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The Buffett Indicator

currentmarketvaluation.com

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Re: The Buffett Indicator

#51

Post by eloff »

DickingAround wrote: post #45
kbutler wrote: post #37

Earlier quoted context omitted.

I wondered about this too, but both sides of the ratio are denominated in current dollars, so dollar valuation is already divided out: ratio of total US stock market value to US GDP

There's just one more step; the market's value is an expectation of the future while the GDP is a 'now' metric. So while inflation is auto-adjusted (roughly) in the past, a strong expectation of inflation now can send the market cap up (and either GDP will catch up, be it natural or on inflated dollar terms) or the market will crash, or some combination of the two to bring the indicator back to earth.

I don't think that's correct. Stocks suffer with inflation. Interest rates rise and money moves to bonds. Credit is costlier and profits fall. Both weigh on stock prices.

Historically stocks perform poorly in times of high inflation.

Re: The Buffett Indicator

#53

Post by [deleted] »

aazaa wrote: post #8

The 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.…

[deleted]

Re: The Buffett Indicator

#54

Post by gpt5 »

H8crilA wrote: post #13

There are much, much better ones: 1) Philosophical Economics' stock/bond/cash preference model: http://www.philosophicaleconomics.com/2013/12/the-single-gre... https://financial-charts.effingapp.com/ 2) John Hussmann's non-financial market cap to gross value added: https://www.hussmanfunds.com/category/comment/ https://www.hussmanfunds.com/comment/mc210715/ But as the sibling comment and all the sources above say, th…

These indicators are far more interesting and useful than crash/recession predictions. Being so highly correlated with subsequent market returns makes your choice simpler - you don't need to predict the crash, instead you can simply see your estimated returns in the next decade (currently negative). Whether the crash comes tomorrow or in 5 years is meaningless.

Re: The Buffett Indicator

#55

Post by Iv »

sb057 wrote: post #44

I would just like to point out the fact that the S&P 500 is almost four times higher capitalized than it was a decade ago. There are three obvious reasons for this that come to my mind: * There has been massive asset inflation. * The market is in a speculative bubble. * The 500 largest American companies really are ~4 times more valuable than they were 10 years ago. Even with #3, the best case scenario, that alone sh…

> their material contribution to society hasn't increased fourfold,

If their contribution to the top 1% increased 400-fold, does that balance out?

Re: The Buffett Indicator

#56

Post by jyriand »

The heuristic that market crashes every ~9 years seems to work well. 2020 had a pretty steep correction, so I will wait another 7 years and start worrying. That might not be optimal, but 70% of the time you can predict the weather by saying it will be the same as yesterday.

Re: The Buffett Indicator

#57

Post by Iv »

It took me a while to understand that market valuation should not be linked to GDP, but to the integral of GDP.

Every year, companies add a portion of the GDP to their overall value.

Re: The Buffett Indicator

#58

Post by JackPoach »

aazaa wrote: post #8

The 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's not an indicator problem, it's a problem of people trying to time markets. Also, there are two ways to use the Buffet Indicator - right and wrong. The wrong way is to say 'it's overvalued, I should do something - short the market'. The right way is 'it's overvalues, I should avoid doing something - buying overvalued stocks'.

Buffett has been sitting on piles of cash in the past for years and years, avoiding buying securities when they are overvalued. He never tried timing the market, simply waiting for the right moment. Nor did he sell stocks when they were overvalued in order to try to buy them back at a lower cost at least AFAIK from reading his biographies. So, for a value investor, it's a useful tool.

Re: The Buffett Indicator

#59

Post by jbay808 »

julienchastang wrote: post #22

Related to all of this, note, we may see in the not too distant future "deeply negative" interest rates. Currently, it is difficult to go much below zero because you can stash physical bank notes under your mattress and get a better rate of return (0% instead of -1). But in a cryptocurrency future, the mattress is not an option enabling central banks to go deeply negative (e.g., -5%). I just read a fascinating articl…

You can actually create negative interest paper bank notes without needing cryptocurrency. One example is stamp scrip, where one must pay a recurring fee to maintain the note's validity:

https://en.m.wikipedia.org/wiki/Scrip#Stamp_scrip

Re: The Buffett Indicator

#60

Post by jbay808 »

ethbr0 wrote: post #5

The 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 sho…

I'm increasingly of the opinion that control theory is the right framework to apply here.

The very existence of business cycles suggests that the economy has "underdamped poles", and perhaps a more forward-looking central bank policy could add enough phase margin to damp them and prevent recessions altogether. But it would require always taking one's foot off the gas pedal before conditions really seem good enough.

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