Simone Wapler – La Chronique Agora (France) –
According to Warren Buffett’s test, stocks are too expensive. But nobody cares … for the moment because credit is still very cheap.
In 2001 Warren Buffett told Fortune magazine that the best and only way to estimate stock valuations at any given time was to compare companies’ capitalization to the size of the economy. If the capitalization is greater than the GDP, the shares are expensive and vice versa.
The Wilshire 5000 Index brings together the 3,500 largest US listed companies. So it’s a very broad index, seven times wider than the S & P 500. My fellow analysts at Bonner & Partners have traced this historical graph that has brought this index to US GDP since 1970, when the dollar was taken out of the market. gold and the Fed has driven easy credit and no counterpart. Here is what it gives.
<img src=”https://cdn.publications-agora.com/elements/lca/newsletter/images/contenu/180314-lca-wilshire-5000.jpg” alt=”Capitalisation du Wilshire 5000 par rapport au PIB” width=”550″ height=”466″ />
You will also note that the ever easier credit system (because of the continuous decline in key rates since 1980) has not stopped inflating this ratio. Despite the accidents of 2000 and 2008, the general slope is ascending.
The easy credit and help provided by indebted governments favors zombie companies over those that are really dynamic, as my colleague Nick Hubble explains , which slows down economic growth.
Stock prices for almost all stocks have never been higher in 48 years.
Comparing the equity markets to interest rates and bond yields, as the Fed does – which estimates that equities are normally valued against the 10-year Treasury yield – makes no sense.
As an old teacher of algebra would say, it’s like cabbages and carrots. The Fed is manipulating the price of carrots on the rise. Lovers of five vegetables a day then fall back on the cabbages whose prices rise in their turn. But the price of cabbage is not “normal”. It is simply also indirectly manipulated on the rise.
Since the bonds began to fall, increasing the yield on the 10-year Treasury, the S & P 500 seems to be hesitant.
<img src=”https://cdn.publications-agora.com/elements/lca/newsletter/images/contenu/180314-lca-sp-500.jpg” alt=”Les haussiers et les baissiers luttent et compriment le S&P500 vers les 2 800″ width=”550″ height=”380″ border=”0″ />
This bull market – which has been going on since 2009 – is the second longest in stock market history after 1987-2000.
In principle, with such a figure, the output can be upward or downward. The suspense is total.
We should soon know if the Warren Buffett indicator is really relevant. Buffett also once said ” we do not make money betting against American companies “.
This is the problem of oracles, they are always difficult to interpret …
In the meantime, do you know exactly what to do in the event of a crash ?