[HN Gopher] 'Buffett Indicator' Warns Stocks Doomed for Worse Cr...
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'Buffett Indicator' Warns Stocks Doomed for Worse Crash Than 2008
Author : mgh2
Score : 30 points
Date : 2020-01-06 21:54 UTC (1 hours ago)
(HTM) web link (www.ccn.com)
(TXT) w3m dump (www.ccn.com)
| the_watcher wrote:
| It looks to me like the indicator has been above 2008 levels
| since 2014 and has been above 100% every year but one since 1998.
| The article doesn't give any kind of indication of what "too top-
| heavy" means, so it looks like they've picked a metric that has
| been above a threshold for a period of time that contained two
| market crashes, then just declared that said metric forecasts a
| worse crash.
|
| The Buffett indicator may be worth paying attention to, and
| Buffett has certainly thought more about this than me. But given
| the data in the post, there's as much support for the record
| highs of the DJI warning of an impending stock crash as there is
| for the Buffett indicator.
| aazaa wrote:
| The indicator is stock market capitalization / GDP. Today's level
| exceeds the record set in 2000 (~150%).
|
| You can get the graph shown in raster form in the article from
| the Federal Reserve:
|
| https://fred.stlouisfed.org/series/DDDM01USA156NWDB
|
| A point to consider: the Buffet Indicator peaks before a
| recession actually is recorded, then falls heading into the
| recession. At least going back to 1996.
|
| Oddly, it looks like the Fed series lacks the last two years.
|
| This article shows a series from present back to 1950:
|
| https://www.advisorperspectives.com/dshort/updates/2020/01/0...
|
| Here, it's interesting to note that the lowest level is ~30%
| (1954, 1983).
|
| Discrepancies appear related to the numerator (Wilshire 5000 vs
| some other custom index).
|
| It appears that the Fed data use inflation-adjusted GDP.
| cletus wrote:
| That's a great chart and a simple metric (total stock value / US
| GDP). I like it.
|
| I certainly can't predict a crash but I find it hard to argue
| anything other than we are closer to the top than the bottom of
| the current cycle. At some point there'll be a reversion to mean,
| which always overcorrects in the short term.
|
| That could be tomorrow, a month from now, a year from now or 5
| years from now. Who knows? This bull market has certainly gone on
| for years longer than anyone would've predicted.
|
| And the thing is we're also in a period of wealth creation unlike
| anything seen since probably Standard Oil and the railroads of
| the 19th century. This isn't the dot-com era of pets.com and the
| like. Apple, Google and Facebook generate profits of a kind
| probably not seen in a century or more (in relative terms).
|
| So yeah, we live in unusual times.
| ggggtez wrote:
| Actually I think it's a terrible chart. The stock market is a
| lot older than 1998, so why does it only begin there?
|
| "The line was high, then it was less high!" What happened to
| "we're not investing in wiggling lines"?
| nabla9 wrote:
| Buffet indicator just says that stocks are priced high relative
| to economy. It indicates smaller ROI in the future if you buy
| now. This can be completely acceptable. Market crash is just one
| way smaller ROI can actualize. Lower than average stock market
| growth for several years corrects the valuations just as easily.
|
| Most things that lead to crash those that are not measured
| accurately and develop under radar. Shadow margin is a suspect.
| It's hard to know how large problem it is and it connects stocks
| and real estate in a dangerous way.
| toohotatopic wrote:
| If companies park their money abroad, is that money part of the
| GDP? If not, then the Buffett Indicator can grow even further
| without problems.
| ggggtez wrote:
| Assuming by "park" you mean just sit on it, then no. Money that
| isn't spent is not part of GDP.
|
| GDP is the total of all private investment + goods + services +
| government costs, basically.
|
| Dividing one number by another number is a meaningless game of
| numerology.
| riffic wrote:
| Perhaps it'd be a good idea to rebalance your 401k portfolios, if
| you're fortunate enough to have savings.
| donohoe wrote:
| Am curious as to what you (and others) think are the better
| funds (or other areas) to move money to to better weather a
| recession?
| riffic wrote:
| there is a ton of literature on effective investing
| strategies (equities vs bonds, et cetera). I myself an not
| qualified to advise you of a particular place to park your
| money.
| starpilot wrote:
| I wonder if this could spur a nonsensical flight into crypto. Are
| we due for another rush?
| uwuhn wrote:
| God I hope so, these bags are killing me.
| Bostonian wrote:
| "the Buffett indicator reflects Warren Buffett's
| characteristically simple thinking about stock values. It's the
| total stock market capitalization of the United States relative
| to U.S. GDP."
|
| If a company goes public or is taken private, or if a company
| issues debt to buy back stock, that changes stock market cap but
| not GDP. Furthermore, the market cap to GDP measure ignores how
| profitable companies are. I don't think the Buffett indicator is
| a good measure.
| nabla9 wrote:
| Your first argument is right. You must correct for the changes
| in private versus public ratio.
|
| Your second argument is not that good. Company profits are
| fraction of the GDP. Profits increase only in expense of wages,
| taxes, or investments and usually only temporarily.
| ajross wrote:
| It's not a rigorous argument to begin with, but your
| understanding is missing the point. "Stock values", and the
| assumed market values of everything really, are the measuring
| sticks by which we measure leverage. You can use stocks as
| collateral for loans, you can trade them for money, etc... The
| "Buffet Indicator" is measuring the relative leverage of the
| economy -- how much of our money is "real" (i.e. reflective of
| control of the means of production, to borrow a phrase) vs. how
| much of it is based on an assumption of market prices (a "bet",
| to borrow another). And it's out of whack, which really isn't
| surprising given that we're at the (presumably) tail end of a
| decade+ expansion.
|
| You're just saying that if everyone ignored the stock market
| and kept working and buying and transacting as if nothing in
| those numbers mattered, that everything would continue to run
| in a steady state. And it would. But that's not the way real
| economies work.
| hsnewman wrote:
| That's probably why you are reading ycombinator and not on your
| private island.
| [deleted]
| chrisco255 wrote:
| You assume that super successful people don't read Hacker
| News? That's an interesting thought, but doesn't hold up to
| scrutiny. What he said is likely true. Furthermore, I'm not
| sure why the stock market should necessarily be tied to U.S.
| GDP save for the outsized influence that U.S. has on the
| world economy as a whole. A company like Apple, for example,
| sells products all around the world. Their market cap is
| pretty detached from the U.S. GDP.
| [deleted]
| code4tee wrote:
| I look at these headlines a few ways:
|
| 1. People have been saying next year is going to be total doom
| and gloom just about every year since around 2011 or so.
|
| 2. They've all basically been wrong up until now and if you got
| scared and sold out when the headlines started you would have
| lost a ton of $$$
|
| 3. Eventually the market will go down and someone will claim to
| be right, probably through sheer dumb luck
|
| 4. When the next cycle starts the media will be all over the
| person from #3 saying they are now again predicting something
| will happen, but they'll likely be wrong this time
|
| When you've lived though a few of the above cycles you learn to
| do your best to stay calm and take a balanced approach to life
| and money. Things go up and down in the short term but in the
| long term things have reliably gone up.
| wizzairflyer wrote:
| It's not the first article I read on HN about an upcoming
| recession. This is for sure self-centered but the questions I end
| up asking myself are mainly how it'll affect my life and career.
|
| Questions like if there was a recession tomorrow would I still be
| able to apply at a cushy well-paid faang job or if it is even
| smart to switch job now since the newer you are the more likely
| your are to be cut off if there is a need for downsizing.
|
| I've never lived through a recession as a working individual
| hence why the prospect makes me nervous. I figure that, over the
| course of one's life, one goes through a few of them and that
| (mostly) everyone seems to make it out ok but if someone has some
| insights to share I'll be grateful.
| notJim wrote:
| I have this theory that's seems too simple (and prior-confirming
| for me) to be true. My theory is that this run-up is caused by
| inequality, and is likely to continue until more is done about
| inequality, either politically or by market forces. Maybe we'll
| have repeating cycles of ever-bigger bubbles and ever-bigger
| corrections until something changes.
|
| The theory goes like this: under inequality, wealth is
| concentrated at the top. People at the top look to invest money,
| but _spend_ a smaller portion of it compared to people lower down
| the distribution. This has two effects:
|
| 1. There is more and more money chasing after returns. This has a
| tendency to drive asset prices ever-higher. 2. Since the people
| who would spend the money (i.e., the less wealthy) don't have it,
| making returns becomes more difficult.
|
| Warren's quotes in the article get at this, with the idea of
| earnings being decoupled from stock valuations, until suddenly
| they forcefully re-couple, so to speak.
| pmiller2 wrote:
| I guess it's a good thing I'm invested in international stocks,
| bonds, real estate, and gold, in addition to US stocks.
|
| The principle behind the indicator makes sense, though. If the
| value of the US stock market exceeds US GDP, there's something
| exceptional going on. Theoretically, stocks should track
| productivity pretty well (although it is possible for prices to
| incorporate future expected increases in productivity).
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