Investors are growing increasingly concerned about one small–but very big indicator.
It’s known as the “Buffett Indicator” and it tends to help mark the peaks in markets (which, most typically, are followed by troughs.)
The indicator was designed by its namesake, the famed investor Warren Buffett, the billionaire founder of Berkshire Hathaway.
It consists of the value of a country’s publicly traded stocks divided by its gross national product.
The Buffett indicator soared to 201% in March of 2021, which could be interpreted as a sign of a stock bubble. Meanwhile, the indicator is at an all-time-high since at least the 1970s. In a 2001 interview, Warren Buffett called the indicator
“probably the best single measure of where valuations stand at any given moment”.
In recent decades, there have been two sizable market peaks (followed by sizable market busts.) Those peaks and valleys took place in the year 2000 and 2007 — in the midst of the dot-com bubble and just prior to the 2008 financial crisis.
And, right now, the index is about twice as high as it was just before the dot-com bubble.
The indicator came under even more scrutiny when Elon Musk, the CEO of Tesla and SpaceX tweeted about it at Cathie Wood, the founder of Ark Invest.
In the late 1800’s and early 1900’s – as telephone, electricity, and the automobile were emerging – the US equity market cap relative to GDP appears to have been 2-3 times higher than it is today. We need to verify this difficult-to-get data but, if true, I have a hypothesis. https://t.co/7V4dNo3vBL
— Cathie Wood (@CathieDWood) April 11, 2021
Wood responded by stating that you’d need to look for data from the 1800s to assess the indicator’s validity. In other words, times have changed.
And, the Fed is signaling GAME ON. Something even Buffett admits needs to be factored into the equation.
At the 2017 Berkshire Hathaway meeting, Warren Buffett himself addressed the Buffett indicator in a way that should give investors pause at this moment in time. He cautioned against using a single indicator to predict whether the market is undervalued or overvalued. He went on to say that “the most important thing is future interest rates,” arguing that low rates justify higher valuations.
Well, given that rates are at all-time-lows for the foreseeable future — perhaps even through 2024 if the Fed lives up to its word, then this could mean that the stock market is not undervalued. That is, if you believe that near-0% interest rates are normal, and won’t have any negative effects on the economy.
All in all, the abnormally high Buffett indicator could be seen as just one effect of the highly irresponsible monetary policy by the world’s central banks–the effects of which are rapidly snowballing out of control.