Warren Buffet’s Favorite Stock Market Metric Is Signaling Huge Downside Ahead

via Adem Tumerkan @ Palisade-Research.com


 

Today – Apple became the first public company worth over $1 trillion dollars. . .

Thanks to very low interest rates – the company’s piling on debt and buying their own shares back – shrinking the float.

And because of a worldwide rush into mutual funds and exchange traded funds (ETF’s) – there’s crazy demand for Apple shares. 

The king of ‘buy and hold’ investing and a Champion of equities – Warren Buffet – must have grin on his face from ear to ear. Because Apple’s surge just netted him a huge profit for his company – Berkshire Hathaway – of over $2.6 billion.

Many now may be thinking that they should buy Apple and other such stocks – right?

Well, not exactly.

Because according to this favorite Buffet metric – the market looks extremely overvalued and the future looks scary.

The Market Cap to GDP metric is a long-term value indicator. And it’s become popular recently thanks to Warren Buffet.

During an interview in 2001 with Fortune – he claimed that this indicator is “probably the best single measure of where valuations stand at any given moment.”

And what his favorite indicator’s showing us today is that stocks are more over-valued than they’ve ever been. . .

So – what is the Market Cap to GDP – aka the ‘Buffet Indicator’?

It’s easy. Just calculate the total market value of all stocks outstanding and divide it by the nations GDP.

When the ratio is greater than 100% – it means that stocks are considered overvalued and have historically less upside going forward.

And when the ratio is less than 100% – it means the opposite. That stocks are considered undervalued and historically have more upside.

I look at it this way: when the ‘Buffet Indicator” is more than 100%, the stock market is negatively asymmetric (high risk, low reward). And when it’s less than 100%, the stock market is positively asymmetric (low risk, high reward).

Or simply put – buy when it’s under 100% and sell/avoid when it’s over 100%.

Now that we know this – what’s the good ole’ Buffet Indicator looking like today?

It’s telling us to avoid stocks as they’re the most expensive they’ve ever been. . .

It’s almost at 140% – the highest on record.

Higher than both the 1990’s Dot-Com bubble and the 2007 Housing bubble. . .

Does this mean stocks will crash tomorrow? Probably not (it’s anybody’s guess when). But we’ve seen the ‘smart money’ already bailing out of equities.

Lately there’s been extreme volatility in the FAANG-tech stocks. Companies like Netflix, Facebook, and Twitter suffered huge losses last week.
 

“Over a two-day period at the end of last week, when the world’s largest social network suffered the largest single-day drop of any company in history, this collection of stocks — Facebook, Apple, Amazon.com, Netflix and Google (part of Alphabet Inc.) — lost $185 billion in value.” – wrote BizJournal


What we do know is that historically – when the Buffet Indicator gets this high – it means we’re in some-kind-of bubble and there’s huge downside ahead.

And when the downside does come – it’s sudden and swift. Just look at the chart above – sharp drops after each peak. . .

Even though Buffet preaches buying into the stock market – what he’s actually doing is sitting on more than $100 billion 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.”


He knows that markets today are ‘frothy’ and overvalued.

The very damn ‘Buffet Indicator’ that’s named after him even says it.

And I’ve also written about this risky market – many times – that you can read here and here and even here. . .

Most importantly – It’s not in Buffet’s portfolio’s best-interest for the crowd to realize all this. Because as we learned from George Soros’ Theory of Reflexivity – market perceptions can drive reality and shift short-term fundamentals.

Otherwise put – if investors believe the market’s heading for a crash, they’ll sell their stock and sit on cash. Doing this will cause equities to tank and the dollar to soar. This will cause liquidity to dry up, an under-performing market, and deflationary spiral. 

Soon the fears cause a self-fulfilling prophecy. . .

Today – with the economy’s outlook looking shaky at best. And an overvalued market – things look ripe for a big market sell off.

 So remember a couple of things:

1. Beware what Buffet or the Elite say compared to what they do. . .

2. The Buffet Indicator – although not great at timing – is historically accurate. . .

3. You won’t get hurt if you simply buy low and sell/avoid when things are high. . .

 

Apple hitting $1 trillion market cap looks good – superficially. But debt fueled share buybacks, and easy money policies that have driven markets higher over the last decade are coming to an end as central banks worldwide tighten.

And as the chart above shows – the last two times over-valued markets and over-indebted economies suffered central bank tightening – things got very ugly.

Comments

CarthaginemDel… Thu, 08/02/2018 - 22:08 Permalink

I ve been hearimg tha t shyte for years yet the insanity of the market keeps marching up. Everytime i try to short the market moves higher. Amazon at 180 p/e and Tesla burning 8 million per day yet market is going higher. wtf!?

Jeffrozz1234 Thu, 08/02/2018 - 23:16 Permalink

So far the only analysts who have been actually predictiing stock market movement on a week to week basis is the group at SHEPWAVE

 

WE all know who is getting the right moves.  History is everything.

lizzoilz Jeffrozz1234 Fri, 08/03/2018 - 00:24 Permalink

This.?

 

ShepWave

ShepWave Pre-Market / Intra Day Update for Friday Published. 
by ShepWave.com
Posted: 8/2/2018 22:42 EST

 

Friday could be a critical day of trading. 

Notice the QQQ/NDX saw an OUTSIDE-UP day on Thursday.  Remember the implications of this particular technical pattern and the frequency of these types of patterns lately in the major U.S. equity indexes.

Now is not the time to be na�ve! Pay close attention to new tend lines and trigger areas using the more aggressive 15 minute and 60 minute time frame charts.  

Will this current atmosphere of angst in the USA contribute to the upcoming stock market move and trends?

STAY OBJECTIVE!

In reply to by Jeffrozz1234

JIMSJOE2 Fri, 08/03/2018 - 06:57 Permalink

What people do not understand is that foreign capital is simply parking in dollar based assets. In 2009 Armstrong Economics computer models forecast that Europe is beginning to collapse and as we move forward capital will flow out of there and into dollar based assets. The forecasts for the Dow was 22,000 then 23,000 and when we enter the last leg to around 40,000. These forecasts were made when the Dow was only around 6000. The models are also forecasting as we move to the end of 2018 the capital flight out will accelerate again and the shit hits the fan there around 2020/21. The EU, euro, most banks, many corporations and countries will not survive in their present form. Of course this will cause massive dollar strength again and weakens foreign currencies especially in emerging markets. This will cause even more capital to flow to dollar based assets which we are just starting to see.

    It is all about the global macroeconomic events outside the US that has been effecting US markets. If you do not understand international capital flows your investments and trading decisions are doomed. There is an old saying, "Follow the money"!

     By the way since Draghi went to negative rates and charged banks to park excess capital they simply opened branches in the US, pulled capital from Europe and parked at the FED. They have also been lending in the US instead of Europe. The banks know the euro will not survive and so they are keeping less capital there and instead moving to the US.

any_mouse JIMSJOE2 Sat, 08/04/2018 - 11:08 Permalink

Swiss central bank - HA(pple)DL.

Switzerland buys AAPL. Russia buys Au. China buys Au. India buys Au. The City of London rehypothecates Au. USA has no Au at all.

Some day reality will catch up to market valuations. Hopefully HODL'rs will know to sell at just the right time.

GLD is not physical.

AAPL's valuation is not physical.

Buy the fucking dip. Sell the fucking bounce. Repeat Adprofiteam. Zero risk between bounce and dip.

FOMO on a major reset is healthy.

In reply to by JIMSJOE2

BarkingCat Hikikomori Fri, 08/03/2018 - 16:15 Permalink

Unfortunately I sold  back in those days. Apple was basically a fashion accessories company for teens back then. Making profits based on sales of ipod to stupid air headed teen and pre-teen girls who had to have them in various colors. 

I reasoned, who would be stupid enough to keep buying this crap when the economy is in the toilet and money is tight. I underestimated the vacuity of an average American. 

In reply to by Hikikomori

Iconoclast422 Fri, 08/03/2018 - 08:55 Permalink

Central banks arent tightening yet. They are simply loosening less. Still another 6-12 months before they actually start tightening. And that's assuming none of them flinch and press CTRL-P, which one of them most likely will.

CountD@nkula Fri, 08/03/2018 - 19:33 Permalink

Buffet is a tourist. He made his fortune during an era of low interest rates allowing him to borrow money to buy stocks and pocket the difference between dividends and interest on the debt.

BetterRalph Sat, 08/04/2018 - 10:15 Permalink

Remember apple is for eating. 

isn't this just a bunch of blunders and circumstance.  Plus people keeping phones little longer by replacing battery.

I don't carry a phone so I don't really care but just my 2cents.   Who cares if it goes down, it ain't going away.

Maybe not be so insolent about headphone jacks going forward?

The Real Tony Sat, 08/04/2018 - 15:20 Permalink

Buy and hold mentality does NOT work when your money is stuffed into a pure 100 percent ponzi like the U.S. stock market of today. One only has to look back at all the ponzi's over time to see the results. In each case 95 percent of the people with "their" money in "good" or "bad" lost. It will be no different with todays' stock market ponzi.