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Warren Buffett’s favorite indicator – the ratio of the value of U.S. stocks to GDP – is seen by him as a reliable gauge
of where the market stands and these days it suggests that all the main indexes are pointing to an imminent 50% crash.
So says Peter Cooper (arabianmoney.net) in edited excerpts from his original article* entitled US stock market-to-GDP ratio favored by Warren Buffett points to imminent 50% crash.
[The following is presented by Lorimer Wilson, editor of www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Cooper goes on to say in further edited excerpts:
Analyst Doug Short has a version of the ‘Warren Buffett Indicator’ which uses the value of the Wilshire 5,000, a very broad index. It shows that stocks are more expensive than they were before the 2008 crash and almost as expensive as they were before the dot-com crash in 2000.
Just consider the 30 per cent advance in the S&P 500 Index last year and the gain of around one tenth of that in U.S. GDP. The overlay of 1928-9 on the current chart of the Dow Jones is compelling:
You don’t need to be a genius like Warren Buffett to see it. The main indexes are all far too high. We appear to be on the precipice of a huge drop in the stock market, with a massive downside which would wipe out the gains of the past two years.
Given that the current stock market appears abnormal in the context of lack lustre U.S. economic growth would this really be so remarkable? Besides, we know from long experience of charts in financial markets that the price spike we saw last year is entirely consistent with a market top. The sharp New Year sell-off followed by a brief but unconvincing dead-cat bounce back to the old high is also a classic market topping formation after a long rally.
Where’s the change in economic circumstances since January to justify this turnaround? There is none. Indeed there has been a lot of bad weather that will worsen the data for Q1. The Federal Reserve Bank of New York’s general economic index fell to 4.48 in February from 12.5 in January. Economists in a Bloomberg News survey predicted the index would decline to 8.5.
Who’s the only major investor still sitting on a huge pile of cash? Why good old Warren Buffett of course who will be on hand to buy bargains when this crash happens.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
* http://www.arabianmoney.net/us-stocks/2014/02/18/us-stock-market-to-gdp-ratio-favored-by-warren-buffett-points-to-imminent-50-crash/ (Copyright Peter Cooper 2012; Sign Up for free Newsletter}
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Three Portfolio Questions:
1. What difference does make if MOST IF NOT ALL YOUR stocks go to 50% OR 38% OR EVEN 78% of their current value if you also own enough PM’s to insure that your portfolio’s overall value remains constant or even increases in value?
2. How much PM would you have to own to insure that your portfolio would at least survive a sudden major decline in the stock market without major loses? If you are not sure then perhaps this will be helpful: https://www.munknee.com/next-crisis-will-start-one-fragile-five-countries-heres/#comment-84086
3. What percentage loss in the stock market would actually result in your portfolio posting a net gain should the value of your PM holdings move upward as the stocks fell?