There is no doubt that the $7 Trillion Dollars of Covid Pandemic spending has boosted U.S. Stock prices to historic levels, but the famous “Buffett Indicator” is flashing extreme warning signs. For the third time this century, this valued indicator has hit the extremes.
The timing was just before the crazy “Dot Com Crash” and again just before the 2008 “Financial Crisis” and near total meltdown. While the past year has been a great time to invest in U.S. Stocks, the future is very dependent on the Federal Reserve’s creation of more fake dollars and the eagerness of Washington to spend that money.
Our worse fears are developing into a reality day by day:
1. Inflation in the 5% to 10% range that persists.
2. The destruction of the U.S. Dollar as the world’s reserve currency.
3. A wave of Stock Market corrections reprice equities down to realistic levels.
4. Most of the 5,000 “cryptocurrencies” will fade from our memories like ToyRus.Com, Worldcom, Global Crossing and Pets.com disappeared after the Dot Com crash.
We’ve been at this stage of a frothy Stock Market before, twice in 20 years. While everything looks great on the way up, the crash ultimately destroys much of the “fantasy” wealth savers were counting on for their retirement. This chart is a stark reminder of how Wall Street dreams can end sadly.
Between 1995 and its peak in March 2000, the Nasdaq Composite stock market index rose 400%, only to fall 78% from its peak by October 2002, giving up all its gains during the bubble. Investors in the most highly speculative Stocks lost everything as worthless corporations who had never created a dime of profit went bankrupt or saw their stocks prices fall to a few cents, then disappear. (Wikipedia)
Beware of Stock Valuations Today
Meanwhile, everything looks great for Wall Street until a day of reckoning arrives suddenly, without warning, and a series of unexpected events washes out 30% to 40% of the froth in Stocks. In the end, we believe that many U.S. Stocks simply can’t live up to today’s prices based on distorted future growth expectations.
Eventually, many of the newcomers will fail and productive corporations will see their overpriced Stocks return to their mean values.
Interpretation of Wiltshire 5000 to GDP Ratio from Longtermtrends.Com
Market Cap to GDP is a long-term valuation indicator for stocks. It has become popular in recent years, thanks to Warren Buffett. Back in 2001 he remarked in a Fortune Magazineinterview that “it is probably the best single measure of where valuations stand at any given moment.”
‘Market Cap to GDP’ is commonly defined as a measure of the total value of all publicly-traded stocks in a country, divided by that country’s Gross Domestic Product.
The ratio in the chart above is calculated by dividing the ‘Wilshire 5000 Total Market Index’ by the US GDP. The Wilshire 5000 is widely accepted as the definitive benchmark for the US equity market and is intended to measure the total market capitalization of all US equity securities with readily available price data.