hey what's going on guys warren buffett
is getting out
his market favorite indicator soars to
record high
in this video i will explain why market
is overvalued
and crash might be coming warren
buffett's favorite market indicator
surged to the record high recently
signaling a market's overvalued and the
crash could be around the corner
the so-called buffet indicator is a
great tool to determine
whether the stock market is overvalued
or undervalued relatively to the size of
the economy
buffett described the yardstick as a
probably the best single measure of
evaluation stand at any given moment
in the fortune magazine article in
december 2001
after the dot-com bubble burst
if you look closer at this chart the
blue line represents the entire publicly
traded stock market in the united states
in terms of market capitalization
and the green line represents u.s
economy a gross domestic product
known as gdp well first and foremost
let me try to explain why this indicator
makes sense
if the real economy grows at three to
four percent annually
why would corporate profits grow at 10
to 15 percent annually
in the end of the day if you buy a
business you will receive what business
produces
nothing more and nothing less therefore
it is logical to assume that
the economy of the business should grow
at the same rate as its productivity
the same goes to real economy there is
no reason why the stock prices should
grow faster than the real economy
of course it will fluctuate but it will
always fluctuate around the real
economic growth
to calculate buffet indicator is very
simple
we take combined market capitalization
of the country's publicly traded stocks
and divided number by quarterly gdp
the result is expressed in percentage
terms
the wheelchair 5000 total market cap
index is valued at about
35.5 trillion dollars as of the time of
this video
while the latest official estimation for
the second quarter u.s gdp
is at 19.4 trillion dollars
so we take 35.5 trillion divided number
by 19.4 trillion
and we get 1.83 or 183 percent
in the history of financial market we
have never seen such a high evaluation
if you look at this table it gives us a
precise idea
when the market is undervalued
overvalued or fairly valued
the fairly valued market is at around
100
which means the growth of the stock
market is the same as the growth of the
economy
one to one when the ratio is less than
100
that means that the economy grows faster
than the stock market
and you as an investor should expect
high returns in the future
since the stock market will catch up
with the real economic growth
and of course if the ratio is over 100
which means
that the stock market grows faster than
the economy
and it's likely forming a bubble right
now
the buffet indicator is significantly
overvalued
is it 183 percent this is insane
buffett indicator also has a great track
record
during 2000.com bubble this indicator
rose
to 132 at which point
market crashed soon after that in 2008
housing bubble
the indicator was slightly over 105
percent
which wasn't even that high in the first
place and yet
market crashed but we are at 183
market is 83 overvalued
in the near future chickens will come
home to roost
which means reality will take place and
we will see convergence between the
stock market
and economic growth let's take a moment
and see what charlie monger and warren
buffett himself
have to say about warren buffett
indicator
you can say you are getting a great deal
for your money
in equities or sometimes you can say
you're getting a great deal for your
money and fixed income investments
uh you can't say that now so what do you
do you know
in terms of new money we we find
ourselves sitting and waiting
for something and we continue to look
but we are forced to look at bigger
ideas so if we were working with smaller
funds we would be much more likely to
find something than we we are in our
present situation
uh charlie says we we we really don't
have any
great one-line advice on it i wish we
did
so go ahead the real
long-term rate of return from
saving money and investing it has to go
down
from recent experience in america
particularly equity related
recent experience the wealth of the
world can't
increase at the kind of rates that
people are used to in the american
equity markets
and the oregon equity markets can't
hugely outperform the growth of the
wealth of the world forever
we ought to have reduced expectations
regarding the future generally
because you know we mentioned earlier 53
percent of the
the world's stock market value is in the
u.s well
if u.s gdp grows at
four percent five percent a year with
one or two percent inflation which would
be a pretty
would be a very good result i think it's
very unlikely that corporate profits are
going to grow at a greater rate than
that corporate profits as a percent of
gdp are on the high side already
and you can't constantly have corporate
profits grow at a faster rate than gdp
and obviously in the end they'd be
greater than gdp and
it's like somebody said that new york
has more lawyers than people i mean
there's there's certain you run into
certain
conflicts and terminology as you go
along if you say profits can get bigger
than gdp
so if you really have a situation where
the best you can hope for in corporate
profit growth over the years is four or
five percent
how can it be reasonable to think that
equities which are a capitalization of
that corporate
of corporate profits can grow at 15 a
year i mean it is nonsense frankly
and people are not going to average 15
or anything like it
uh in equities and uh
i would almost defy them to show me
mathematically how it can be done
in aggregate uh i looked the other day
at the fortune 500 they earned 334
billion dollars
on and had a market cap of 9.9 trillion
at the end of the year which would
probably be
at least 10 and a half trillion now well
the only money investors are going to
make in the long run are what the
businesses make
i mean there is nothing added the
government doesn't throw in anything
you know nobody's adding to the pot
people are taking out from the pot in
terms of frictional costs
investment management fees brokerage
commissions and all of that but the 334
million is all that
it's all the investment earns i mean if
you want to farm
the what the farm produces is all you're
going to get from the farm
if it produces you know 50 an acre of
net profit you get 50
an acre of net profit and and there's
nothing about it that
transforms that in some miraculous form
if you own all of american
if you own all of the fortune 500 now if
you owned 100 of us
you would be making 334 billion and
if you pay 10 10 and a half trillion for
that
that is not a great return on investment
and then you say
yourself can that double in five years
it can't the 334 billion it can't double
in five years
with gdp growing at four percent a year
or some number like that it would it
would
it would just produce things that are so
out of whack
uh in terms of experience in the
american economy it won't happen
so anytime you get involved in these
things where if you trace out the
mathematics of it
you bump into absurdities uh
then you better change expectations
somewhat sorry
well there are two great sayings uh one
is
if a thing can't go on forever it will
eventually stop
and
and the other i borrow from my friend
fred stanbach who i think is here
people who expect perpetual
growth and real wealth in a finite earth
are either mad men or economists
i like what charlie said people who
expect perpetual growth in the real
wealth in the finite earth
are either madmen or economist and this
is so true
99 of economists just exactly passed
into the future and believe
that it will grow forever what we see in
the market is just an expansion of price
earning multiples if you look at the
apple for example
the current p e ratio is at 37 earnings
increased by few percentage points while
the stock price
doubled the same goes with google
alphabet
current p e ratio is at 36. earnings
actually decreased while the stock price
increased the list can go on and on
no wonder why warren buffett isn't
buying anything right now
in fact he sold majority of his bank
holdings including entire stake in
goldman
and just recently he bought gold
specifically
gold mining companies he's hedging the
risk in this crazy market
let me know what do you guys think about
warren buffett indicator
is another crash right around the corner
leave your thoughts in the comment
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