debt driven economy.  But to suggest current prices do not reflect these "once a generation" cuts and the material turnaround of regulations and the potential for lucrative trade deals is silly.  And not to realize the disconnect between forward looking pricing and backward looking/reported GNP is naive.  but continue.

In reply to by bshirley1968

buzzsaw99 Thu, 08/02/2018 - 09:15 Permalink

so buffett is waiting to btfd like everyone else.  that means any dip will be bought because we're all waiting for it, including the fed.  he should just buy back his own overpriced stock like everyone else.

SQRT 69 Thu, 08/02/2018 - 09:16 Permalink

The stock market is a rigged casino and Buffett is in on it.   Here's one of my favorite Buffett lines:  

Look around the poker table; If you can’t see the sucker, you’re it.

Endgame Napoleon SQRT 69 Thu, 08/02/2018 - 10:26 Permalink

That is a good motto for the many low-wage jobs in financial services and the many “voted-best-for-moms” office jobs, where you look around as you are doing 75 things at once, trying to keep the family-friendly, “needs-the-job” manager’s numbers up, seeing sometimes just yourself alone navigating 3 phone lines with 10 customers waiting onsite and sometimes 1 or 2 other suckers.

I say suckers since, even when you meet the numbers every month and get the small amount of commission, you cannot cover rent and all other household bills on your earned-only income as a single person with no spousal income, no child support to cover rent and no pay for sex and reproduction from .gov as a single-earner parent who stays under the income limits for the welfare programs.

Those single-breadwinner mommas enjoy free EBT food, subsidized rent, monthly cash assistance and refundable child-tax-credit cash infusions up to $6,431 that far, far, far exceed your commission for busting your can, month after month.

You are exhausted at the end of the day, day after day, helping to keep the numbers up while watching beleaguered mommas taking off days, mornings, afternoons and weeks beyond PTO & pregnancy leave without consequences, even though they do not meet their quotas in most cases.

Yet, who will the well-vacationed momma manager churn with no UC to cover rent between churn jobs?

Hint: It will not be her fellow absentee mom cronies who likewise are buffered by streams of unearned income for sex and reproduction—by, as crony-parent managers put in in interviews, “somethin’ comin’ in”—from spousal income, checks from exes or monthly welfare and bigly chunks of welfare from the progressive tax code.

The first to be churned will be the “non-culture-fit” sucker(s) who did the flextime-momma manager’s work for her, helping to make sure her bonus was high enough to cover her 10th, yearly, two-week vacation for busy-working parents, not the corrupt employees who left work all the time, including during the manager’s protracted absences, leaving behind phones ringing off the hook with paying customers.

Look around the building, and if you are frequently the only one or one of a few working hard, do not assume that this will benefit you in any way, not in terms of pay sufficient to cover the rent on a modest and crappy one-room apartment and not in terms of job longevity. Assume the opposite to minimize the consequences for working hard and generating / retaining a lot of accounts. 

In reply to by SQRT 69

wmbz Thu, 08/02/2018 - 09:18 Permalink

"That doesn’t mean that a stock market crash is imminent"

Well, of course not!

That would not be allowed in the 100% rigged "market" place.

 

falak pema Thu, 08/02/2018 - 09:22 Permalink

The Warren Buffet long hot summer WS buffet price indicator is allegedly better than the McDonald hamburger price indicator :

When the Duck's Flagada Jones piloting of Pax Americana's about turn from its past makes it fly "too close to the sun"...

The Deplorables sing : QAnon; like Lot as he flees S&G.

Great towers of salt looming on the horizon!

Will the buffet price fall like dot.com or will it rise on #Maga Kentucky fry chicken wings?

Some conundrum.

21st.century Thu, 08/02/2018 - 09:24 Permalink

oh good-- the morning report on the Buffett bowel movement !

Buffett is the single example of last century, crony-corruption . co-owner of politicians , buyer and maintainer of the worst, ramshackle and UN-fair tax code - ever. through the co-ownership of his politicians , buffett has used that last century tax code to .... ? ?? .... what did the old timers use to warn about  ....

they warned about "dangerous concentrations of wealth" ... the "foundations, charities and NGO's that possess tax exemptions from the peoples' Treasury.

funny, all of these yappers who love FDR and the corrupt New Deal ... fdr hated the stock, holding companies ( Buffett)

today, they fund and purchase these DNC politicians.  

dl242424 Thu, 08/02/2018 - 09:37 Permalink

Buffett's greatest legacy will be supporting Planned Parenthood and funding the extermination of an entire generation of liberal voters!!!

nobodysfool Thu, 08/02/2018 - 09:41 Permalink

Screw Buffets indicator...

Here’s why the Dow will hit 40,000 by 2025...

https://www.cnbc.com/2018/07/03/heres-why-the-dow-will-hit-40000-by-202…

  • The Dow Jones need only rise 6.75 percent (not including dividends) annually — less than the postwar average of 7.2 percent — to hit 40,000 by December 2025.
  • All economic indicators point north, with consumer and small-business owner confidence, as well as corporate spending, still on the rise.
  • Making judicious equity investments now makes a lot of sense for investors willing and able to let their money ride for the long term.
     
SeaMonkeys nobodysfool Thu, 08/02/2018 - 12:21 Permalink

The government will do anything it can to keep the value of wealth assets climbing. That is the lesson learned from the "community organizer" Barack Obama. He campaigned in 2008 to help homeowners who were under water and to bring back the real economy. He did just the opposite. He, Timothy Geithner, and Ben Bernanke used QE to keep zombie corporations and banks alive. The markets upward climb is a reflection of that.

There is no reason to believe that will change. Washington is in an agency relationship with Wall Street. The voting population in the real economy that relies on earned income is the "customer."

This is why the 2 parties promote identity politics. They want their bases to feel that the "customer is King." They want their bases to feel that they (the 2 parties) are willing to shed blood for them.

The markets are artificially pumped on steroids. Any crash has to be from an exogenous source.

In reply to by nobodysfool