The Buffett Indicator
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The Buffett Indicator
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Re: The Buffett Indicator
#2Just a reminder that a larger portion of today's market value is made up from Tech stocks. Tech stocks are typically higher valuations and P/E multiples, giving a skewed data point perspective vs. 20 years ago.
Re: The Buffett Indicator
#3This doesn't take into account interest rates.
Buffett himself has said recently that given the current interest rates stocks are not overvalued.
Re: The Buffett Indicator
#4This doesn't take into account interest rates. Buffett himself has said recently that given the current interest rates stocks are not overvalued.
nvm, just got to the "Criticisms of The Buffett Indicator" section where they cover just this topic :)
Re: The Buffett Indicator
#5The problem with macro-economic composites is that at that level, everything is unfolding on different timescales. So around transitional moments, your end result is going to go wonky.
GDP plummets -> interest rates are dropped -> GDP recovers -> interest rates are raised
You're balancing between responsiveness, accuracy, and reliability: pick two.
I'd have thought the last few crises would have taught us that we should be thinking about the system more in terms of stability, or lack thereof.
The housing crisis could have not exploded, if key institutions and/or investors had acted differently. But it was objectively true that the entire system was in a very unstable state.
Re: The Buffett Indicator
#6Just a reminder that a larger portion of today's market value is made up from Tech stocks. Tech stocks are typically higher valuations and P/E multiples, giving a skewed data point perspective vs. 20 years ago.
Same can be said of market valuation in 99/00.
And just like at that time people are looking for adjusted valuation measures and all type of excuses to justify unrealistic growth expectations.
Like ALL previous bubbles it will end in tears.
Re: The Buffett Indicator
#7[deleted]
Re: The Buffett Indicator
#8The problem with these indicators is that, although they may indicate over- or undervaluation, they tell you nothing about when a mean reversion will happen.
As Keynes famously said: "The market can stay irrational longer than you can stay solvent."
An indicator that does a pretty good job of signaling the "when" of a recession, and by extension the likely "when" of large market corrections, is yield curve inversion. It predicted the recession of early 2020 quite well, even with the external shock of the pandemic.
https://www.forbes.com/sites/leonlabrecque/2020/02/26/anothe...
From the perspective that somehow a reset of the business cycle has happened through government transfers (not exactly a sound assumption), watch interest rates, and in particular the relationship between the 2 and 10 year.
Should we start to see a rise in short-term rates, without a similar rise in long rates, watch out. You'll no doubt see a multitude of articles explaining how "this time is different." It won't be. And on top of all of that, we'll head into it with the most overvalued market in history.
Re: The Buffett Indicator
#9Just a reminder that a larger portion of today's market value is made up from Tech stocks. Tech stocks are typically higher valuations and P/E multiples, giving a skewed data point perspective vs. 20 years ago.
Market excesses are always marked by a "hot" sector. Remember the Nifty 50?
https://en.wikipedia.org/wiki/Nifty_Fifty
The members of that group were the tech giants of their time.
Replace "large-cap" with "tech" in that article. Rinse and repeat.
Re: The Buffett Indicator
#10The problem with these indicators is that, although they may indicate over- or undervaluation, they tell you nothing about when a mean reversion will happen. As Keynes famously said: "The market can stay irrational longer than you can stay solvent." An indicator that does a pretty good job of signaling the "when" of a recession, and by extension the likely "when" of large market corrections, is yield curve inversion.…
An inverted yield curve has accurately predicted 9 out of the last 5 recessions ;)
You can even see it on the chart in the linked article, in 2005/06 — that time, it was different.