Authored by Michael Snyder via The Economic Collapse blog,
Warren Buffett’s favorite indicator is telling us that stocks are more overvalued right now than they have ever been before in American history.
That doesn’t mean that a stock market crash is imminent. In fact, this indicator has been in the “danger zone” for quite some time. But what it does tell us is that stock valuations are more bloated than we have ever seen and that a stock market crash would make perfect sense.
So precisely what is the “Buffett Indicator”? Well, it is actually very simple to calculate. You just take the total market value of all stocks and divide it by the gross domestic product. When that ratio is more than 100 percent, stocks are generally considered to be overvalued, and when that ratio is under 100 percent stocks are generally considered to be undervalued. The following comes from MSN…
That being said, the Buffett Indicator, while it’s not a flawless indicator, does tend to peak during hot stock markets and bottom during weak markets. And as a general rule, if the indicator falls below 80%-90% or so, it has historically signaled that stocks are cheap. On the other hand, levels significantly higher than 100% can indicate stocks are expensive.
For context, the Buffett indicator peaked at about 145% right before the dot-com bubble burst and reached nearly 110% before the financial crisis.
So where are we today?
Right now we are at almost 149 percent, which is the highest level ever recorded…
Where does the Buffett Indicator stand now? It may surprise you to learn that, at nearly 149%, the total market cap to GDP ratio has never been higher. It’s even higher than the 145% peak we saw during the dot-com bubble.
In recent days we have seen a “tech bloodbath”, but that was nothing compared to what is eventually coming. Ultimately, the stock market would need to fall by at least one-third in order for prices to be properly balanced again.
And it appears that Warren Buffett is taking his own advice. His company is currently sitting on more than 100 billion dollars in cash…
Having said that, it does seem like Buffett himself is paying attention and agrees that the market is generally expensive. After all, the lack of attractive investment opportunities has resulted in Berkshire Hathaway accumulating nearly $110 billion of cash and equivalents on its balance sheet. Plus, Buffett has specifically cited valuation when discussing the absence of major acquisitions lately.
Warren Buffett didn’t become one of the wealthiest men in America by being stupid. He knows that valuations are absurd right now, and he is waiting to strike until valuations are not so absurd.
And he knows that another recession is inevitably coming. ...