Warren Buffett’s favorite indicator – the ratio of the value of U.S. stocks to GDP – is seen by him as a reliable gauge of where the market stands and these days it suggests that all the main indexes are pointing to an imminent 50% crash.
So says Peter Cooper (arabianmoney.net) in edited excerpts from his original article* entitled US stock market-to-GDP ratio favored by Warren Buffett points to imminent 50% crash.
[The following is presented by Lorimer Wilson, editor of www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Cooper goes on to say in further edited excerpts:
Analyst Doug Short has a version of the ‘Warren Buffett Indicator’ which uses the value of the Wilshire 5,000, a very broad index. It shows that stocks are more expensive than they were before the 2008 crash and almost as expensive as they were before the dot-com crash in 2000.
Just consider the 30 per cent advance in the S&P 500 Index last year and the gain of around one tenth of that in U.S. GDP. The overlay of 1928-9 on the current chart of the Dow Jones is compelling:
You don’t need to be a genius like Warren Buffett to see it. The main indexes are all far too high. We appear to be on the precipice of a huge drop in the stock market, with a massive downside which would wipe out the gains of the past two years.
Given that the current stock market appears abnormal in the context of lack lustre U.S. economic growth would this really be so remarkable? Besides, we know from long experience of charts in financial markets that the price spike we saw last year is entirely consistent with a market top. The sharp New Year sell-off followed by a brief but unconvincing dead-cat bounce back to the old high is also a classic market topping formation after a long rally.
Where’s the change in economic circumstances since January to justify this turnaround? There is none. Indeed there has been a lot of bad weather that will worsen the data for Q1. The Federal Reserve Bank of New York’s general economic index fell to 4.48 in February from 12.5 in January. Economists in a Bloomberg News survey predicted the index would decline to 8.5.
Who’s the only major investor still sitting on a huge pile of cash? Why good old Warren Buffett of course who will be on hand to buy bargains when this crash happens.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
* http://www.arabianmoney.net/us-stocks/2014/02/18/us-stock-market-to-gdp-ratio-favored-by-warren-buffett-points-to-imminent-50-crash/ (Copyright Peter Cooper 2012; Sign Up for free Newsletter}
The markets are considerably, fantastically overbought and that whatever happens after this “Wall Street Party” is going to be a sort of catastrophe. Here’s why. Read More »
The Dow is up almost 28% but the chart below showing how it’s 12% annualized gain over the past 5-years compares with past bull markets suggest we are probably not at a top – that “We ain’t seen nothin’ yet!” Take a look. Read More »
What is the likely market return in the coming new year? This articles tries to answer that question by presenting technical and fundamental market factors that are influencing the market in the coming year. Some of these factors point to a positive market return this year while others point to negative influences. Let’s take a look. Read More »
The Fed has manufactured a parabolic move in the stock market…which is much more aggressive (and thus even more unsustainable) than witnessed at either the 2000 or 2007 stock market tops. Parabolas always collapse – there are never any exceptions – so when the pin finds this bubble it’s going to take down not only our stock market, but unleash a destructive force on the global economy. Read More »
Current macro conditions indicate that we are in a sweet spot for equity returns…that global growth is continuing and there is little or no tail risk in the immediate future. It’s time to get long equities…but I have this nagging feeling that these market conditions are too good to be true. If you look, there are a number of technical and fundamental clouds on the horizon. Read More »
There’s no fear anymore – anywhere – and I’m talking about the type of fear that overwhelms investors – and, in turn, the market. The surest indication of this can be found in the following chart. Read More »
Each December we publish a list of investment themes that we feel are critical to the coming year. Below are our expectations for the U.S, Japanese and European stock markets, municipal bonds and gold. Read More »
Bubble predictions are headline-grabbing claims that are sure to attract reader/viewership and more than a few worried individuals who will be pushed to act but, like all forecasts, these bubble warnings should be taken with a grain of salt. Read More »
Here’s some perspective on the potential value of the U.S. equity market using Warren Buffett’s favorite valuation metric – total stock market capitalization relative to GDP. Read More »