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He's been clear for decades that an overall barometer of market health is the ratio of the stock market's total value to GDP. This metric is called "The Buffett

He's been clear for decades that an overall barometer of market health is the ratio of the stock market's total value to GDP. This metric is called "The Buffett Indicator". It's at a ratio today that dwarfs the dot-com runup. https://www.longtermtrends.net/market-cap-to-gdp-the-buffett-indicator/ https://www.longtermtrends.net/market-cap-to-gdp-the-buffett...

bwestergard 2y ago
Hm, but doesn't this indicator conflate two very different phenomena? 1. Investor valuations of the total value of all publicly traded companies. 2. The fraction of the total valuation of all firms that in publicly traded. Imagine a world where all businesses are totally static, report steady earnings, etc. One day, dozens of formerly privately held firms IPO. This indicator increases, but this doesn't not reflect any change in the valuation of the legacy firms: merely that more of the value of all enterprises is being publicly traded.
- qzw 2y ago
  You certainly make a good point, but in defense of the Buffet Indicator, perhaps the tendency for private companies to go public and vice versa also depends on economic conditions. Being a public company can be a costly and burdensome proposition, so unless there's a clear increase in ROI in terms of access to capital and shareholder liquidity, there's no real incentive for a profitable private firm to go public. So if a lot of private companies are going public, then that could also be an indicator that the public markets are overheated and something is fundamentally out of balance.
deleted 2y ago
[deleted]
crazygringo 2y ago
One counterpoint is that this assumes the economic growth rate is and will continue to be constant over the long term. Of course, if you think that AI and tech more broadly is going to increase our rate of economic growth over the next few decades, you would expect the "correct" value of that ratio to increase significantly. And that's, of course, ignoring the other factors like interest rates, inflation, etc. that need to be taken into account as well.
- remexre 2y ago
  Shouldn't those things increase GDP as well?
  - crazygringo 2y ago
    No, that's the whole point. They don't increase current GDP. Valuation of stocks is based on future expected profitability, while GDP is today's GDP.
    - remexre 2y ago
      That's still based on optimism (i.e., needs to be adjusted for risk), though; if the technology will massively increase productivity, the ratio should correct once those benefits start to be realized. It seems like "many market participants are mis-estimating risk" is exactly the sort of thing that this metric is intended to measure.
- dgb23 2y ago
  But you don’t invest in tech. You invest in companies. See: dotcom bubble, where most companies were bad bets. Even very established ones. If you think the crash will happen, then it might be cheaper to buy after the crash.
  - crazygringo 2y ago
    I'm explaining the perspective if you think a crash won't happen. Of course it's always cheaper to buy after a crash if there is one.
fullshark 2y ago
I think he said that no longer holds cause so many us public companies operate in foreign markets.
- dgb23 2y ago
  Asset inflation is also a global phenomenon.
xadhominemx 2y ago
Most of the market cap is in the technology giants with global reach.
agent281 2y ago
Given how companies operate internationally, is it fair to compare the stock market valuation against GDP? If Apple moved to a New Zealand based stock exchange, would that mean that the stock market in New Zealand wasn't healthy? Also, could an increase in internationalization explain the relative difference between the Buffet Indicator today vs 25 years ago during the DotCom boom?
- relaxing 2y ago
  Foreign investment in US stocks is certainly a factor. It’s been on the rise since the 90s and it could be interpreted as making the US markets overheated, if foreign investment suddenly pulled out…
- lend000 2y ago
  Interesting point -- I wonder if there are variations on this calculation available with global GDP, or ideally, company market cap adjusted by percentage of US revenue/profit to US GDP.

bwestergard 2y ago

Hm, but doesn't this indicator conflate two very different phenomena? 1. Investor valuations of the total value of all publicly traded companies. 2. The fraction of the total valuation of all firms that in publicly traded. Imagine a world where all businesses are totally static, report steady earnings, etc. One day, dozens of formerly privately held firms IPO. This indicator increases, but this doesn't not reflect any change in the valuation of the legacy firms: merely that more of the value of all enterprises is being publicly traded.

qzw 2y ago
You certainly make a good point, but in defense of the Buffet Indicator, perhaps the tendency for private companies to go public and vice versa also depends on economic conditions. Being a public company can be a costly and burdensome proposition, so unless there's a clear increase in ROI in terms of access to capital and shareholder liquidity, there's no real incentive for a profitable private firm to go public. So if a lot of private companies are going public, then that could also be an indicator that the public markets are overheated and something is fundamentally out of balance.

deleted 2y ago

[deleted]

crazygringo 2y ago

One counterpoint is that this assumes the economic growth rate is and will continue to be constant over the long term. Of course, if you think that AI and tech more broadly is going to increase our rate of economic growth over the next few decades, you would expect the "correct" value of that ratio to increase significantly. And that's, of course, ignoring the other factors like interest rates, inflation, etc. that need to be taken into account as well.

remexre 2y ago
Shouldn't those things increase GDP as well?
- crazygringo 2y ago
  No, that's the whole point. They don't increase current GDP. Valuation of stocks is based on future expected profitability, while GDP is today's GDP.
  - remexre 2y ago
    That's still based on optimism (i.e., needs to be adjusted for risk), though; if the technology will massively increase productivity, the ratio should correct once those benefits start to be realized. It seems like "many market participants are mis-estimating risk" is exactly the sort of thing that this metric is intended to measure.
dgb23 2y ago
But you don’t invest in tech. You invest in companies. See: dotcom bubble, where most companies were bad bets. Even very established ones. If you think the crash will happen, then it might be cheaper to buy after the crash.
- crazygringo 2y ago
  I'm explaining the perspective if you think a crash won't happen. Of course it's always cheaper to buy after a crash if there is one.

fullshark 2y ago

I think he said that no longer holds cause so many us public companies operate in foreign markets.

dgb23 2y ago
Asset inflation is also a global phenomenon.

xadhominemx 2y ago

Most of the market cap is in the technology giants with global reach.

agent281 2y ago

Given how companies operate internationally, is it fair to compare the stock market valuation against GDP? If Apple moved to a New Zealand based stock exchange, would that mean that the stock market in New Zealand wasn't healthy? Also, could an increase in internationalization explain the relative difference between the Buffet Indicator today vs 25 years ago during the DotCom boom?

relaxing 2y ago
Foreign investment in US stocks is certainly a factor. It’s been on the rise since the 90s and it could be interpreted as making the US markets overheated, if foreign investment suddenly pulled out…
lend000 2y ago
Interesting point -- I wonder if there are variations on this calculation available with global GDP, or ideally, company market cap adjusted by percentage of US revenue/profit to US GDP.