
‘Buffett Indicator’ Warns Stocks Doomed for Worse Crash Than 2008 - mgh2
https://www.ccn.com/buffett-indicator-warns-stocks-doomed-worse-crash-than-2008/
======
aazaa
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](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...](https://www.advisorperspectives.com/dshort/updates/2020/01/06/market-
cap-to-gdp-an-updated-look-at-the-buffett-valuation-indicator)

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.

~~~
pacaro
It's also interesting to look at the series from 1950 and see that regardless
of "corrections" that there is a gradual upward trend, so even if a high value
is predictive of a bubble we don't necessarily know what the threshold is.

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code4tee
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.

~~~
notJim
> Things go up and down in the short term but in the long term things have
> reliably gone up.

And yet, recent articles have warned that millennials may need to save more
than prior generations, because people are predicting weaker economic growth
over the next ~50 years or so than the previous.

~~~
refurb
I read a 2002 book that basically said “You’ll need to adjust your
expectations of future equities growth. It’ll be more like 3% annually, not
7%”.

I was concerned.

Since that book was published, equities have gone up on average 6.6%, which
includes the 2008 crash.

~~~
adventured
And of course in 2002 very few people were predicting that China would achieve
the scale that it has at the pace that it has. A lot of people were predicting
the rise of China in the 1990s. Almost nobody was calling for their GDP to 10x
so rapidly, going from $1.4t in 2002 to $14t 17 years later.

That resulted in an additional $45-$50 trillion in new wealth in just China
alone. The knock-on value creation is probably equal to that globally. Most
predictions didn't see that coming at that scale and how it could further lift
global S&P 500 type companies (and the US stock market along with it).

~~~
refurb
This is true!

I think my main point was past predictions about long term economic growth
have been wrong in the past, so I would weigh new ones very carefully.

------
the_watcher
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.

~~~
ggggtez
Anyone who takes the 'Buffet Indicator' at face value, is themselves a fool.
Anyone who thinks that Buffet got rich buy dividing one number by a different
number, and that he would give away his golden-cow for free? Come on now...
I've got a bridge I'd like to sell you.

~~~
_wzsf
Sorry, the "selling the Brooklyn Bridge" expression reached its expiration
date in December 2019.

------
nabla9
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.

------
cletus
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
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"?

~~~
arthurcolle
Because the monetary regimes of, say, the late 20s, or the early 50s, or even
into the late 70s and into the deregulatory periods of the 1980s are so vastly
different than what exists now, that a comparison across vast timeframes would
be completely specious.

Not sure that is explicitly what they were trying to accomplish, but that is
what I got out of the graphic.

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knapcio
I don’t think this indicator is relevant anymore. Nowadays, it’s extremely
easy for anyone around the world to invest in US stocks when in 2000/2008 that
was nearly impossible in the majority of countries. I’m from eastern europe
and invested in a few american companies a while ago. People underestimate the
value of that.

~~~
pazimzadeh
It doesn't change the main point, which is that the value of the stock market
is derived from the value of the actual companies. It doesn't matter where the
money is coming from to buy those stocks.

~~~
dh5
How is that value determined though? It's just by what people think the stock
is worth. If you have more money coming in to the market the listed companies'
stocks will naturally be at a higher price point.

~~~
Accujack
>How is that value determined though?

By the real profits of the companies in question according to standard
accounting rules.

It's not "perceived value" or "demand" or anything else that can be affected
by speculation or hype. It's literally the units of money produced by the
company that issued the stock.

Buffet's rule of thumb says that ultimately the value matters. Investors and
banks can play whatever games they like trading securities, building new
financial instruments, speculation, etc, but ultimately the value of stocks is
tied to the amount of money produced as profit, and eventually the market
corrects.

So far he's been right.

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topmonk
I think this is the Fed trying for a long time to keep interest rates down,
because they are worried about it crashing the economy.

Everyone, ie the government and corporations, have gone into record debt, so
they are much more dependent on low interest rates then before.

The recent daily pump of billions into the repo market is the latest play to
do this.

This as well as the deficit, is adding a lot of money that has to be placed
somewhere. That's why the stocks, gold and bonds have all become more bought
at the same time.

Some of this money gets into the hands of banks, who use it as collateral, for
lending out even more money.

The banks are the ones, becoming overleveraged, who will be the first to fall.

This is also what my guess is that this escalation in Iran is about. This
could also have been why 9/11 occurred. The government wants something to
blame for the coming crash. They don't want people to suddenly see the economy
crash for no reason and then blame the government, so they start a war to
distract and give them something else to blame instead.

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notJim
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.

~~~
ikeboy
Higher savings lead to higher investment lead to lower interest rates lead to
higher asset prices, sure.

However, the rest of your theory falls apart. Corporate profits have
simultaneously been increasing, GDP is increasing, the claim that business is
harder isn't reflected in the data.

Also, low interest rates aren't enough to account for a significant portion of
the asset price increase. We had low interest rates in 2008 coincide with
decreasing asset values.

~~~
entangledqubit
Which part did you read as claiming "business is harder"?

~~~
ikeboy
"Since the people who would spend the money (i.e., the less wealthy) don't
have it, making returns becomes more difficult."

The claim is that there's less spending and this means returns, i.e. business
profits are harder to get.

~~~
entangledqubit
I guess I read it more as valuations get bloated which makes the returns more
difficult but not that business profits themselves are "harder" to get in an
effort per unit sense.

~~~
ikeboy
It's talking about consumer spending, which would affect business profits
potentially but not business valuations directly.

------
wizzairflyer
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.

~~~
appleiigs
I've seen all sorts get laid off during downsizing. Doesn't matter about age,
tenure, usefulness, etc. Full departments just get cut.

Thing that helped me most is diversification and conservatism.

Diversification: 1) wife has job in different industry, 2) my skills are
applicable to different industries and especially different locations, 3) side
projects make some money.

Conservatism: I only splurge on my main hobby and go cheap on everything else.
I can cut my expenses down fast (house -> apartment; apartment -> live with
family; car -> public transit).

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yasp
Interest rates were substantially higher prior to the 2000 and 20008 bear
markets though.

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toohotatopic
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
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.

~~~
BenoitEssiambre
Also note that "investment" here is economic investment not financial
investment. It does not mean people buying stocks or bonds. It means building
factories, equipment, durable goods, infrastructure, anything that lasts for a
long time and helps produce more consumption in the future (these are not
counted in goods and services).

GDP is an aggregate measure. When you buy a financial investment, someone else
is selling it. For the aggregate it ads up to zero.

"Government costs" here means goods and services and investment that the
government pays for. It's not always explicitly separated in the equation. GDP
simplifies to goods+services+investment if each variable includes both what is
paid for by government and by private individuals.

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RickJWagner
In the immortal words of Jack Bogle, "Nobody knows nothing."

Ignore that at your own peril.

(For an explanation, read Bogleheads.org, and prosper.)

~~~
Accujack
So... everybody knows something?

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

~~~
chrisco255
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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riffic
Perhaps it'd be a good idea to rebalance your 401k portfolios, if you're
fortunate enough to have savings.

~~~
donohoe
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?

~~~
AmericanChopper
You can’t predict a recession, and you’ll just lose money by trying to. The
sane approach to retirement savings is to invest more heavily in higher
growth/risk assets the further you are away from retirement.

If you don’t need the money for another 30 years, it doesn’t matter if you
lose 30% in one year. If you were gaining 10% most years, but have a couple of
big downturns during your working lifetime, you’ll still come out well ahead
of the person getting 3% every year.

~~~
riffic
recessions are an inevitable component of a business cycle. I can't predict
_when_ it will happen, but I can prepare for it to arrive when it surely will.

~~~
AmericanChopper
Preparing your investment portfolio for a recession means moving your money
into lower risk, lower return investments. Trying to prepare for that is
trying to time the market, which you can’t do. For retirement specifically, as
long as retirement is sufficiently far away for you, then you’ll make the most
money by forgetting that recessions even exist, and maximising for long term
returns. Go look at pretty much any high growth mutual fund, even if it had a
30% down year in 2008, it’s 20 year returns will almost certainly exceed the
returns of any low risk asset.

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nipponese
FYI, CCN stands for CryptoCoinsNews.

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starpilot
I wonder if this could spur a nonsensical flight into crypto. Are we due for
another rush?

~~~
ggggtez
Consider the website is Crypto Coin News, I'm sure they want you to do exactly
that. It's not "nonsensical" if it's essentially targeted propaganda put out
from someone who would do quite well for themselves if people left traditional
stocks and tried their hand at trading hopes and dreams of lambos instead.

