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US stock market-to-GDP ratio favored by Warren Buffett points to imminent 50% crash

Posted on 18 February 2014 with 3 comments from readers

Whenever the Sage of Omaha is pushed on how he judges whether the US stock market is trading too high or too low he refers to the ratio between the value of US stocks and GDP as a reliable guage of where the market stands.

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.

50% crash

Warren Buffett is not exactly shouting it from the roof tops but his favorite indicator is pointing to an imminent 50 per cent crash in US stocks. The main indexes are all far too high. You don’t need to be a genius like Warren Buffett to see it.

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 US GDP. The overlay of 1928-9 on the current chart of the Dow Jones is compelling:

Again we appear to be on the precipice of a huge drop in the stock market, with a massive downside. Yet that would only wipe out the gains of the past two years. Given that they appear abnormal in the context of lack lustre US economic growth would this really be so remarkable?

Price spike

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.

Data today showed manufacturing in New York, northern New Jersey and southern Connecticut slowed this month. 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.

And who’s the only major investor still sat 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…

Posted on 18 February 2014 Categories: Banking & Finance, Global Economics, Hedge Funds, Investment Gurus, Sovereign Wealth Funds, US Stocks

3 Comments posted by readers:

Comment by Rusty Brown in Canada - 18 February 2014

My brief and casual attempt to verify “the ratio between the value of US stocks and GDP as a reliable guage of where the market stands…” keeps finding comments such as: “the relationship between…U.S. GDP and the S&P 500 is virtually zero…” and similar.

Comment by Frank - 19 February 2014

I’m just now getting my last bit of long term supplies into the underground bunker. Beans, silver, and a room full o’ bullets.

Comment by Shaun - 12 March 2014

A huge mistake many people make is that they think market should follow the Economy situation.
First of all , these reports and numbers that are known as economy indicators can all be cooked and changed. after all they are just a number coming from people who have contributed to market direction.
But now, lets just assume that all economical reports are true. It still does not mean that market should respect that. as a matter of fact, market movements are all made by market makers and they don’t give a rats ass about fundamental and economical reports and numbers. PPT can move the market to any desired direction.

A perfect example is the last few months, ( broken government, GDP not too good, Job market not as expected, Russians trying to eat Ukraine and …. ) but we are still making a new high, why ? because they can, and if you ask them they always have an answer, most likely they say, it goes up because FED will keep its support if things are not good …..

At last, let me tell you that Warren knows this and he knows it very well. so If one day he comes out and say market will crash, its not because he has gaged the economy. its because he has a shit load of short positions and needs other to short as well and once he covers his short positions, He will buy again and tell you that how everything is good ….

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