‘Buffett Indicator’ Extremes Expose “Remarkable Mania” in US Equities
The comments below are an edited and abridged synopsis of an article by Tyler Durden
Global stock markets are in the process of making a speculative move (driven by global liquidity) that may compare to the advances that culminated in the seminal market tops in the fall of 1987 and the spring of 2000.
This applies to everything from junk bond yields at record lows (amid record leverage) to soaring commodity prices, and from 2,000% decentralized short squeezes in worthless stocks to Dogecoin exuberance.
The latest of these extreme market indications comes from Warren Buffett, whose favorite stock market valuation indicator flashes redder than ever before.
The Buffett Indicator is a simple ratio: The total market capitalization of US stocks divided by the total dollar value of the nation’s gross domestic product. It first crossed above its previous dot-com era peak in 2019.
And now, with the US market cap more than double the level of estimated GDP for the current quarter, the ratio has surged to the highest-ever reading above its long-term trend, suggesting a strongly overvalued situation.
This detachment of the Buffett Indicator from its long-term trend joins an assortment of other valuation metrics that have exceeded their records in the rebound from the pandemic-induced bear market last year, if not years earlier.
Price-to-earnings, price-to-sales and price-to-tangible-book value are among the metrics firmly above dot-com era levels that many investors assumed were once-in-a-lifetime peaks.
For those who claim that valuations don’t matter, and that low rates mean there is no alternative to stocks, some fact-checking may be in order; 30Y Treasury yields are at their ‘cheapest’ to stocks since July 2019.
Fed Chair Powell reiterated that the Fed’s stimulative policies will not be reeled in anytime soon, because how else will the US government afford all this malarkey?
Former Dallas Fed president Richard Fisher warned in 2016 that the Fed was “living in a constant fear of a market reaction. This is not how the way you manage central bank policy.” That situation is now so conditioned into investors’ minds that the Fed is even more cornered (by its own hand).