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Buffett Indicator: Where Are We With Market Valuations? - YouTube
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recently there has been a discussion
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around the record value of the warren
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buffett indicator
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lots of experts expressed their concerns
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regarding the current u.s market
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valuation in the u.s economy
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let us look into the buffett indicator
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and try to understand what is going on
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the indicator represents a ratio of
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total u s stock market valuation to
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total u.s gdp
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the stock market valuation is based on
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wilshire 5000 index
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wilshire 5000 index represents the
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biggest 5 000 us-based companies by
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market capitalization
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theoretically this ratio shows how the
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economy is valued relative to how much
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money it actually produces
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recently the warren buffett indicator
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crossed the 200 percent mark which
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suggests that the economy is strongly
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overvalued
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is it the case though
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let us start with how and where people
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invest their money
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there are several basic asset classes
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equities fixed income and cash
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equities are also known as stocks or
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company shares
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fixed income investment is comprised of
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bonds and equivalent instruments
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cash asset is represented by saving
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accounts and currency exchanges
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all the other investments like real
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estate commodities and art are
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considered to be alternative investments
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standard investment theory describes an
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investment portfolio in an associated
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level of risk
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the proportion between stocks bonds and
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cash defined the risk profile of the
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portfolio
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the more stocks a portfolio had the more
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risk was associated with it
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so what has changed nowadays then
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investment returns on bonds started
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falling roughly in 1988 and are falling
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ever since
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nowadays they reached historically low
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levels and are almost unable to cover
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the inflation rate
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apart from that saving accounts in
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developed countries now have negative
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return rates
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and within last decade investment became
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so accessible that much more people
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started investing
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all of this leads to a widespread
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withdrawal from fixed income and cash
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investments
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instead people and companies heavily
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invest in stocks and alternative
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investments
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this trend can be also seen in rising
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prices of commodities and higher demand
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for cryptocurrencies
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so is the world economy in a dire state
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as suggested by the buffett indicator
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with record low interest rates and
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global pandemic it is hard to say
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anything for sure
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however the indicator is quite outdated
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and too simple to be solely taken into
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account
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as of now there is no single metric
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indicator or ratio that can fully
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describe the state of the economy
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and it will most likely stay that way
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for a while
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which indicators do you use for economic
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evaluation let me know in the comments
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below
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thank you for watching
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please like this video and subscribe to
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my channel
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see you in the next one jesse power off
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you
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