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"the Buffett indicator reflects Warren Buffett’s characteristically simple thinking about stock values. It’s the total stock market capitalization of the United

"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.

hsnewman 7y ago
That's probably why you are reading ycombinator and not on your private island.
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- chrisco255 7y ago
  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.
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    [deleted]
ajross 7y ago
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.
- ggggtez 7y ago
  I think you misunderstood the above poster. Diving stock by US GDP at best needs to be defended with a real argument, not taken as the word of investment divinity. Maybe there is an argument there, but "The number was big and then it was not big!" is a weak one. What is the GDP? It's goods/services/stocks/and government spending. So you are (sort of) trying to figure out the ratio of stocks to the other things. Maybe intuitively we feel that investment should not be too much higher than the actual payoffs (goods/services) we are producing right now. But what exactly, is too high? The number is bigger than before... so what?
  - ajross 7y ago
    You're demanding... a first principles model of stock market prediction (something that obviously doesn't exist) before you'll buy an ad hoc napkin result showing that we're probably due for a correction in the relatively near term (something basically everyone agrees on)? Seriously? I mean, this logic spins around too: if you think the market won't dip, what's your reasoning? The fact that you aren't a billionaire tells me you probably don't know any better than anyone else. At least this metric has empirical data (there's a chart right there in the article!) to back it up, and it was "developed" by a seasoned practitioner who most of us would agree is better at this stuff than randos on HN. I mean... it passes the smell test if nothing else.
nabla9 7y ago
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. ps. Nonfinancial corporate business: Profits before tax/Gross Domestic Product https://fred.stlouisfed.org/graph/?g=pR5f https://fred.stlouisfed.org/graph/?g=pR5f

hsnewman 7y ago

That's probably why you are reading ycombinator and not on your private island.

deleted 7y ago
[deleted]
chrisco255 7y ago
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 7y ago
  [deleted]

ajross 7y ago

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.

ggggtez 7y ago
I think you misunderstood the above poster. Diving stock by US GDP at best needs to be defended with a real argument, not taken as the word of investment divinity. Maybe there is an argument there, but "The number was big and then it was not big!" is a weak one. What is the GDP? It's goods/services/stocks/and government spending. So you are (sort of) trying to figure out the ratio of stocks to the other things. Maybe intuitively we feel that investment should not be too much higher than the actual payoffs (goods/services) we are producing right now. But what exactly, is too high? The number is bigger than before... so what?
- ajross 7y ago
  You're demanding... a first principles model of stock market prediction (something that obviously doesn't exist) before you'll buy an ad hoc napkin result showing that we're probably due for a correction in the relatively near term (something basically everyone agrees on)? Seriously? I mean, this logic spins around too: if you think the market won't dip, what's your reasoning? The fact that you aren't a billionaire tells me you probably don't know any better than anyone else. At least this metric has empirical data (there's a chart right there in the article!) to back it up, and it was "developed" by a seasoned practitioner who most of us would agree is better at this stuff than randos on HN. I mean... it passes the smell test if nothing else.

nabla9 7y ago

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. ps. Nonfinancial corporate business: Profits before tax/Gross Domestic Product https://fred.stlouisfed.org/graph/?g=pR5f https://fred.stlouisfed.org/graph/?g=pR5f